TFSA-With Mutual Funds

[Newdual]

It looks like I made a big mistake in June 2011 when I opened a Bank of Nova Scotia TFSA with the $$ in mutual funds. As a U.S. citizen and Canadian permanent resident, I was very naive and didn't know about the implications of this until after the tax revelations in Sept. 2011. Even then, I didn't understand the paperwork implications. Now I'm getting ready to prepare my U.S. taxes for 2011 and have encountered the situation with holding Canadian mutual funds and the forms that must be prepared. My TFSA was opened in July with $4000 and I made a one time additional contribution in July of $200. Of course, since then, the total value has dropped by a couple of hundred because of fluctuations. It seems that I must complete a form 3520, 3520-A, and 8621. Is this correct? I did take the 3520 & 3520-A to the bank to ask for help because it appears that I need information from them, but they would not help me and gave me no information at all. I can't even begin to fathom what to do with the 8621. I called 2 tax accountants and was given a rough quote from both of them that started at about $500 per form (and went up from there, depending upon the degree of difficulty) which would mean a minimum of $1500 - $2000 for an account worth less than $4000!! Could you give me any options on how I might proceed with this problem? I've done some internet searching, but I admit that my understanding is rudimentary. Thank you for your consideration.

[CdnAmerican]

Hi newdual, what I've seen on this board is that the TFSA is more hassle than it's worth, as it's not exempt from US taxes. But you already have it (I did the same thing a couple of years back), so you do have to file the 3520 & 3520A, as far as I know.

Here is a thread that helps out a lot with the 3520 & A:

http://forums.serbinski.com/viewtopic.php?p=19169

I did mine using this format, and was (I think) mostly successful. You also may want to apply for a TIN for that account; that's easy enough to do - you just do a short form and a quick phone call to get that number.

Hope that helps - good luck!

[Newdual]

Hi CdnAmerican,

Thanks for the response. The problem with my TFSA is that it is invested in mutual funds and it seems that it might require Form 8621, which is the real problem form. I did see the posts about the 3520 & 3520-A here which will help somewhat, but the Form 8621 is the real problem. Have you seen any help with that form. I have cashed out the account now, but I guess I'll still need to report for 2011.

I'm a U.S. citizen, so I already have a social security number.

Thanks again.

[Newdual]

Hi again CdnAmerican,

Forgot to ask if your TFSA had mutual funds or was it the straight forward savings account?

Thanks again.

[CdnAmerican]

Hi Newdual, I am doing the 8621 this year - didn't know about it last year and will do it this year. I haven't seen guidance on it, unfortunately. I know there are a few posts here about it, but they seem to be at a higher level than I am at. Has anyone seen a thread that walks you through a) how to make a decision (presumably mark-to-market for most) and b) what numbers to put in?

For the TIN, the IRS actually wants a TIN that is specific to the account itself. It's different from your SSN (which they also request). If you submit the form without the TIN (which I did), they will assign one to you, but in my case they sent the letter with the TIN to the bank, which may or may not actually forward it on to you! It's not a huge deal, but just a bit more hassle to try to hunt down.

[Newdual]

Wow, this info about the TIN for the account is new to me. I have never heard of such a thing and didn't know that a specific account could even have a TIN!! I thought that TIN meant Taxpayer Identification Number and was for people who don't actual have a SSN, for example NRA's who for some reason need to file U.S. taxes. I didn't realize that the TIN would also be assigned to accounts. So does that mean my TFSA is now a taxpayer, independent of me?!?! How does that even work?

I was hoping for some specific help on the Form 8621, too, but it looks like no one is going to post anything. There really isn't anything out there on the web, I called the IRS, but they first started reading to me from the instructions, and when I told them I had the instructions they were reading from, all they would say was to consult a tax accountant or tax attorney if I had questions.

I tried to explain about the cost, but was basically told that was my problem and I shouldn't have had the account in the first place unless I knew how to report it. Which I guess is true, but still very harsh, especially when I was just trying to save a little for my retirement. Guess the IRS doesn't want us to actually be able to do that :roll:

Thanks for your response, though. At first, I thought I was the only person in the world to whom this has happened. Looks like there are two of us!

