QEF dividends

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skobes
Posts: 24
Joined: Sat Mar 25, 2017 10:41 pm

QEF dividends

Post by skobes » Wed Aug 19, 2020 2:03 pm

Suppose a US person holds shares of a PFIC (such as a Canadian ETF) that is a pedigreed QEF, and some of its ordinary earnings are distributed as dividends during the year.

Should those dividends be reported on Schedule B? If so, how do you avoid the redundant inclusion of income between

- 8621 Line 6a (pro rata share of ordinary earnings) -> 1040 Schedule 1 Line 8 (other income)
- Schedule B Line 6 -> 1040 Line 3b (ordinary dividends)

Presumably the dividends are excludable pursuant to IRC § 1293(c), but I am unclear on how to indicate this on the return.

(Assume the taxpayer is NOT making a section 1294 election.)

MGeorge
Posts: 309
Joined: Fri Jun 22, 2012 9:23 am
Location: Canada

Re: QEF dividends

Post by MGeorge » Wed Sep 02, 2020 12:05 pm

You're right. Anything distributed from a pedigreed QEF is not to be reported as a dividend. It becomes a "non-dividend distribution" and it lowers your cost basis in the shares.
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MGeorge is neither an accounting nor taxation professional.

skobes
Posts: 24
Joined: Sat Mar 25, 2017 10:41 pm

Re: QEF dividends

Post by skobes » Sat Sep 05, 2020 1:48 pm

Thanks. To be clear: you are saying to leave it off of Schedule B entirely?

MGeorge
Posts: 309
Joined: Fri Jun 22, 2012 9:23 am
Location: Canada

Re: QEF dividends

Post by MGeorge » Wed Sep 16, 2020 5:59 am

That's right. Once you make the QEF election, you are no longer required to report distributions from the fund. Instead you report the QEF statement income on 8621. It is usually higher, but I've had a few cases were it is lower than the fund's actual distribution. Important to note that when you do receive an actual dividend from the fund, it lowers your cost basis, so effectively, you are still counting that income, but is only when you sell that it affects you (because you reduced your cost basis). I hope this helps.
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MGeorge is neither an accounting nor taxation professional.

skobes
Posts: 24
Joined: Sat Mar 25, 2017 10:41 pm

Re: QEF dividends

Post by skobes » Tue Sep 22, 2020 5:04 pm

Yes that helps, thanks.

> effectively, you are still counting that income, but is only when you sell that it affects you

Perhaps you didn't mean this, but for maximum clarity: it's not as if the tax on the dividend is deferred until sale. Distributions reduce basis, but the pro rata earnings increase basis, and as you note we usually have earnings > distributions. So it's more like the dividend is taxed as part of the current 8621 income. Example:

prior basis in QEF = $30000
8621 Line 6a pro rata share of earnings = $2000
amount distributed as dividends = $1500

In this case the fund earned $2000 and distributed $1500. We have current gross income inclusion of $2000 and updated basis of $10000 + 2000 – 1500 = $30500. The basis ends higher, to the extent that we were taxed on undistributed income inside the fund.

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