Transition Financial Advisors Group, Inc. – Client Relationship Summary

Item 1 – Introduction

Transition Financial Advisors Group, Inc. (“Transition”, “we” or “us”) is registered with the Securities Exchange Commission (“SEC”) as a Registered Investment Adviser (“RIA”). As an RIA, our services and compensation structure differ from that of a registered broker-dealer, and it is important for you to understand the differences. Free and simple tools are available to research firms and financial professionals at Investor.gov/CRS. The site also provides educational materials about broker-dealers, investment advisers and investing.

Item 2 – Relationships and Services

What investment services and advice can you provide me?

We provide investment advisory services, including discretionary investment management, financial planning and consulting, and tax planning and preparation services to individuals, trusts, and estates (our “retail investors”).
When a retail investor engages us to provide investment management services we shall monitor, on a continuous basis, the investments in the accounts over which we have investment authority as part of our investment management service. Furthermore, when engaged on a discretionary basis, we shall have the authority, without prior consultation with you (unless you impose restrictions on our discretionary authority), to buy, sell, trade and allocate the investments within your account(s) consistent with your investment objectives. Our discretionary authority over your account(s) shall continue until our engagement is terminated.
When a retail investor engages us to provide financial planning and consulting or tax planning and preparation services, we rely upon the information provided by the client and do not verify or monitor any such information while providing these services. Our financial planning and consulting services are completed upon the communication of our recommendations to the retail investor, while our tax services are completed on delivery of the client’s tax returns.
We do not limit the scope of our investment advisory services to proprietary products or a limited group or type of investment. We generally impose a minimum annual fee retainer of $5,000 or a minimum asset level of $1,000,000 for investment advisory services. These minimum requirements are subject to reduction or waiver at our discretion.
Additional Information: For more detailed information about our Advisory Business and the Types of Clients we generally service, please see Items 4 and 7, respectively in our ADV Part 2A.

Given my financial situation, should I choose an investment advisory service? Why or why not?
How will you choose investments to recommend to me?
What is your relevant experience, including your licenses, education and other qualifications? What do these qualifications mean?

Item 3 – Fees, Costs, Conflicts, and Standard of Conduct

What fees will I pay?  

We provide our investment advisory services on a fee-only basis. When engaged to provide investment management services, we shall charge a fee calculated as a percentage of your assets under our management (our “AUM Fee”). Our annual AUM Fee is negotiable and based on a tiered fee schedule, with descending fee tiers ranging from 1.00% to 0.15%. In a tiered fee schedule, the client will pay a reduced AUM Fee for assets exceeding certain breakpoint thresholds. For example, a client placing $1,500,000 under our management may pay a 1.00% AUM Fee on the first $1,000,000 and a 0.85% AUM Fee on the remaining assets. The client’s ultimate fee will vary depending on a number of factors including the dollar amount of assets placed under our management and the investment strategy selected. We typically deduct our AUM Fee from one or more of your investment accounts, in arrears, on a quarterly basis. Because our AUM Fee is calculated as a percentage of your assets under management, the more assets you have in your advisory account, the more you will pay us for our investment management services. Therefore, we have an incentive to encourage you to increase the assets maintained in accounts we manage.
We offer our financial planning and consulting services on a fixed fee or hourly rate basis, ranging from $3,000 to $100,000 for fixed fee engagements and $100 to $600 per hour for hourly engagements. The overall fee is dependent on the scope and complexity of the engagement. We may require that up to 50% of the total fee be paid in advance. Tax planning and preparation services are available for a separate and additional fee, ranging from $300 to $350 per hour for standalone tax preparation services, or $150 to $180 per hour when tax preparation is combined with one or more of our other services.

Other Fees and Costs: Your investment assets will be held with a qualified custodian. Custodians generally charge transaction fees for effecting certain securities transactions (for example, transaction fees may be charged for certain mutual fund transactions). These charges will be assessed in accordance with the qualified custodian’s transaction fee schedule. In addition, relative to certain mutual fund and exchange traded fund purchases, certain charges will be imposed at the fund level (e.g. management fees and other fund expenses). You will pay fees and costs whether you make or lose money on your investments. Fees and costs will reduce any amount of money you make on your investments over time. Please make sure you understand what fees and costs you are paying.