[Oceansunshine]

@Newdual or @CdnAmerican,

Assumedly you have both now figured out how to enter the form 8621...any chance either of you want to post that 'instruction' page you wished you'd had, for those of us still muddled by (a) how to choose which option applies, and (b) how to provide all the info on 8621 given the Cdn bank has sent us nothing...?

I'm also in the position of having had less money in the savings (now cashed out) then it would cost me to get an accountant, and phoning the IRS has not been fruitful...

I'd never heard of the TIN need so thanks for that tip...

[CdnAmerican]

Hi Oceansunshine - I can give you a very quick version of how I tried to do the 8621. I did mark-to-market, mainly because a) my situation seemed to fit that choice, and b) I think I understood how to do it. Basically, I filled out the form by checking choice (f), and then going straight to Part III.

I think that 'fair market value' (5a) comes from the value of the fund that's on my year-end statement. In other words, that's what the fund would be worth if I sold it all on December 31. **I also converted this and all values here into US funds, of course.

THen, to get adjusted basis (5b), you can use the book value of the fund at the end of the year. (I am less confident of this part.)

For (5c), I simply subtracted these from each other, and put the gain in Other INcome on my 1040.

I also appended a letter stating the changes in my account over the course of the year. Basically, this was an indication of how much was added to it, and when (I am not sure whether the enormous details of every single transaction are necessary.)

By doing this form, my presumption is that I will claim the growth (loss) in this fund each year, so that when I finally sell it, I won't have a huge tax hit, but will only have to claim income that was made in that particular year. My thought is that doing this form will actually probably benefit me in the long run, if I know what I am doing (which is not at all a certainty).

Next year, when I do this form, I think I will use (5a) from 2011 as (5b) for 2012, while also adding in any new deposits.

I made sure that I reconciled values on this form with my info on 3520/3520A, to make sure they were consistent with each other.

I did not have any sales of this fund during the year; if I did, I would've done line 8.

So I hope that helps. PLEASE don't take this as the guaranteed right way to do it; I think it's the right way given my own situation, but I am not an expert in any way.

Good luck! If anyone else has input on this, please hop in. THis is frankly my best guess.

[NickH]

To be clear, all references to "TIN" in this thread should read "EIN" for Employer Identification Number. The EIN is assigned to the TFSA because it is a trust, and it is the trustee's responsibility to file certain paperwork. The Canadian banks are uninterested in doing so for small customers.

[CdnAmerican]

Thanks NickH - yes, that's right. Also, there is another thread about how to get an EIN for your trust. This turns out to be quite easy to do - a form and a phone call to the IRS will get it to you in about an hour.

[Jyrki21]

To be clear, are holders of any Canadian mutual funds (not necessarily part of a TFSA) required to file all three of the 3520, 3520A and 8621 every year?

So, so much needless paperwork.

[nelsona]

Not to my understanding. If you hold MFs in a straight account, only 8621 is needed for every fund.

MFs can't be considered trusts and PFICs

[jenfin]

nelsona was CdnAmerican correct in using the y/e book value as his adjusted basis. I thought the first year you used mark to market you had to first give 1291 treatment to the fund to account for prior years holdings.

[CdnAmerican]

One other clarification. If you hold an RESP which contains mutual funds, do you need to do all of 8621, 3520 and 3520A?

[gogo]

I have form 8621 questions. I am Canadian and live in US.
I have one mutual fund that do not have div/int for years. I still keep it. if I decide fill out 8621 and do the market to market election 2011, then I put (5a) comes from the value of the fund that's on my year-end statement.; put adjusted basis (5b),=book value ; for the 2012 the adjusted basis 5(b) will be copy form my 2011 5(a), right.
That said 2012, I decide to sell this Canadian mutual fund. I will hit less tax. However, I will also received
1) NR4 that withhold about 25% gross income form sale mutual fund to remitted to revenue Canada-Since NR4 is already withhold big part of tax, do I still need to file tax return to Revenue Canada ?
2) Mutual fund company will mail me 1099 to IRS & me .-since I will report this sell in the regular income and pay the tax on it on form 8621. For 1099, Can I put the final process amount and cost in the same amount. so it won't double tax me
can you answer this question to me ? thank you