Late to the PFIC party

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hadley
Posts: 4
Joined: Sun Aug 10, 2014 9:59 pm

Late to the PFIC party

Post by hadley »

I am just becoming aware of the requirements for filing form 8621 for US citizens that own Canadian mutual funds. I have not been filing this form for a mutual fund I have owned for the past decade. I would like the forum's opinion on how to proceed. Can I start with backfiling this form with an amended 1040 just for 2013 because that's when the latest 1298 regulations were finalized, or do I have to go back to 2010 - or even to when I first purchased the fund? I have been including the distributions as other income thus far. The value of the fund is less than 75,000. Thanks.
CdnAmerican
Posts: 245
Joined: Tue Aug 30, 2011 12:15 am

Post by CdnAmerican »

Hi Hadley - I'm curious what others will say about this one. The 8621 doesn't have any stated penalty that's associated with it. If you have been claiming your gains all the way through, then my sense is that this would simply be an information return that you haven't done (i.e., not willful neglect). I guess your choices would be to a) backfile for 2013 with this form, or b) start up in 2014 in using it. I don't think you'd need to consider backfiling further, as long as you've claimed your gains along the way.

But, that might be a problem. If you do 8621, you can claim gains as mark-to-market (the easiest) , or in other ways (which I don't know enough to explain well). if you do mark-to-market, then you are supposed to claim your gains (not just distributions, but gains you have made each year) as income.

As I write this, I'm not sure which is the best way to go. Hopefully some more experienced folks will hop in.
Not a professional opinion.
CdnAmerican
Posts: 245
Joined: Tue Aug 30, 2011 12:15 am

Post by CdnAmerican »

Hi Hadley - I'm curious what others will say about this one. The 8621 doesn't have any stated penalty that's associated with it. If you have been claiming your gains all the way through, then my sense is that this would simply be an information return that you haven't done (i.e., not willful neglect). I guess your choices would be to a) backfile for 2013 with this form, or b) start up in 2014 in using it. I don't think you'd need to consider backfiling further, as long as you've claimed your gains along the way.

But, that might be a problem. If you do 8621, you can claim gains as mark-to-market (the easiest) , or in other ways (which I don't know enough to explain well). if you do mark-to-market, then you are supposed to claim your gains (not just distributions, but gains you have made each year) as income.

As I write this, I'm not sure which is the best way to go. Hopefully some more experienced folks will hop in.
Not a professional opinion.
MGeorge
Posts: 313
Joined: Fri Jun 22, 2012 9:23 am
Location: Canada

Post by MGeorge »

Hello,

I'm sorry to hear about this. I was in this situation in 2012 - but I was able to just start filing 8621 because the annual filing requirement didn't kick in until 2013. I did not have to file amended returns because I hadn't sold any shares, and didn't have any "excess distributions" and I had been reporting the dividends from my mutual funds as ordinary dividends. I happened to be in compliance without knowing it.

The only problem with 8621 reporting is the default mode of taxation that occurs when you haven't made a Mark to market election or QEF election.

I will assume that you haven't sold any shares of your mutual fund for the last 10 years (correct me if I'm wrong).
If you make a mark to market election on your 2013 return, This means the default mode of taxation, called the "excess distribution" regime was in effect from the time you owned the fund (ie. from 2004 until Dec 31, 2012). Once the mark to market election is made, it is considered that you sold all units on Dec 31 2012, then the mark to market applies from Jan 1 2013 onwards. Unfortunately, any capital gain from 2004 until Dec 31 2012 will be taxed at the highest tax rate for those years (35%) and an interest amounts will apply as if the gain were spread equally over each year from 2004. My reply is getting long. Please let me know if you follow this so far.

Once the mark to market election is in effect, then you report the year's gains as ordinary income. Anyway, as far as I know, one can not make a retroactive mark to market election without permission.

My advice is, figure out how much capital gain you had from the day you bought the fund until Dec 31 2012 (assuming if you haven't filed for 2013 yet). If you didn't have much of a gain, or better yet, a loss, then it all gets simple.