Help me understand how these fees and costs might affect my investments. If I give you $10,000 to invest, how much will go to fees and costs, and how much will be invested for me?

Additional Information: For more detailed information about our fees and costs related to our management of your account, please see Item 5 in our ADV Part 2A.

What are your legal obligations to me when acting as my investment adviser? How else does your firm make money and what conflicts of interest do you have?

When we act as your investment adviser, we have to act in your best interest and not put our interest ahead of yours. At the same time, the way we make money creates some conflicts with your interests. You should understand and ask us about these conflicts because they can affect the investment advice we provide you. Here are some examples to help you understand what this means:

* We may recommend a particular custodian from whom we receive support services and/or products, which assist us to better monitor and service your account.
* We may recommend rollovers out of employer-sponsored retirement plans and into Individual Retirement Accounts that we manage for an asset-based fee, which could have the effect of increasing our compensation. How might your conflicts of interest affect me, and how will you address them?

Additional Information: For more detailed information about our conflicts of interest, please review our ADV Part 2A.

How do your financial professionals make money?

Our financial professionals are generally compensated on a salary basis, with a discretionary bonus component. Discretionary bonuses are primarily based on the overall profitability of Transition. You should discuss your financial professional’s compensation directly with your financial professional.

Item 4 – Disciplinary History

Do you or your financial professionals have legal or disciplinary history?

No. We encourage you to visit www.Investor.gov/CRS to research our firm and our financial professionals. Furthermore, we encourage you to ask your financial professional: As a financial professional, do you have any disciplinary history? If so, for what type of conduct?

Item 5 – Additional Information

Additional information about our firm is available on the SEC’s website at www.adviserinfo.sec.gov. You may contact our Chief Compliance Officer at any time to request a current copy of our ADV Part 2A or our relationship summary. Our Chief Compliance Officer may be reached by phone: (480) 722-9414.

Who is my primary contact person? Is he or she a representative of an investment adviser or broker-dealer? Who can I talk to if I have concerns about how this person is treating me?

Exhibit of Material Changes
Since our most recent filing dated June 26, 2020, this Client Relationship Summary has been revised at Item 2 to update details regarding our investment advisory and tax preparation fees.

Understanding the Passive Foreign Investment Company (PFIC)

Rules and Regulations

Whole Article

Background

While many parts of the U.S. tax code are both convoluted and harsh, the IRS regulations involving the treatment of PFICs – Passive Foreign Investment Companies (IRS PFICs) are almost unmatched in their complexity and draconian tax treatment. These regulations came about as part of the 1986 Tax Reform Act. The purpose of the regulation was to eliminate the beneficial tax treatment for certain foreign investments. Under prior law, U.S. taxpayers could accumulate tax-deferred income from foreign investments and then, upon sale of the investment, recognize the gain at the long-term capital gains tax rate. The prior law put U.S. mutual funds at a disadvantage as they are required to pass-through all income to the shareholder in the year earned. The new IRS PFIC regulations were designed to create a more level playing field for U.S. funds.

Then in 2010, after a policy review, the IRS determined that all foreign (non-US) mutual funds and Exchange Traded Funds (ETF’s) are to be classified as corporations (rather than trusts) for U.S. tax purposes and are now subject to the extremely complex and onerous tax consequences of the PFIC tax regime. Consequently, all U.S. citizens, green card holders or others required to file a U.S. 1040 tax return (including those residing in Canada or anywhere else in the world) are subject to the ridiculously complex set of PFIC rules if they invested in any Canadian mutual funds or ETF’s.

What is a PFIC?         

Before going any further, it may be helpful to understand the precise IRS definition of a PFIC. A PFIC is essentially a non-US corporation that generates most of their income from passive investment sources such as dividends, interest, rents, royalties, and capital gains.  Specifically, if 75% or more of the foreign company’s income is passive income or 50% or more of the foreign company’s holdings are held to generate passive income, then the company is considered an IRS PFIC. As a result of this definition, all Canadian (foreign) mutual funds, ETF’s, labor sponsored funds, money market funds, real estate funds, and pension funds fall squarely into this definition.

