form 8621 and Canadian mutual funds

[unionjack]

Is it necessary to file form 8621 if, as a US resident (1040 filer), I owned Canadian mutual fund shares? I've read conflicting things on other sites (one saying that all Canadian mutual funds fall under this form and another saying that mutual funds don't count as the kind of company this form applies to.)

[nelsona]

I'd be curious to know what other sites you are talking about.

I know of no one that suggests this course.

That said, US ressidnts owning ANY Cdn mutaul funds (outside their RRSP) is problematic due to SEC regualtions. They can only be 'held' or sold. Not bought or traded.

[JohnSt]

Nelson, see here:
http://www.advisor.ca/images/other/ae/a ... arried.pdf

"Passive income generally includes interest, dividends, rent and capital gains from certain property transactions. The PFIC rules usually apply to Canadian mutual funds or other similar investments as well."

Also here:
http://www.us.kpmg.com/microsite/ies/ta ... apter3.htm

"Any U.S. person, who invests in a passive foreign investment company (PFIC), such as a foreign mutual fund, will pay tax and an interest charge on any gain derived from the sale of the investment or on an excess distribution from the PFIC."

Also here:
http://www.rpifs.com/offshoretax/otpfic.htm

"The tax code refers to any kind of corporate mutual fund or investment company outside the U.S. as a passive foreign investment company or a PFIC."

Even if the gain is not realized, would not the passive income or distribution cause a problem?

[nelsona]

I don't there is any question that one would pay tax on any gain. Cdn mutual funds genearlly disribute gains yealy.

The is uuse is filing the form in question.

[unionjack]

The third site that JohnSt links to was one of the ones I saw.

The other site, that seemed to say the opposite, was David Ingram's Cen-ta site. My browser for some reason won't let me cut &paste the link, but if you type "form 8621" on the site's search page it's the only reference that comes up.

About halfway down the page, Ingram responds to a Can res/US citizen who owns "lots of Can mutual funds" and who asks about 8621. Ingram says the form is not needed because the Canadian taxes will usually "wipe out any US tax by filing form 1116." (I don't understand the connection b/t 8621 and 1116.)

[unionjack]

In my case, I moved back to Can from US and am filing 1040 for the year. I bought a mutual fund after I moved back. If I file dual status instead, with 1040NR covering the time I owned the fund, I guess the problem would not arise.

My mutual fund (a money market) paid "interest" periodically during the year.

From reading the form, I'm not clear on exactly what it's for (gains; passive income; is it a tax on top of what you pay by declaring the interest from a fund on 1040 as regular interest/dividend income?)

[unionjack]

1) Ok, after reading JohnSt's first two links again, I think I understand a little bit better. It seems that the form is, in part, for ensuring that UNdistributed income is taxed in the year it's earned. So does this mean that if you own a fund that distributes your income yearly, there's no deferred tax and therefore that 8621 would be unnecessary? (I'm not an accountant, so I'm struggling a bit here.)

2) The links also seem to say that the form is for distributions that are "excess distributions." Does anyone know if this applies to mutual funds and, if so, how share-owners know when their distributions are "excess"?

[nelsona]

1) is correct.

[JohnSt]

1) Thanks Nelson. It is confusing.

2) FWIW, and I'm certainly no expert, my understanding is that some mutual funds do an excess distribution every X number of years. You might get a clue by looking at past distribution patterns. I believe the 8621 instructions quantify the excess amount.