Pfic nightmare

caffemaven · Post by **caffemaven** » Tue Nov 18, 2014 5:35 am

I just hired an accountant to review my taxes, and learned about the pfic nightmare. In brief, i'm a US citizen, permanent resident in canada married to a canadian .. I own 20 diiferent etfs in canadian discount investment firms, each with a value betweem $1000 and $5000 dollars. The accountant informed me it would cost about $6000 to file all the pfics this year, and i'd need to refile both us and canadian taxes.

Do i sell all the etfs immediately?
Is their any solution to this?
Please help! :cry:

MGeorge · Post by **MGeorge** » Wed Nov 19, 2014 9:53 am

Hi caffemaven,

I'm sorry to hear - I found out about PFICs a few years ago and I do remember that OMG moment.
The first thing I would say is don't sell anything for now. There is absolutely no rush to shed your ETFs.
First question - in general, have you held these for a long time?

The usual problem is that the default PFIC tax regime applies if you haven't filed 8621 in the past, and therefore have not made an election. Given that you've just found out about this, this appears to be the case.

In the default tax regime, nothing bad happens until you sell the PFICs (ETFs). To help you further, I have some questions for you:
1. Are all of the ETFs you own domiciled in Canada. Note that US domiciled ETFs like Ishares IVV, or Guggenheim's RSP are NOT PFICs!
2. Have you held your 20 or so ETFs for a long time, more than 1 year, more than 5 years?

First thing's first. Don't sell until you've work out your options.

Note: If you've been declaring the dividends and distributions from the ETFs as ordinary dividends, you are technically compliant. It's the selling under the default US tax regime that is the problem.

Best Regards.

caffemaven · Post by **caffemaven** » Wed Nov 19, 2014 10:39 am

I bought most of them this year. And yes, most are domiciled in Canada. There are a few, like xqq, that are simply canadian versions of the us qqq.

MGeorge · Post by **MGeorge** » Wed Nov 19, 2014 1:05 pm

OK,
So for the ETFs you bought this year, the reporting on form 8621 would be very very simple. There would be no complexities regarding excess distributions and interest charges, etc. You could probably get your accountant to "sharpen his pencil" given that most of them were bought this year. These PFICs are no problem. You can make the "Mark-to-market election".

The ones that you held longer than 1 year are more challenging to file correctly on 8621.

caffemaven · Post by **caffemaven** » Wed Nov 19, 2014 2:53 pm

So shouldn't I sell the ones I've held for greater than one year, so they won't be a nightmare for 2015 tax reporting? And same question for the current ones? Thanks for your help.

MGeorge · Post by **MGeorge** » Wed Nov 19, 2014 3:57 pm

I'm only suggesting that there is no rush to sell your ETFs. I'm sure you selected them for a good reason.
What I would recommend you do, is read up on how PFICs are taxed, in particular, the default tax rule, and the other 2 taxation regimes: Mark-to-market and QEF. Depending on your personal tax situation, you may be able to continue with these investments without any additional US tax liabilities using one of the 2 elections. I know folks, myself included, where it is perfectly fine to keep a few ETFs and report them under the mark-to-market regime.

The default tax regime, called the "Excess distribution method" results in high taxes (35% and higher) and potential interest charges (for ETFs held more than 1 year).

If you can figure out that it makes some sense to keep your ETFs, say, having them reported and taxed under the mark-to-market (M2M) regime, then you can make this election on your 2014 tax return. Making the M2M election is equivalent to having sold them on Dec 31 2013 (for the ones bought earlier than this date).

I can see your concern with the accounting costs, so if you've already decided to sell them and replace them with US based ETFs, than you could do this before the end of 2014 to simplify your 2015 return. It's your call of course.

Given the amount accountants charge to fill out form 8621, I decided it was worth the few hours of reading and google searches to learn about how they work.

I hope this helps.

MGeorge · Post by **MGeorge** » Wed Nov 19, 2014 4:28 pm

I just re-read your posts, and it does sound like you don't want to deal with PFICs and form 8621 (don't blame you). To answer your last 2 questions, selling all of these ETFs, both the ones bought this year, and previous would mean you would only have to deal with form 8621 on this year's return.

Why did the accountant need to change your Canadian tax return?

caffemaven · Post by **caffemaven** » Thu Nov 20, 2014 12:21 pm

I assume I am safe buying individual canadian stocks? The IRS won't go after us for that?

I did my taxes myself this year. CRA sent me a letter stating they want to review my return. SO I hired an accountant to take care of that. That's when I had the "OMG moment", learning that I screwed myself simply by trying to save for retirement.

MGeorge · Post by **MGeorge** » Thu Nov 20, 2014 3:00 pm

Yes - individual stocks are no problem.
US domiciled ETFs are another option. If you want a Canadian component to your portfolio there are:
EWC - US based Ishares - Canadian equity
EWCS - Canadian small cap, also US based Ishares
QCAN - Canadian equity - it's a new ETF from spdr.

These aren't PFICs.