Best Regards.
hadley
Posts: 4
Joined: Sun Aug 10, 2014 9:59 pm

Post by hadley »

THanks for your reply MGeorge. I follow what you are saying and I like it because the repercussions of not making the election are so awful. However, I have unfortunately already filed my 2013 return.

I am considering filing an amended 1040x however so that I can file the 8621, make the election, assume that I didn't have to file before 2013 and then make the changes to my income that will result from the gain on the fund from when I bought it to Dec 2012.

Does anyone else know or have an opinion on how the IRS would respond to an amended return with a MTM election for the most recent tax year?
voribo
Posts: 12
Joined: Mon Aug 04, 2014 1:59 pm

Post by voribo »

Has anyone heard an update on efforts of the Canadian mutual fund industry's attempt to have Can. mutual funds (and ETFs) excluded from PFIC rules?
It seems that Canadian duals can't own US mutual funds and effective can't own Canadian ones either--this is a limitation on financial well being .From what you said your fund passes the income through to you (does not keep the interest, dividend earnings internal) and you declare it every year, which is good.
A solid strategy may be difficult to come by. Perhaps try contacting the IRS and see what they say, and/or an experienced cross border tax pro, since making the wrong decision and ending up being taxed under some of the PFIC rules could be punitive and costly.
no-pro
hadley
Posts: 4
Joined: Sun Aug 10, 2014 9:59 pm

Post by hadley »

I hope the Canadian mutual fund industry will lobby the US government on our behalf. Any US citizen living in Canada who becomes aware of these filling requirements will not invest in these funds, that's for sure!

Thanks for your comment. I will be talking to a professional as these things are so complex.
MGeorge
Posts: 313
Joined: Fri Jun 22, 2012 9:23 am
Location: Canada

Post by MGeorge »

Hi Hadley,

There are a few mutual funds out there that will provide "PFIC Annual Information Statements" which allow US citizens to take the "QEF election" which preserves the capital gain tax rates when the fund is sold. Here is a list if you are interested:

1. Dimensional Fund Advisors (mutual fund company on the west coast)
2. MacKenzie Finanical - all of their funds to my knowledge.
3. Fidelity Investments - all of their funds
4. Purpose Investments of Toronto - Mutual funds and ETFs!
-Maybe there are more.
5. CIBC Rennaissance Mutual funds (not the regular CIBC bank mutual funds)

The QEF election is good because it preserves the capital gain rates, and the gains are taxed only when sold, like under Canada rules. The only drawbacks I'm aware of is the dividends are not "qualified dividends" and if some of the dividends are even from US sources, they lose their US source character and are considered to be Canadian sourced since the "corporation" is Canadian domiciled. This means that US dividends from a Canadian fund can get taxed twice with no foreign tax credit mechanism. There are examples of this you can find by studying the Dimensional Fund's PFIC statements for US investments, and comparing them with the "Management Report of Fund Performance".

One good option is to use one of the above for Canadian investments. Then use US-domiciled ETFs for US investments. And use US domiciled ETFs for international investments.
For fixed income, bond type investments, and Canadian ETF or mutual fund is fine because the Mark-2-market election will not likely result in additional tax since the income is primarily interest.

I hope this is helpful.

For your mutual fund filing you mentioned earlier, if you can figure out the cost basis of your investment in US dollars - you could always come to this forum for help with the forms. I've heard that the professionals sometimes don't even get it right.

Best Regards.
MGeorge
Posts: 313
Joined: Fri Jun 22, 2012 9:23 am
Location: Canada

Post by MGeorge »

Hello all,

I haven't heard anything about the efforts by the fund industry to have Canadian mutual funds and ETFs excluded.

I used a CPA a few years back and he pointed out that there is no fine for failing to file an 8621, but not doing so could leave the tax return open for audit indefinitely because it would be considered incomplete.

Regarding the PFIC statements, the thing I find frustrating is that is only fund companies with very high MERs that are offering PFIC statements - I guess this isn't surprising.

