Exempt from filing 8621?

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notoriouspg
Posts: 7
Joined: Tue Mar 16, 2010 1:03 am

Exempt from filing 8621?

Post by notoriouspg »

My wife and I are US Green Card holders living in Canada. We file US taxes jointly.

I purchased shares of a Canadian ETF in 2014 in an unregistered brokerage account, and purchased more of the same fund in 2015 (I had no such holdings prior to 2014).

I was not aware of PFICs and Form 8621 until about a week ago -- I did not file it for tax year 2014.

Holdings were worth about $23100 on Dec 31 2014 and $31000 on Dec 31 2015.

Reading the 8621 instructions and various websites it seems that we might be exempt from filing for both 2014 and 2015 since we're below the threshold of $50000 (as a couple filing jointly).

Is this true?
MGeorge
Posts: 313
Joined: Fri Jun 22, 2012 9:23 am
Location: Canada

Post by MGeorge »

It is true provided that you did not receive an "excess distribution" in 2015. This is if, on a per-share basis, the dividend in 2015 was not more than 1.25 times the dividend of 2014 (in Canadian dollars).

You only have to file form 8621 if you're above the exemption, have an excess distribution, or a gain treated as an excess distribution.

Given what you've written, you didn't have to file 8621 for the 2014 tax year. If you meet no excess distribution thing above than you're good for 2015.

The only thing is, you might want one of the more tax favourable elections (mark to market) or QEF if you are planning on keeping this investment. Also, if you sell this fund in 2016 for a gain (in US dollars) then this will force you to file 8621 on your 2016 return. You may wish to bite the bullet and file 8621 this year for one of the elections.

Best of luck!
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MGeorge is neither an accounting nor taxation professional.
notoriouspg
Posts: 7
Joined: Tue Mar 16, 2010 1:03 am

Post by notoriouspg »

Thank you!

I'll wait and see how the distributions look on my T3. But looking at my statements it looks like I'm in the clear (per-share dividend payouts were very similar in 2015 vs 2014).

When comparing the distributions for 2014 vs 2015, do I also have to consider the capital gains that are reinvested by the fund (and reported in box 21 of T3?) (These were not distributed as cash to unit holders.)

Or is it just the dividends that matter?
MGeorge
Posts: 313
Joined: Fri Jun 22, 2012 9:23 am
Location: Canada

Post by MGeorge »

The US won't differentiate between which portions of the distributions are capital gain, or dividends, or interest, etc. To them, the Canadian ETF is just viewed as a foreign corporation, paying a dividend. Treat the whole distribution.

Whether you reinvested the distribution or not doesn't make a difference.

ETFs are usually passive management, so the distributions are likely very consistent - so you're probably in good shape.

My preference has always been to make the mark-to-market election or even better, a QEF election. I only know of one ETF company in Canada that provides QEF statements, so you are likely stuck with Mark-to-market as an option. The default treatment "the excess distribution regime" almost always results in more tax (39.6%). It gets added directly to line 44 of your 1040, even if you've excluded all of your earned income.

The accounting effort in order from simplest to most complex, in my opinion, is:
1. Mark-to-market (don't need to worry about holding period, do need to track previously taxed "inclusions)
2. QEF (need to track holding period, reporting years may not be calendar years, complicated cost basis adjustments)
3. the default, excess distribution method (need a spreadsheet to determine previous years, interest charges, complexity of excess distribution in native currency, etc)
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MGeorge is neither an accounting nor taxation professional.
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