PFIC Shareholder Filing Requirements

Beginning in 2013, US citizens, Green Card holders or any U.S. 1040 tax filer who holds more than U$25,000 in PFIC shares (U$50,000 if married filing jointly) are required to disclose certain information to the IRS on Form 8621 on an annual basis. In previous years, there was a reporting obligation with respect to PFIC’s only if there was a transaction related to that investment. Now, reporting must be made even if there is no activity. Disclosure of a PFIC is required in a “non-registered” account (regular taxable brokerage account); however, there is much debate about PFIC’s held in a “registered” account (like an RRSP, RRIF or LIRA) as the IRS has not issued guidance on whether they must be disclosed. In our opinion, the Canada/US Treaty election taken on Form 8891 or 8833 provides protection from the taxation of PFICs in a registered account. However, to further complicate things, the IRS revised Form 8621 in December of 2012 and included a new “Part I – Summary of Annual Information” that may apply to all PFICs no matter where they are held but . . . Part I is currently “reserved for future use” until the underlying regulations under Section 1298(f) are published which are undetermined at this time.

In the meantime, if you are subject to the IRS PFIC requirements, you must file Form 8621 for each PFIC you own with your tax return and you have the option of taking one of two tax treatment elections for each one. The first election is to treat the PFIC as a qualified electing fund (QEF), probably the most advantageous of the three methods. The second method is the mark-to-market method which requires the shareholder to report annual increase in market value of the PFIC as ordinary income. If neither of these options is selected, the “default” method is employed where the investment is treated like a Section 1291 Fund (Excess Distributions). The mark-to-market and default method will be discussed in our concluding article on this subject matter.

Tax Treatment of a PFIC

The QEF Election

If the QEF election is taken, a US taxpayer’s investment in a PFIC is generally subject to the same tax rules and rates as a domestic investment, except dividends are not considered qualified dividends and subject to ordinary income. The taxpayer includes a pro rata share of the PFIC’s ordinary earnings and net capital gains on their US tax return each year. Let’s look at an example:

If an investor owns five shares of ABC mutual fund, a Canadian mutual fund that qualifies as a PFIC. At the end of the year, the mutual fund as a whole earns $50,000 in investment income and $75,000 in capital appreciation. To figure out the tax due according to the QEF method, the investor needs to know their proportionate ownership of the mutual fund so they can calculate the income and gains attributed to them. If there are 500 shares outstanding, we can calculate the investor of five shares owns 1% of the fund. Therefore, the investor is taxed on $500 of investment income and $750 of capital gains on their U.S. return.

This method seems quite straight-forward, however, there is one huge obstacle. In order to take the QEF election, the mutual fund (PFIC) must comply with substantial IRS reporting requirements. The PFIC must provide an Annual Information Statement to the shareholder which must include the shareholder’s pro rata share of the PFIC’s ordinary earnings and net capital gains for that tax year. Because most Canadian mutual funds are unaware of these requirements, or may not be willing to comply because of the cost (that is changing quickly as people pull their money from these mutual funds), the QEF election is not frequently available to US 1040 tax filers invested in Canadian mutual funds.

The Mark-to-Market Election

The shareholder can elect to treat the PFIC using the “mark-to-market” method if the PFIC is considered a “marketable” stock or fund. To be considered a “marketable” stock or fund, the PFIC must be regularly traded on either a national securities exchange that is registered with the SEC, the national market system established by the Securities Exchange Act of 1934, or a foreign exchange regulated by a governmental authority of the country in which the market is located (like the Toronto Stock Exchange). If the mark-to-market election is taken, the PFIC holder recognizes the gain or loss on the shares of the fund as if they had sold all shares at fair market value at the end of the taxable year. The gain or loss is treated as ordinary income on the US return, an unfavorable tax treatment for most individuals. Unrealized losses are only reportable to the extent that they offset previously reported gains. Upon the sale of the PFIC shares, all gains are reported as ordinary income whereas losses are reported as capital losses on Schedule D. Let’s look at some examples to illustrate the potential adverse tax consequences of the mark-to-market method.

First, let’s look at the issue of taxation on unrealized capital gains from mutual funds. Let’s assume you purchase $50,000 of XYZ fund, a Canadian mutual fund that qualifies as a PFIC, but does not provide the necessary information to select the QEF option. Therefore, you elect the mark-to-market tax treatment. At the end of the year, your position in the fund is worth $60,000, a 20% gain. Let’s also assume that the fund is managed in a tax-efficient manner so no capital gain distributions occurred during the year. On your Canadian tax return, no tax is due from this investment since no distributions were made from the fund. However, for U.S. tax purposes, you would be taxed on the $10,000 gain in value according to the mark-to-market tax method. Furthermore, this gain would be characterized as ordinary income for US tax purposes . . . an unfavorable tax outcome. The same tax disadvantages hold true for Canadian listed Exchange Traded Funds and all other funds that qualify as PFICs.