I'm working on a way to justify calculating my own PFIC statements using the data in the "Management report of fund performance". For example, there is a good index mutual fund from RBC (RBF556), it has a low 0.77% MER. The fund turnover rate is less than 8%, which means it should be justifiable that the "ordinary income" for QEF purposes would be the dividends already distributed. The tiny realized gain or loss given in Canadian dollars could be estimated in USD statistically based on historical exchange rates, average holding period of the underlying stocks. I don't know if this would hold water in an audit though.

I've been studying the PFIC issue, almost as a hobby, and I've found that the Canadian accounting rules and the US account rules are so close. The only problem is the gains - as defined in US dollars, and the need to know the holding period for the US "short term and long term gain". In low turnover ETFs and index funds, this should be almost nill. I'm curious if anyone else has thought about this.
nelsona
Posts: 18311
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

The only thought I have is appreciation for the efforts and headway you are making on this topic.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
voribo
Posts: 12
Joined: Mon Aug 04, 2014 1:59 pm

Post by voribo »

Just go to the IFIC website and search 'pfic', to see the submission regarding Can mutual funds-- that may also cover etfs.

Have you seen how the QEF statements compare to the Can. T3? Like would the Can. and US taxes line up?
no-pro
MGeorge
Posts: 313
Joined: Fri Jun 22, 2012 9:23 am
Location: Canada

Post by MGeorge »

Thanks - I remember seeing the submission from the IFIC. THat would be good if congress listens to it and agrees. I hope ETFs would be covered by any exemption if it happens.

For comparing T3's with the PFIC statements, the only thing I've been able to do is compare the "Management report of fund performance" with the PFIC statements from the Dimensional Fund Advisor group. They post their PFIC statements online. Purpose Investments does too, but they only started in Sept of 2013, so the PFIC statements have a lot of zeros on them.

The general observations I have are that T3 dividend and interest distributions would be part of the "ordinary income" on the PFIC statement.

If we assumed that the USD/CAD exchange rate didn't ever change (not a good assumption), then the T3 capital gain distribution would have to be split into "short term" and "long term". The portion that is short term would be added to "ordinary income", only if it is a gain. A loss would not reduce ordinary income. The portion of the gain that is long term becomes the second item on the PFIC statement "net capital gain".

The problem with the T3 capital gain is that it is based on the Canadian dollar. The gain in USD is simply not known from looking at a T3 statement. Who knows when the underlying securities were bought and when they were sold. The Management Report of Fund Performance (MRFP) contains more information, and I would argue sufficient information to estimate PFIC data - with some degree of statistical inaccuracy. Specifically, the MRFP has the realized gains and losses. This might not have to be distributed (T3) for Canadian purposes because the fund could be carrying forward losses, in the same way an individual taxpayer can. In this way, the MRFP has more data.

To summarize, for low turnover funds the "ordinary" PFIC income will be at least the T3 dividend or interest distribution. The gains are a whole different story.

A very interesting thing happens to a Canadian mutual fund that holds mostly US stocks. If the fund earned $100 per share in US dividends, it will distribute $85 net of the withholding tax within the fund. On the PFIC statement, it will say:
"Ordinary Income" = $100
"net capital gain" = $ whatever it is

"Property actually distributed" = $85.

Under PFIC rules, the dividend is not US sourced anymore. You simply declare $100, even though you received $85. Then you are allowed a cost basis adjustment of + $15 per share. This is not ideal because you can't strictly speaking take a foreign tax credit for the 15% that was withheld.

This isn't a problem with Canadian stock dividends which is why I would only hold US domiciled ETFs for US based investments.
CdnDual1
Posts: 3
Joined: Sat Apr 04, 2015 12:43 am

Similar but worse case

Post by CdnDual1 »

