Clarification on capital gains within Canadian Mutual Funds

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nelsona
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Post by nelsona »

No. Your RRSP is a trust, and must be dealt with as such. Moreover, you cannot claim undistributed income as income until it is distributed.

So far, PFICs within RRSP are exempt from PFIC rules... so far.

Btw, if you want to trigger the cap gains you are quite free to swap some units around to trigger the gains.

But for 2010, your RRSP is already settled.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
quickcanuck
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Mark to Market income on 1116

Post by quickcanuck »

The gain from mark to market on a 8621 is taken into "other income" on the 1040. Is this income passive income when completing my 1116, or general income?
nelsona
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Post by nelsona »

Passive
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quickcanuck
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Post by quickcanuck »

Interesting, so to allocate my Canadian taxes paid on the 1116 I would add the MTM amount to my Cdn taxable income and take the total passive income (Int + Div + CG + MTM gain) as a % of the new larger total and apply that % to my Total Cdn Tax paid? I obviously did not pay tax on the MTM amount...
nelsona
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Post by nelsona »

Not sure about your calculation.

The "income" that is reported on 1116 is income from your 1040. So whatever foreign income you report on your 1040, including MTM, can be put on 1116s, in the various buckets.

The Cdn tax paid however comes form your Cdn tax return. The apportionment of tax is based on the Cdn tax. Since no Cdn tax was paid on that income, there is no way to apportion any tax to the MTM income. You can only use cdn tax that was paid on your other passive income.

Example: Cdn return has $50K of passive and $50K of general income. Assuming it to be all interst (since cap gains and dividends would skew the apportionment) you have, say $40K in tax, this would be $20K passive $20K general.

Your 1040 has $60K of passive income ($50 + $10K MTM) and $50K of general.

You can put $60 of passive income on your 1116, but you can still only use $20K of the Cdn tax.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
quickcanuck
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Post by quickcanuck »

Thanks very much for your detailed answer! That helps clarify the 1116, unfortunately it leaves me with a big tax problem - the passive income from interest and dividends is very small compared to the MTM gains and so I get very little foreign credit even though my total Canadian taxes paid are more than enough to cover the US tax payable. It seems the PFIC rules are very unfair because losses (remember 2008?) can not be used to offset gains (2009 recovery). No option to use QEF, and the excess distribution methodology is even more unfair. Ouch...
nelsona
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Post by nelsona »

Yup. You unfortunately need to be generating cap gains tax in canada for this to work.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
quickcanuck
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Post by quickcanuck »

Yes, but when I recognize the capital gain in Canada the losses will offset the gains, so the net gain can be much smaller than the US annual calculation.

Since I can't use my full Canadian tax to offset the MTM, if I use the full Canadian tax as a deduction instead of a credit, do I have to adjust for the amount for foreign income exclusion on 2555? Can CPP and EI count toward the deduction amount?
nelsona
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Post by nelsona »

Well, I meant you need to be generating equivalaent gains/losses.

If you sell in years that you lose, you will get those losses. Not the best scenarion, either way.

Your foreignm exclusion income is only from earned income. This has nothing to do with it.

If you use 2555, your passive income, and the tax related to it do not change. CPP and EI are all related to your earned income, this do not affect the tax on your passive income.

You can always use the tax on non-excluded income as a deduction, but since I would think that at some point you will be declaring positive income you will be using the tax as a credit at some point, I would be carrying it forward, rather than using it as a deduction.
Example: you have PFIC income in one year with no other cap gains. You can use the tax from other years towards this.

I only advise people to use foreign tax deduction when they incurr a one-time Cdn tax that cannot be used as a credit. Otherwise, cary forward is always best, since you will have ongoing Cdn taxation and US reporting.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
quickcanuck
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Post by quickcanuck »

Quick update - it looks as if this will work out OK after all (no US tax payable). The MTM amount for 2009 - a large gain following a larger loss in 2008 can be reduced somewhat because the MTM loss in 2008 is limited to previous MTM inclusions, so not all of the loss is booked on the 8621, and the amount the loss that exceeds the previous inclusions is not subtracted from the cost base for the fund....so the gain for 2009 is reduced by that amount, and is small enough to fit within my deductions and exclusions.
jenfin
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Post by jenfin »

This is becoming quite insane. How can anyone be penalized for non-compliance with the unknowable.

If the ruling classifying Canadian based mutual funds was only made in 2010 is the requirement for PFIC treatment only on a go forward basis?
Also I understand it also applies to Canadian based ETFS, are they apt to go after Segregated Funds (insurance contracts) retroactively as well?

Here I thought I was being a law abiding "citizen" by filing all these years in spite of disagreeing with the principle, only to get blindsided by constant rule changes, not necessarily in the public domain, and generally punitive. There is nothing fair about the whole process.

This is all particularly punitive to seniors living on fixed incomes. There is no "earned income deduction" for passive income. Prudent investing for most seniors would be in mutual funds or ETFs. As a Canadian resident for over 40 years (and a dual citizen) I have invested in many funds, often in small amounts, over the years. Does the IRS really want all this back paperwork? Lets see 15 funds over 7 years ..that is 105 8621s. I am not sure what the "HIRE" act does for hiring other than creating jobs for accountants and IRS staff!

Am I allowed to expound like this on this site? Sorry to go on but I find this extremely stressful. The Canadian government seemed to step in and advocate for the Canadian Financial Institutions is there no interest in or forum for individuals to raise issues with governments on both sides of the border about the unfairness of these provisions which are disciminatory against Canadian Citizens who hold US citizenship vs a vs other Canadians regardless of how many years it has been since they resided in the US.
Adamrock
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Post by Adamrock »

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Maria
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Post by Maria »

I'm a Canadian living in the US. I left a couple of income mutual funds behind, bank accounts term deposits and a RRIF. The RRIF no problem, there's 8891 for that. The rest, including the mutual funds, I always listed on the TD F 90-22.1 sent to the Treasury after faithfully declaring all the non-registered income received in Canada. So far so good.

I'm very stressed now over this business about mutual funds but after I comply with f8621, I may even sell them if this yearly obligation becomes a real pain, doing any selling on a January first or second, when the "gain" if any over the new basis (f8621 lines 5a and 5c) will be minimal. That way any sizeable capital gains becoming "excess distributions" (with all the punitive tax and interest to follow) would be kept to a minimum, I believe.

Oh and by the way, 2011 tax year is the first year for mutual funds inclusion in the f8621. Some power decided they were "corporations" instead but this did not get enacted into law until March 18, 2010 so it does not apply to tax years beginning BEFORE the date of enactment.

***The current instructions to Form 8621 limit the filing requirement to years in which the taxpayer (1) receives direct or indirect distributions from the PFIC, (2) recognizes gain on disposition of the taxpayer’s interest in the PFIC, or (3) makes a QEF or mark-to-market election. However, Section 521 of the Hiring Incentives to Restore Employment Act of 2010 amends Code Section 1298 to require any US person who owns an interest in a PFIC to “file an annual report containing such information as the Secretary may require.â€￾ Code Section 1298(f). The instructions to Form 8621 have not been amended to reflect this change in the statute which was effective March 18, 2010. The Internal Revenue Service has released guidance which confirms that PFIC investors who were not required to file Form 8621 before enactment of Code Section 1298(f) will not be required to file the Form for tax years beginning before the date of enactment solely as a result of the change in law. See Notice 2010-34, 2010-17 IRB 612 (April 6, 2010).***

From: http://rewardlaw.com/Publications/Artic ... PFICs.aspx
Maria
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Post by Maria »

Forgot to say. I'll go the MTM route.
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