Let’s turn to an example involving the sale or disposition of an asset using the mark-to-market method. To start the illustration, let’s assume you buy $50,000 of QRS fund that is NOT a PFIC.  The investment does very well and you sell it later the same year for $75,000. In Canada, one-half of the gain is taxable. Let’s use the highest tax rate for this illustration.  If the investor is a resident of Nova Scotia, the top tax rate is 50%.  Therefore, the tax rate on the capital gain would be 25%. For U.S. purposes, the gain would be taxed at 20%, the top long-term capital gains tax rate (We assume the 3.8% surtax of investments does not apply).  Since the Canadian tax exceeds the U.S. tax, no tax is due in the U.S. because of the foreign tax credits permitted by the Canada/US Tax treaty.

Let’s look at the scenario again, but this time the investment qualifies as a PFIC. For U.S. tax purposes, you pay the top ordinary income tax rate on the gain, which is currently 39.6% (once again, we will assume the surtax of 3.8% does not apply). The tax rate in Nova Scotia remains at 25%. Since the U.S. tax exceeds the Canadian tax, you could owe the IRS 14.6% of the $25,000 gain, or an additional $3,650 in tax if no other foreign tax credits were available.

Excess Distributions (Section 1291)

If neither election is made, the PFIC will be considered a Section 1291 and the shareholder is subject to even more complex and generally less favorable treatment. The general penalty for investing in a PFIC is that “excess distributions” including gains from the sale of the PFIC are thrown back over the shareholder’s holding period and subject to tax at the shareholder’s highest ordinary income tax rate in each throwback year. The definition of an “excess distribution” is:

1. The part of the distribution received from a section 1291 fund in the current tax year that is greater than 125% of the average distributions received in respect to such stock by the shareholder during the 3 preceding tax years (or, if shorter, the portion of the shareholder’s holding period before the current tax year.

2. Any capital gains that result from the sale of PFIC shares.

Let’s look at an illustration of the “excess distribution” rules at work. A Canadian resident buys 100 shares of REM fund (a PFIC) on January 1, 2010, valued at $1000 per share for a total investment of $100,000. The fund distributes $80 per share in dividends every year. On December 31, 2012, the shares were sold for $250,000. Since the dividends each year never exceeded the prior year’s amount, there are no excess distributions relating to dividends. However, since the sale resulted in a capital gain of $150,000, the gain is an excess distribution and will be allocated over the life of the investment. In particular, the excess distribution would be allocated $50,000 for 2010, $50,000 for 2011, and $50,000 for 2012. The taxable amounts in 2010 and 2011 are taxed at the highest marginal tax rate for those tax years (35%). Furthermore, the resulting additional tax for 2010 and 2011 draws an interest charge as if it were an underpayment of taxes for the year in question. Fortunately, amended returns don’t need to be filed, the underpayment of taxes is simply included on line 16c of Form 8621. The allocation of the final $50,000 of gains is added to ordinary income on line 21 on the 2012 1040 and subject to the taxpayer’s marginal tax bracket for that year.

Moreover, the taxable amounts allocated to the prior year PFIC period are not included in the investor’s income. Rather the tax and interest are added to the investor’s tax liability without regard to other tax characteristics. This means that tax and interest is payable even if the investor otherwise had a current loss or net operating carryovers.

Conclusion

As you can see, the complexity and punitive nature of the PFIC rules render most individual taxpayers incapable of filing their own returns without qualified, professional assistance. The American Institute of CPAs (AICPA) wrote a letter to the IRS in May of 2013 asking the IRS to provide an exemption for certain shareholders in PFICs that include: shareholders with ownership of less than 2% in a PFIC, shareholders that don’t know they own a PFIC or PFICs that did not notify its shareholders of its status as a PFIC. This would eliminate many innocent taxpayers from having to comply with these complex, draconian tax rules. Hopefully, the IRS will heed some of what the AICPA is saying.

