Clarification on capital gains within Canadian Mutual Funds

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quickcanuck
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Clarification on capital gains within Canadian Mutual Funds

Post by quickcanuck »

I am one of the "accidental Americans", born in the US but have lived all my life in Canada, just discovering the requirement to file US tax returns.

I have been reading through the material provided in this forum - many thanks to the folks who have contributed over the years. I am hoping to get onside with the IRS by filing returns for the past few years, and am experimenting with TurboTax to produce a return for 2010.

One area that I am not clear about is to how to handle Canadian mutual funds that are not RRSP's. I have several TD funds that reinvest their income as reinvested dividends throughout the year, and issue a T3 for that income. I understand that income is declared on form 1099. The fund's net asset values also increase as the value of the underlying assets increase, but no actual capital gain is triggered unless the fund sells some assets and distributes (reinvests) a capital gain (and identifies that on the T3); or when I sell the mutual fund and calculate the gain based on my adjusted cost base. Is the capital gain therefore only recognized on a US tax return when the fund is sold or has a CG distribution, or is the unrealized CG calculated annually through form 8621 and declared as income each year?
nelsona
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Post by nelsona »

Income is declred on form 1040. 1099 doesn't apply here since these are Cdn firms. You simply report the various incomes direcrly on your return.

Interst, cap gains, and dividends.

8621 is for specific types of mutual funds. You still need to report the income on your return.
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nstudent
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Post by nstudent »

nelsona:

by "cap gains" you mean the realized ones, not the un-realized ones?

"8621 is for specific types of mutual funds." I am struggling with this one. What types of mutual funds are you referring to?

Many thanks.
nelsona
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Post by nelsona »

cap gains can be distributions or sales.

8621 is for PFIC. No one I know has definitively stated what Cdn MFs are PFICs.
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quickcanuck
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Post by quickcanuck »

Thanks, Nelsona. If I therefore report the income on an annual basis, and the mutual fund company does not make a capital gains distribution, then the only time the capital gain is recognized is when I sell the fund - and at that time it is reported as a long term capital gain?
nelsona
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Post by nelsona »

Yes, except that you still must determine if the fund is a PFIC. IF it is, you pretty much have to pay cap gains as you go, year over year, even without any transactions.
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quickcanuck
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Post by quickcanuck »

Sounds like there is some "room for interpretation" as to whether a Canadian MF is a PFIC? Any resources or guidance on that question that anyone can point to, or precedents?

Would it be practical to catch up on my back reporting on 1040's and FBAR's for 3 years now assuming that the MF's are not PFIC's, and let the IRS come back and tell me that they should be PFIC's and need 8621's? I did do a quick test and it looks like even if I take the undistributed capital gains as "other income" that I do not owe any tax, so would it be "safer" to just file the 8621's anyway?
nelsona
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Post by nelsona »

MFs are PFICs unless you know otrherwise, so the room for interpretation is not favourable.
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patti
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Post by patti »

"MFs are PFICs unless you know otrherwise, so the room for interpretation is not favourable."

I seem to remember reading something on this site that you did not consider Canadian MFs to be PFICs since they pay out distributions as they go. Has something changed???
nelsona
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Post by nelsona »

The mutual funds might pay out, but what about the components?

In any event, these rules are changing yearly as IRS aggressively seeks out foreign income.

For example, last year MFs in RRSPs were exempt from these rules, not this year.
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tsanaha
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Post by tsanaha »

I heard that trusts issue T3s and corporations issue T5s.

Would that make difference if or not PFIC ?
nelsona
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Post by nelsona »

No. It doesn't matter on the Cdn definition. Its the IRS's you have to be concerned about.

They are even thinking of making RRSPs corporations.
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andied
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Post by andied »

nelsona, you wrote above "For example, last year MFs in RRSPs were exempt from these rules, not this year."

Say what? I thought I was safe keeping MF's, reit's, etc. in my RRSP, and not have to deal with all the reporting. Where can I get more info?
nelsona
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Post by nelsona »

Look on the internet. There are new foreign account and holding forms coming, apart from FBAR. There have been estate tax rulings which expose RRSPs.

It does not look good.
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nelsona
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Post by nelsona »

Remember, the treaty only protectas addresses taxation of RRSPs. It does noting with regards to reporting requirements.
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