I too have somehow only just found out about the PFIC issue- it seems every year I think I finally have everything figured out and then the next year I realize I've been missing something or I qualify for some new lengthy form... This year I have both this and the NIIT tax to deal with and both have me determined to renounce my US citizenship - but first I have to sort these out.
So.. I am a dual citizen living in Canada.. I switched my non-registered mutual funds from one investment company to another in 2011. I had 9 different mutual funds with the new company ever since. I may have redistrubited some money between the funds one year- I have to go back and check. But then this year I made the (retrospectively unfortunate) decision to move them all into one new fund- which of course involved selling all 9 and in the process realizing about 30,000 in capital gains which I had just planned to report as normal on my 1040 (as I had been doing with all my T3 income in the past). It sounds like if I didnt sell any funds prior to this year since 2013, and other requirements mentioned in MGeorge's first reply above were met, I don't have to redo my returns for previous years. But for this year, am I going to be facing a big bill for those capital gains and is there any treaty recourse for that? Since this is the first year I have the new account, I would have the option of doing QEF, but it sounds like that's almsot impossible unless the company issues a Pfic statement and I don't believe they are one of the ones that do.
This was wordy but thanks for any advice!
MGeorge
Posts: 313
Joined: Fri Jun 22, 2012 9:23 am
Location: Canada

Post by MGeorge »

HI CdnDual1,

I'm not sure what to say on this one - it is unfortunate that you've realized a large gain when you sold the 9 mutual funds. Still, you would be in the same situation if you make one of the 2 other elections since there is a deemed sale, but I guess you might be suggesting that you could have held off on selling the funds until after you renounce.

One thing I could suggest in this situation is to request relief from the IRS. I read an article some time ago about relief given to folks who didn't know about the PFIC rules and the tax rate on the "gain treated as an excess distribution" was reduced to 20% instead of 35% or 39.6%. The back interest still applied though. This was referred to as an "alternate resolution".

Have a look at this:

http://www.woodllp.com/Publications/Art ... a_PFIC.pdf

Did you pay any Canadian tax on the sale of the mutual funds? One thing I would suggest is to use software to see if you can offset some of it with foreign tax credits. This reduces the amount of the gain that receives the interest payment. I hope this helps.
------------------------------
MGeorge is neither an accounting nor taxation professional.
Canadalady
Posts: 3
Joined: Wed Apr 29, 2015 10:42 pm

Post by Canadalady »

Hi,
I have some questions regarding PFIC (8621). I just aware that I need to file PFIC for my AGF mutual fund accounts . I am Canadian and moved to US approx 20 years ago.

I have three mutual fund accounts with AGF investment ( I keep them and do not do anything after I moved to USA) . two are under RRSP which I elected 8891 back to 10+ years ago ( in year 2014, form 8891 is no longer be used but is filed under statement of specified foreign financial assets -form 8938 instead) and one is regular mutual funds.

In the past , Some years AGF will send me the 1099 D to report ( In 1099 D it always shows the payor is Citigroup fund services Canada Inc), the letter attached stated that Citigroup fund service Canada act as administration for AGF funds. inc.

When I received 1099 D ( most of them under my RRSP account, sometime are both RRSP accounts and mutual fund account ). In order to avoid unnecessary hassle, I always report 1099 D in that years as ordinary income..no matter is under RRSP or regular mutual fund. I just learn that I need to report my one AGF mutual fund account under PFIC. this account normally have no dividend for years. My questions are

1) If AGF is consider USA company or not ? ( because they are able to issue 1099 D to me , have payor id number in 1099 D form)

2) If AGF is not consider USA company, and I need to file my PFIC. This mutual fund account is less than than $10,000. I read the article under IRS website, TD 9650 that allow you to not file form 8621 ( PFIC) end 12/31/2013. If the total account is under $25K single or $50K couples. and
you do not have distribution or sell , then you can file start year 2014.
I plan to elect M2M in my 2014x; my questions are

1) I have loss for less than $100 (FMV ), can I take the deduction in the first year, after tax calculation, maybe refund me less then $20

2) I am using Turbo Tax, where do I put this loss

3) Back to few years ago, I think I have one dividend that is from my mutual fund, but amount is less than $300 (I think is reinvestment div), and I report it as ordinary income alone with other AGF RRSP dividends.at that years already. Since TD 9650 allow us to start file from year 2014, what consequence Ii will have if I elect M2M for year 2014 ?

thank you
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