I’m a Canadian who took a job transfer to the US over 15+ years ago and now have a green card. My paycheck still originates in Canada and I had been buying TD Mutual Funds on a bi-weekly basis until I found out about PFICs earlier this year. As a result, I am now liquidating all of my TD Mutual Funds in December. My questions are on calculation of the Cost Base and allocation of gains for Form 8621.
My understanding is that I must calculate the USD cost base and determine the applicable gain for each year, which is then ratably allocated over the holding period. Tax and accrued interest is then calculated for the holding period.
What exchange rate is acceptable for use by the IRS in calculating the USD equivalent to CAD purchases? Do I have to use the spot rate or will the IRS accept a slightly more favorable buy rate that includes a spread cost (and increases my cost base)?
How do I calculate the gain attributable to each year since I have been continually buying funds? Do I have to look at the value of the shares purchased each year and compare that to the sale price to determine the gain for each year? There may be purchase years with a loss using the above method (which aren’t credited), resulting in a total gain greater than the overall sale price minus cost base.
Could I instead use the purchase cost base fraction for each year to calculate the gain attributable to each year (prior to the ratable allocation)? This would ensure that the total gains by year add up to the overall gain.
I would really appreciate guidance anyone can offer.
Thank you
PFIC Form 8621 Gain Calculation for Mutual Fund Sale
Moderator: Mark T Serbinski CA CPA
Hi johnf,
Regarding an acceptable exchange rate, I believe that the Bank of Canada exchange rates are good enough. For the purposes you describe though, I would recommend trying the oanda.com website. They allow you to download a .csv file for use in a spreadsheet. If you are comfortable with spreadsheets, you can use the "Vlookup" function to apply the spot rates to each regular purchase that you have made.
The regular purchase things really makes exact 8621 reporting difficult to say the least. If you made, say monthly or biweekly contributions each year, I suggest that you might be justified to just use the average exchange rate for the year. Statistically, there should only be a small error with this approach.
In order to attribute the gain correctly to each year, it is as complicated as it sounds. It is a separate calculation for each purchase. It is on a "by holding period" basis. You could try considering all purchases made in a given year as 1 holding period, say, pretend you bought all the funds on July 1 (middle of the year). Any examiner would probably agree that this is sufficient, and if you try this, disclose your method in a statement.
Note - I'm not qualified to give this advice, but this is what I would do (and have done on one of my returns). If you need to estimate for simplicity, disclose it, and make sure that any errors would not be obviously in your favour.
Say you considered some monthly purchases in 2010 to the present as being 1 holding period. If the capital gain is $1000, you'd calculate:
2010: 1/4 x $1000 x 35% + 3 years of interest = $101
2011: 1/4 x $1000 x 35% + 2 years of interest = $96
2012: 1/4 x $1000 x 35% + 1 years of interest = $91
2013: Report 1/4 x $1000 as "ordinary income" the rate for the 2013 year (if this is your 2013 return) would work out as your tax rate on ordinary income.
I hope this helps.
Regarding an acceptable exchange rate, I believe that the Bank of Canada exchange rates are good enough. For the purposes you describe though, I would recommend trying the oanda.com website. They allow you to download a .csv file for use in a spreadsheet. If you are comfortable with spreadsheets, you can use the "Vlookup" function to apply the spot rates to each regular purchase that you have made.
The regular purchase things really makes exact 8621 reporting difficult to say the least. If you made, say monthly or biweekly contributions each year, I suggest that you might be justified to just use the average exchange rate for the year. Statistically, there should only be a small error with this approach.
In order to attribute the gain correctly to each year, it is as complicated as it sounds. It is a separate calculation for each purchase. It is on a "by holding period" basis. You could try considering all purchases made in a given year as 1 holding period, say, pretend you bought all the funds on July 1 (middle of the year). Any examiner would probably agree that this is sufficient, and if you try this, disclose your method in a statement.
Note - I'm not qualified to give this advice, but this is what I would do (and have done on one of my returns). If you need to estimate for simplicity, disclose it, and make sure that any errors would not be obviously in your favour.
Say you considered some monthly purchases in 2010 to the present as being 1 holding period. If the capital gain is $1000, you'd calculate:
2010: 1/4 x $1000 x 35% + 3 years of interest = $101
2011: 1/4 x $1000 x 35% + 2 years of interest = $96
2012: 1/4 x $1000 x 35% + 1 years of interest = $91
2013: Report 1/4 x $1000 as "ordinary income" the rate for the 2013 year (if this is your 2013 return) would work out as your tax rate on ordinary income.
I hope this helps.
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MGeorge is neither an accounting nor taxation professional.
MGeorge is neither an accounting nor taxation professional.