Canadian mutual fund

[calgary-alberta]

I live in US and have Canadian mutual fund account. Does Canadian mutual fund count as foreign trust? do I need to fill form 3520 when:

1. switch fund
2. close account (capital loss)

Thanks!

[nelsona]

IF the mutual fund is a trust or a PFIC, you need to file 3520 (or file PFIC form)every year that you had it outside RRSP, even part year (year-end for PFIC).

Only your fundco can tell you if it is NOT a trust or PFIC. Otherwise you need to treat it as such.

[rlb]

Is there any downside to treating a stock as a PFIC should the IRS decide it is not a PFIC? In other words, is it safe to treat anything as a PFIC if there is the slightest doubt in your mind about whether it is a PFIC or not? (Excluding, of course, any disadvantages resulting from the bother of the extra forms and from paying capital gains early as you go instead of at the sale.)

[nelsona]

Well, the goal of paying tax in 2 countries is to have them occur at the same time so the credit will match.

Taken to the extreme, you could report $100 every year thru PFIC, pay US tax for 10 years, and then sell and pay cdn tax on $1000 gain, and have no US income to write it off again, so you will pay double cap gains atx on your true gain.

So you may not simply be paying caop gains early, you may be paying it early AND at normal time.

[Jyrki21]

I recently read about the IRS requiring form 3520 for TFSAs and ruling that mutual funds may require form 8621. (I say may, but in practice my fund has no idea how the IRS characterizes it, so I imagine I have to assume it is one).

1) How on earth could a TFSA savings account be a "foreign trust" when it is a savings account like any other? I've reported its interest income as though it were a normal savings account, because Canada's tax-free treatment is the only difference.

2) As I did not know this before, what is the procedure for backfiling these forms? Does it have to be an amended 1040, or can one merely submit the missing forms?

[nelsona]

The TFSA is a trust because it has a trustee.

Since your TFSA has no doubnt genetrated income, you need to submit a revised 1040. Even if it has not, it is best to attach any missing form to a 1040-X.

3520 can be submitted on its own.

[aca]

My TFSA is not a trust and has no trustee. It's a deposit account earning 1.5 percent interest at ING Direct:

Tax-Free Investment Savings Account (TFSA)
http://www.ingdirect.ca/en/save-invest/tfsa/index.html

Other Tax-Free Savings Accounts at ING Direct are trusts, such as their Tax-Free Mutual Fund Account, but mine isn't. I report the income from my TFSA on Schedule B (Part I Interest), and I also report my ownership of the account on Form TD F 90-22.1 (the "FBAR"). My RRSP is indeed a trust, but I report it on Form 8891 (as well as the FBAR).

Can anyone point to authoritative information indicating that this non-trust has been deemed a trust by the IRS and therefore requires Forms 3250 and 3250-A to be filed?

[aca]

Sorry, that should have been Forms 3520 and 3520-A (not 3250) in my previous post.

- Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts
- Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner

I'm just having trouble imagining that I have to complete 10 pages of forms for a simple deposit savings account whose existence and income is already reported and that is, you know, NOT a trust. All I can think is that articles like this:

US Citizens Holding RESP and TFSA Accounts
http://hutcheson.ca/articles/us-citizen ... a-accounts

are really just talking about the majority of Tax-Free Savings Accounts that are indeed trusts, but it doesn't apply to mine. Right? (Gulp.)

[nelsona]

Nothing in what you showed me from ING states that either type of TFSA is or is not a trust. An RRSP holding only savings account is a trust, why would a TFSA be any different?

There has been no concrete statement that I've seen of IRS position on TFSA, neither on their treatment nor on their definition.

[aca]

I called ING Direct and they said it's not a trust. They said it's a savings deposit account registered with the Canadian Government as a Tax-Free Savings Account. They offered to transfer me to the mutual fund department if I would like to open a TFSA in the form of a trust. I then spoke with their mutual fund representative who said I could open up their mutual fund TFSA as either a corporation or as a trust, depending on how I wanted it classified. He said 95 percent of their clients choose to open their mutual fund accounts as trusts.