Written by Brian Wruk and Mitch Marenus of Transition Financial Advisors Group, Inc.

480/722-9414

Brian Wruk, MBA, CFP®(US), CFP®(Canada), TEP, CIM, is the author of The Canadian in America and The American in Canada. His firm, Transition Financial Advisors Group, Inc. specializes in high net worth families migrating between Canada and the U.S.

Mitch Marenus, MBA, CFP®(US), CFA is the Chief Investment Officer at Transition Financial Advisors Group, Inc. and specializes in the investment management needs of those migrating between Canada and the U.S. with assets stranded on either side of the border.

Worried About the Markets? Why?

The recent volatile swing in stock markets around the world has caused unrest with some investors. Of course, the media has jumped on this normal occurrence and made it a focal point in all of their publications, talking points and headlines exasperating the issue and further causing angst in those with money in financial markets. But what is really going on? Here are some thoughts if you are worried about the markets. My question is “Why?”

1. Consider how much merit you place in what the media tells you. Ask yourself “How does the media make money?” The answer is “By attracting eye balls and ear drums to what they have to say.” What is the best way to attract? Negative news! Is there a conflict of interest in what they report? Yes! Some call it “investment pornography.” The bottom line is the media will put anything out there to attract an audience, but should it be considered reliable investment advice relevant and applicable to your specific situation? No! Do you think you are going to hear an unbiased viewpoint on market volatility and the fact the market declines by 10% on average once per year and it typically takes eight months to recover? No. So why worry?

2. The investment research has shown it is not the depth of the decline, but the rate of recovery that is the key to your long term financial projections. Recent research by Michael Kitces has shown that it is not the depth to which stock markets plunge that affect your long-term financial projections, instead it is the rate of recovery that has the biggest impact. The biggest damage inflicted is when we have a “hockey stick” recovery (like in the 70s) vs. a “V” recovery. The 2008 meltdown was a great example when the S&P 500 plunged 57% to its low on March 9, 2009 of 676.53 after reaching its peak on Oct. 9, 2007 of 1,565.15. So when did the S&P 500 get back to this level? March 29, 2013 when it closed at 1,569.19 . . . just four years later. Generally, the steeper the drop, the quicker the recovery and Kitces research shows, “V” shaped recoveries do little to affect the long-term sustainability of your portfolio to support your living expenses.

3. Nobody can make consistent short-term market direction predictions. If they could, why would they tell anyone? They could leverage their entire net worth on the next prediction and make huge profits. There are a couple of interesting observations about the numbers above that confirm this. First, many people prided themselves on “getting out in early September before the market tanked.” On Sept. 2, 2008, the market closed at 1,277.58, a decline of 18.4% from its peak a year earlier in Oct. of 2007! Almost a year earlier was the time to get out, not very good timing. Second, if you got out “in time,” did you get back in “in time?” Did you get back in on March 9, 2009? If not, how about within one week of that date? One month? Six months? A year? Missing out on the rapid recovery of financial markets is detrimental to building your portfolio. The bottom line is no one can time financial markets successfully because it requires TWO accurate predictions; when to get out, and when to get in. If you find someone who can, you have to ask yourself “Is it luck or skill?” Second, when you hear the talking heads on the media touting their predictions about when to get in or when to get out, ask yourself “What is their track record?” Believe it or not, researchers have tracked the performance of various investment experts and their ability to accurately predict the future over the long-term is dismal. Click here for a history of bad predictions.

4. If you have done everything you possibly can do, there is nothing left to do (except worry?)

Ron Blue teaches there are five things you can do with your money:

1. Live within your means
2. Pay off debt
3. Have savings
4. Have long-term goals
5. Give generously

If you have been following these principles in managing your finances, you have done all you can do. Therefore, market volatility should have minimal impact on you. Take comfort in the fact you have done all you can do and there is nothing more to be done, particularly about the volatility in financial markets. So why worry? If you are still working on some of these items, no doubt the market volatility may cause you some angst. My encouragement is to use this volatility to be a motivator to get back to the basics and work on these five principles to ease your worry. Alternatively, if you are still having difficulty handling the emotions that come with market volatility, you should consider your current asset allocation, your financial goals and how much you have in stocks. It may be better for you to sit down with your fee-only advisor and revisit your current investment policy to make things more conservative.

