Foreign Universal Life Insurance

[JY]

Hello,
I am a Canadian working in U.S. In preparing the 2011 tax return, I am very confused with following questions, and appreciate helps:

1) I have a Universal Life Insurance policy with case surrender value that was bought in Canada. Do i need to report it using Form 3520 or another form? The policy earned little investment interest, should this interest be included in 1040 Schedule B?

2) A thread of the forum mentioned Form 720 for the taxation of foreign life insurance premium, do i need to attach the Form 720 with 1040, and where should i put the tax in Form 1040?

3) I paid the insurance premium last year from the policy investment balance, is this a distribution from the policy?

4) I have a RESP but didn't contribute from 2008. Do i still need to report this RESP using Form 3520 every year and include the interest in 1040 Schedule B? Since the RESP invested in mutual fund, is the Form 8621 mandatory for 2011 and future tax return per section 1298(f) even without contribution to and income from the RESP?

Thanks,

[qweryt]

4) Yes and yes.

[nelsona]

... and the RRSP holding mutual funds then also requires PFIC filing.

[nelsona]

i meant RESP.

[Jospher]

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[Filo]

@JY: The form 8621 instructions I downloaded don't cover section 1298(f). Where did you find the instructions for 1298(f)?

[JY]

Thanks for the help to all replies.

Filo, regarding the 8621 i downloaded Rev. Dec. 2011. I read the instruction again after seeing your question, and this time i think form 8621 may not be filed as MUST even in tax year 2011 if a PFIC fund meets the followings:

1) No recognized gain on a direct or indirect disposition
2) No excess direct or indirect distribution
3) You are not making an election (i.e. the PFIC will be treated as Section 1291 fund)

The instruction mentions section 1298(f) at beginning, however notice 2011-55 suspends the reporting requirement for tax years beginning after March 18, 2010 until the release of a new revision of 8621.

However, following the release of revised form 8621, you may need to submit it for all the taxable years that has been suspended since 2011 to the next tax return.

Is my understanding correct?

Thanks,

[g3kamdbs]

Hello JY,
Regarding your foreign life insurance, I have done significant research in this area and this is what I found out.

1. You are require to file form 720 and pay 1% of the premium. Form 720 is due on every quarter of the year. It is being filed separately and there is no need to attach to form 1040.

2. If your insurance policy produces fixed-rate return, it will be treated as a PFIC and you need to report it on form 8621. The interest and dividend are considered distributions.

3. On Form 8621, I am not sure if you can use the Mark-to-Market method as insurance policy is not a publicly traded entity. I use the standard method of treating the policy as 1291 fund, and the way to calculate the excess tax and distribution is not fun at all. The calculation is ridiculously complex and time-consuming.

Hope this helps.

[Filo]

@JY:

For PFICs governed specifically by the new US Code section 1298(f), I agree with your understanding. So far as I can see, Canadian mutual funds are such PFICs as of the 2011 tax year. Nobody seems to have any information whatsoever on what the instructions for handling these 1298(f) PFICs will be. One hopes they will be merciful.

[zunen]

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