PFIC enforcement

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lanman2000
Posts: 137
Joined: Wed Jul 29, 2009 8:30 am

PFIC enforcement

Post by lanman2000 »

Let me start by saying I absolutely follow all the rules and dutifully file my PFIC forms every single year. I choose only ETFs that produce the annual information statement which is a requirement to be able to use the QEF election. Following this approach is actually not that bad in terms of how difficult it is to file the 8621. I did it manually for several years and recently switched to using HR Block expat program which is surprisingly good. I always pay the extra $100 or whatever for one of their accountants to review my work and it's worth it. Rarely have I got something wrong but it's just nice to have a second set of eyes. Way way better than paying 1000s to accountants which is entirely unnecessary.

Now, that all said, I wonder if it ever really is worth it at all. Has anyone ever actually got some sort of an enforcement letter or been required to pay all the insane penalties that get thrown around in these forums and by accounting firms that clearly have a vested interest in making this seem terrible / expensive so as to frighten people onto over spending on tax preparation. Does the IRS really want to chase down every American living in Canada who happens to hold an ETF? I mean youre talking about hundreds of thousands of not millions of people and I wonder what percentage are dutifully filing every PFIC perfectly each year!!??? I would bet money it's under 5%. If you just file it like a normal investment and pay taxes on it every year would the IRS really take issue with that and make your life hell? I really don't think so.

Really interested in what others feel about the PFIC issue. I think it cast a net much wider than ever was intended by Congress or the IRS.
MGeorge
Posts: 313
Joined: Fri Jun 22, 2012 9:23 am
Location: Canada

Re: PFIC enforcement

Post by MGeorge »

Hello,

I've been wondering the same thing. I have years of experience filing QEF elections on form 8621 and I still struggle to keep track of all of the cost basis adjustments for each lot, etc. If we just treat Canadian ETFs and mutual funds as if they were regulated investment funds "RICs" then that should be considered reasonable business care which is the standard for compliance. I've thought of doing this, then selling and rebuying every 2-3 years just in case I get a letter from the IRS insisting on proper PFIC treatment.

The only concern I have with this is the warning that the returns will have a longer statute of limitations - technically, a missing 8621 while there is no fine, the return might be considered incomplete.

Another problem that I have had with QEF elections is sometimes the ordinary income inclusion is 3-4x larger than the actual distribution I received. I can never figure out how that works out. Watch out for HXCN, XIU, XEF - some years have been terrible for high income inclusions. Vanguard ETFs seem to be more reasonable.

For now, I'll keep filing 8621 - would like to hear other comments.
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MGeorge is neither an accounting nor taxation professional.
lanman2000
Posts: 137
Joined: Wed Jul 29, 2009 8:30 am

Re: PFIC enforcement

Post by lanman2000 »

Happy to hear that I'm not the only one wondering this. And you'll be happy to know that you're not alone in terms of it's super complicated to keep track of all this stuff and I really don't know why I'm doing it and it's just a huge waste of time and stress every year. Can I hear you about things not lining up in terms of the amounts and the distributions because they just don't. Not just that but I worry about how am I going to get a foreign tax credit for these things in Canada in a few years from now when they become taxable on the Canadian return but I've been paying US taxes all along. I'm almost positive that this is going to result in major double taxation. Either that or I'm just doing it all wrong or something I don't know. To answer your question about the funds I'm with vanguard and I have everything pretty much in VGRO
MGeorge
Posts: 313
Joined: Fri Jun 22, 2012 9:23 am
Location: Canada

Re: PFIC enforcement

Post by MGeorge »

Hello Ianman2000,

VGRO is a great fund, I have it as well. You're right about the double tax issue due to the timing. It's very odd how sometimes the QEF inclusions are very high, and then sometimes zero. I suspect no one at the fund companies really understands how to compute the inclusion amounts. I've noticed some funds routinely just use 1.1-1.2 times the Canadian distribution amounts. It looks like improvising.

The other problem is that a good portion of the QEF ordinary income should really be qualified dividends, and they would be qualified if it were a US domiciled fund. I held EWC for exposure to Canadian stocks and it showed qualified dividends. But the problem with doing this is the US dollar denomination, and the fact that Canada will tax it heavily as it if gives US source dividends.

I've written to my member of parliament about an update to the Canada-US tax treaty but still no reply after 11 months. I intend to keep fighting this while complying at the same time - I'll posted any updates here.

Cheers!
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MGeorge is neither an accounting nor taxation professional.
lanman2000
Posts: 137
Joined: Wed Jul 29, 2009 8:30 am

Re: PFIC enforcement

Post by lanman2000 »

Don't hold your breath on treaty changes... Many people and groups have been screaming about these issues for years. The others:

RESP // 529 equal treatment
TFSA // Roth equal treatment

It should be doable since they somehow managed to (mostly) equal treat RRSP // Trad IRA.
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