I wrote my United States accountant (CPA, MS-Tax) and my Canadian accountant (CGA), and they searched the "IRS primary authority guidance" and found nothing about a TFSA requiring Forms 3520 or 3520-A. They told me it's okay not to file Form 3520, "an onerous form," because my TFSA is not a trust -- as long as I report the interest income on Schedule B and the balance of the account on Form TD F 90-22.1 every year. They said that they file Form 3520 for their clients with foreign family trusts.

I called Hutcheson, the authors of the scary "All Tax-Free Savings Accounts are Trusts" article, and they said they're not accepting new clients because they're so busy with recently-acquired clients -- presumably filling out lots of Forms 3520 and 3520-A, most quite necessary, some not.

I know my RRSP is a trust because I have documents saying things like "The Canada Trust Company, Trustee" on my Designation of Beneficiary. But all my documentation from ING Direct just talk about "ING Bank of Canada, a member of CDIC." The main difference between the accounts is that my RRSP is self-directed -- an account in which I can place my money in a wide range of investments. My TFSA works the opposite way -- it's a simple savings deposit account that I have externally designated to be my TFSA and that ING Direct has registered with the Canadian Government.

So if my Canadian accountant, and my United States accountant, and even ING Direct itself, and I personally cannot find any documentation indicated that my TFSA is in any way a trust, how could the IRS possibly track me down and tell me that it's a trust? Where would the IRS find documentation for such a claim?

I'm just as paranoid as the next guy, especially when the penalty starts at $10,000 per year, but I don't fill out IRS forms about owning a farm when I don't own a farm, just to be on the safe side. The same sanity should apply when I don't own a trust, right?

[nelsona]

RRSPs were in existence for 30 years before they were declared trusts by IRS. Cdn mutauls have ben arond 100 years before they were declared PFICs by IRS.

While many people may have TFSAs that are savings accounts (why, I do not know, since interest rates are so low, there would be no income to be taxed), most would have more sophisticated accounts, which will be considered trusts as well as contain PFICs.

[nelsona]

and hutcheson is certainly not the only firm filing 3520 for TFSA. they were simply the on eI was able to point to quickly as having recent IRS information.

[aca]

I opened my TFSA as a simple high-interest savings account (originally making 2 percent interest) for three reasons: (1) so that it was CDIC insured, (2) because I want no possibility for losses, as I might need the money, and most importantly, (3) explicitly to avoid any possible additional U.S. filing requirements.

You're right, it doesn't gain me much for now -- just some interest income that's not taxed by Canada and not big enough yet to be taxed by the United States. I'll likely just close it this year, as I've already lost a weekend reading about Form 3520, and it's not worth it. Maybe the IRS will come out with some kind of Form 8891 for TFSAs as they did for RRSPs, or perhaps they will at least publish some clear information about TFSAs.

Thank you for your comments. I suspect all the "TFSAs are trusts" information on the Web I've found must be because the accountants can't imagine someone opening a simple high-interest savings account for designation as a TFSA. Yet that's what I, and others on this forum, have done. They're not trusts.

[Jyrki21]

Thanks for both your comments.

Nelsona, to be clear, I am in the exact same position as ACA -- I *have* been reporting its income as interest income to the IRS, and it is the identical ING simple tax-free savings account, like any other savings account.

It is the Hutcheson article that I also came across making me wonder about this. So I think I agree with ACA that there is no way a simple savings account could possibly be classified as a trust, and perhaps I will un-drain it.

As to my earlier question about mutual funds, though -- if I wanted (or perhaps more properly, "felt compelled") to backfile forms 8621 for a few ING mutual fund units, how is that done? There is no impact on the income I've declared.

[nelsona]

1040-x for each year, with attached forms.