Transition Financial Advisors Group, Inc.  480/722-9414

Mitch Marenus, Chief Investment Officer

Brian Wruk, President & Founder

Brian Wruk, Financial Advisor

We have had a few inquiries in response to the market turbulence created by the United Kingdom’s vote to leave the European Union, and we thought it important to share our thoughts:

1. In the short-term, we believe this event is likely to impact the markets much like any major market shock (i.e. terrorist attack); panic selling followed by a recovery as cooler heads prevail. Indiscriminate selling usually creates opportunities to buy assets with positive fundamentals at a discounted price and we will be looking at those opportunities for our clients. A long-term investment horizon remains the key to successful investing.

2. The longer-term question for markets is the impact the Brexit will have on the future of the European Union. Many pundits believe this may be the first in a series of global anti-establishment votes and that the disintegration of the EU is inevitable. We do not agree with this point of view. The Brexit could actually do the reverse and propel the EU towards greater political and fiscal union because some of the long standing issues within the EU will be rectified. History suggests that a crisis may be what is needed to force the EU into making long needed structural reforms. Moreover, we believe the current global market turmoil will actually dissuade other EU countries from wanting to follow Britain’s lead.

3. In immediate response to the Brexit surprise, we are doing very little as the suspected vote reversed almost overnight and the losses have already occurred. As long-term investors we are under no pressure to make rash judgments with little information about how the Brexit vote will ultimately be acted upon and most importantly, whether other EU countries will undertake similar referendums. The vote simply gives the UK the mandate to begin negotiations surrounding the exit from the EU. As with anything of this nature, this will be a long, protracted process with nothing of substance for some time.

4. Nothing about the vote for Britain to leave the European Union suggests that the fundamentals of capitalism have changed. So, neither should our confidence in long-term ownership of the world’s greatest companies.  Mercedes Benz and BMW are still going to sell cars to the U.K., the second largest economy in Europe, regardless of whether they are in or out of the EU. Furthermore, UK companies are expected to be relatively immune from the departure from the EU because 70% of their business comes from overseas. The British economy and markets are among the most globally integrated.

5. Your portfolio is not the stock market. Most of the portfolios we manage are comprised of 40% to 50% bonds which have been going up.

We hope our comments bring some clarity to a very complicated situation. If you would like to speak more about Brexit’s impact, please call Brian or Mitch to set up a conference call or meeting.

We have posted a new blog entitled, “Worried About the Markets? Why?”  to our website. In it we discuss the nature of financial markets, the hype of the media, the history of stock picking and market timing and what to do now that the markets have displayed normal volatility.

If you would like a courtesy portfolio review, or have any questions please contact us. To manage your subscription settings or to unsubscribe at anytime, [wpmlmanage]

Mitch Marenus, Chief Investment Officer
MBA, CFP® (US), CFA®

Brian Wruk, President
MBA, CFP® (US), CFP® (Canada), CIM, TEP

Brian Wruk, Financial Advisor
CFP® (US)

Transition Financial Advisors Group, Inc.
480/722-9414
20 W Juniper Avenue, Suite 101
Gilbert, AZ  85233

Much has been made in the media lately about the IRS coming after Americans living in Canada (and abroad) through the Foreign Account Tax Compliance Act (FATCA). Starting July 1, 2014, most Canadian financial institutions will begin reporting any accounts associated with a “U.S. person” to Canada Revenue Agency, who, in turn, will forward that on to the IRS. What will the IRS do with that information? Make sure it is reflected on your U.S. tax return correctly.

But what if you are one of the thousands of American citizens, derivative citizens, or green card holders (U.S. persons) living in Canada that have not been filing tax returns? Or suspect your tax  returns have not been filed correctly to reflect these foreign accounts? Our latest blog article details the “5 Options for Americans not Filing with the IRS” including the latest penalty-free initiative the IRS is offering to those innocent bystanders caught in the wide FATCA net the IRS has cast. We trust this article will bring some clarity to an issue that is gaining attention across the U.S., Canada and the globe!

We have posted a new blog entitled, “Why You Don’t Lose Money On Currency Exchange”  to our website. In it we discuss how currency exchange works, what really happens when you exchange currency, factors that can affect currency valuations, and what the real issue with currency exchange is. We trust this will give you a different perspective on the issue.