Do I Need an AIS for a PFIC?

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Do I Need an AIS for a PFIC?

Post by nielkfj » Tue May 26, 2020 7:58 pm

I am considering putting some money into a Canadian ETF as an investment. Since it is Canadian it will be considered a PFIC by the IRS. However the company that runs the ETF does not issue “Annual Information Statements” (AIS).

1) Is it a lot more difficult to report income from a PFIC on my U.S. tax return without an AIS?

2) I understand that an AIS is needed in order to take the “QEF election” for a PFIC. Is it generally preferred to take the QEF election for a PFIC?

3) How does taking the QEF election for a PFIC affect taxation of distributions from the ETF, and capital gains or losses realized when I sell shares of the ETF?

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Re: Do I Need an AIS for a PFIC?

Post by MGeorge » Thu Jun 04, 2020 7:49 am


I've held Canadian ETFs with the QEF election and with the mark-to-market election.
From a tax point of view, the good part about the QEF election is that it allows long term capital gain treatment. However, I have found that the book keeping required with the QEF election is much more complicated. To answer your questions:
1. Not at all. Without the QEF election, the easiest thing to do is to choose the mark-to-market election. The only drawback is that you'll pay tax at ordinary income tax rates on both realized and unrealized gain from the ETF. Also, you will report any distributions as ordinary dividends (not qualified) with the mark-to-market election. QEF elections are complicated. You have to track the number of shares x days per year and then use the appropriate factor from the AIS. Then you have to adjust your cost basis up for any income from the AIS, and reduce your cost basis by any distributions received.
2. Yes. With the QEF election, long term capital gains treatment occurs if you hold the shares for more than a year. It isn't as good as it sounds though. Look at the AIS statements for XIU (iShares TSX ETF). In tax year 2018, the ordinary income you'd need to report was very high. Almost negating the benefit of the QEF. Most QEF inclusions are taxed at ordinary rates and can be several times higher than the actual dividend distributed.
3. With the QEF election, you report only the income from the AIS. You don't report the actual dividends you received. You adjust the basis up for income reported on 8621, and adjust your basis down for dividends actually received (and not reported). Then when you sell, you have the luxury of treating like any other US stock. Schedule D, long term if held for more than a year.

I hope this helps!
MGeorge is neither an accounting nor taxation professional.

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