Selling non-registared Cdn Mutual Funds vs PFIC reporting

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leo
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Joined: Sat Dec 19, 2009 11:30 am

Selling non-registared Cdn Mutual Funds vs PFIC reporting

Post by leo »

Hi All,
Was just wondering if the form had any advise on the relative merits of keeping or selling a Cdn mutual fund to avoid any PFIC penalties. It seems to me that there may be instances where the tax burden on selling the mutual fund might be greater than the PFIC. Am I right or just confused? Is there a calculus one can use to figure out the best strategy?
nelsona
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Post by nelsona »

Selling does not avoid PFIC penalties, as you still need to report PFIC in the year you have it, and penalties only occur after you weresupposed to report it.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
leo
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Joined: Sat Dec 19, 2009 11:30 am

Post by leo »

Thanks for the reply. Do I understand you correctly that the penalty applies if you don't report the mutual fund to the IRS? Certainly, that makes a lot of sense, but I was referring more to the consequences of the increased tax payable "added" income from passive reporting vs a potential long term capital gain arising from selling a long-held position in a mutual fund. For example, if the added cost of keeping the fund is a small fraction of the taxable gain from selling why would one sell? Of course, one would have to figure out the reporting cost of keeping the fund--and that is the problem I have!
nelsona
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Post by nelsona »

I'm no expert on PFIC, as I have scrupulously avoid any posts on this matter, and think i should return to that policy.

others?
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
MGeorge
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Post by MGeorge »

Hello,

I don't believe there are any published penalities for not filing an 8621 for a Cdn mutual fund. I have read about examples of "alternate resolutions" when the IRS has determined that a taxpayer held shares of a PFIC and this results in the appication of the "deemed dividend election" which automatically taxes previous year's gains x an interest rate of 25%. These are only when the PFIC holdings are "significant" but I can't quantify the amounts.

I believe your options are:
1. Continue with the mutual fund, file an 8621 for each one with a Mark-to-Market election. Note that there is one 8621 per fund. This can lead to a double tax unless you force your funds to realize gains/losses at the end of each year.

2. You could move them into an RRSP where the taxing regime is immune to PFIC rules. Then just file 8621 this year, and all gains will be synchronized on your Cdn return - thus no double tax.

3. My favourite approach: Just declare the T3 income exactly the way you do on your Cdn return. You can attach a blank 8621 to your return with the words "see statement", then attach a statement saying that your mutual funds might be considered PFICs, but you hold a tiny share of them and have reported the income on your 1040.

The Mark-to-market option is not fair as it results in a double tax. The treaty would never allow this (if it were covered).
MGeorge
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Location: Canada

Post by MGeorge »

Sorry - I just spotted a mistake in my post. In the first paragraph, I should have stated that the deemed dividend election is the default, and previous year's gains are taxed at the maximum rate (35% this year) and interest is applied on previous years at a rate of 1.25x per year.
leo
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Joined: Sat Dec 19, 2009 11:30 am

Post by leo »

Hi MGeorge & Nelsona.
Thanks for your input. You've been helpful.
And Nelsona it's nice to see that there is an accounting topic that is kryptonite for the Serbinski Accounting firm forum--Bazinga!
nelsona
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Post by nelsona »

Oh, I'm quite sure if one was PAID to answer these Q's, it would be quite easily done. There are instructions after all.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
Mark T Serbinski CA CPA
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Post by Mark T Serbinski CA CPA »

Although there may not be specific penalties for failure to file form 8621, a US return is not considered complete unless all required forms are filed.

This may mean that the statute of limitations would not close the return after three years as in the case of complete returns, and civil penalties could be levied. Form 8621 is also part of the FBAR forms that IRS is now very concerned with.

Since this form changes the way in which distributions from PFIC's are taxed, as compared to regular dividends etc., there may be an accuracy related penalty for not using this method in including T3 income, so you should be careful if you are considering just listing the T3 income on the 1040.
Mark
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