Algorithm for doing a 3520-3520A in 2nd year and beyond

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CdnAmerican
Posts: 229
Joined: Tue Aug 30, 2011 12:15 am

Post by CdnAmerican » Tue Feb 10, 2015 12:29 am

Hi MGeorge - Thanks for this! I'm curious about others' takes on this too.
Part I - Line 2: I would argue that I myself am the agent. That's worked so far, at least.
Part III - Line 8: I have not sent in these documents, but it's only necessary to send them in if an agent is not reported. So your approach here is correct if you are not indicating an agent, I think.
3520A - Page 3: I've never heard of the 50-50 rule. We just do it based on which spouse's name happens to be on the paperwork. Here in Alberta, it's always just one of us.
1040 - I treat dividends the same way, except for not including the 50-50 piece. I also add/subtract in net gains/losses to the mutual funds, matching my values with those obtained in the 8621.

So, pretty close for two non-tax professionals! My primary evidence that I am doing it well lies in the lack of audits from these forms (after the first year I did them, at least). Absence of evidence is certainly not proof, of course..
Not a professional opinion.

MGeorge
Posts: 300
Joined: Fri Jun 22, 2012 9:23 am
Location: Canada

Post by MGeorge » Tue Feb 10, 2015 10:01 am

Hi CdnAmerican,

Thanks for these comments. I was wondering how you treated the Agent issue - I didn't even consider that I could put myself as the agent. I think it makes sense because the onus is on us to provide the 3520A which would ordinarily be the agent's job. I think it is significant that your approach hasn't attracted any audit attention - even though as you say, it isn't proof that it won't down the road. I just assumed that an agent had to be 3rd party, but if you look at my approach, I'm saying that there is no agent, but then I provide the details myself - so again no 3rd party.

Last year, I received a 1099-div for my kid's RESP and it had my name, and my wife's name on it, but only my SSN as my wife is an NRA. This worried me because it could be argued that she would have to file a 1040NR to pay her 15% on the dividend since nothing was withheld. Due to this, I got rid of the US dividend producing investment. It would be easier for me to claim it all - but I don't think I have to.

I'm still not 100% convinced that my "community property" 50-50 arguement will hold water. I'm curious what you or others think on this topic.
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MGeorge is neither an accounting nor taxation professional.

DaveM
Posts: 52
Joined: Thu Jun 12, 2014 12:46 am

Post by DaveM » Tue Feb 10, 2015 4:56 pm

Just some thoughts, regarding some of the above, after a year spent on this subject:

The accountant that initially helped me with the first RESP 3520/A forms suggested making myself (as Trustee) the U.S. agent. And, in fact, the IRS 2014 3520A Instructions on p5 give a good template (which can be entered as a Statement) for declaring yourself the U.S. agent.

This makes sense for more than one reason: First, few RESP promotors are going to want to or even know about being a U.S. agent (mine certainly didn't). Second, you avoid having to send a lot of trust documents into the IRS with the forms.

The third reason is part of a broader point that has become apparent to me: Particularly when it comes to issues related to RRSPs and RESPs that don't fall into the categories that the IRS would be most interested in, it seems unlikely that the IRS is going to audit on matters that are of little practical interest to it eg. the U.S. Agent or some of the minutiae of how to fill in these forms. (It turns out that many accountants are confused about what to put where in parts of the 3520/A forms.)

The most important information that I think agents (who have limited time available) focus on have to do with identifying the RESP owner information and ID, amounts showing income to the trust and particularly the end-of-year value of the trust (eg. amounts shown in 3250A Part II and Part III, Form 3250A p3 Line 9, Form 3250 Part II Line 21 and so on) and consistency of amounts on forms from one year to the next.

I also think a potential flag would be if the Foreign Grantor Trust Owner Statement from Form 3520A is not filed with Form 3250 as required on Form 3520 Part II, Line 22.

GatorSPO
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Joined: Fri Feb 27, 2015 7:59 pm

Post by GatorSPO » Fri Feb 27, 2015 8:04 pm

I just wanted to chime in and say this has been extremely helpful in getting up to speed on the documentation and de-mystifying the process.

Tacking 3520-A for my RESP which is invested in mutual funds. Well under the PFIC reporting minimum for all my investments at least. Most here seem to have theirs in GIC's, so the guide is helpful to a point...

Of course accounting for the growth related to the funds is giving me pause on the form. It's not interest, its not an ordinary gain, nor is it specifically a capital gain since I haven't sold the investment. Thoughts?

MGeorge
Posts: 300
Joined: Fri Jun 22, 2012 9:23 am
Location: Canada

Post by MGeorge » Mon Mar 02, 2015 11:09 am

Hi - I run into this all the time. I report any income from form 8621 as "other income" then I attach a statement saying that it is income from form 8621.
If it is due to a market to market election, I report the mark-to-market gains as this "other income". The dividends from said funds are still dividends.
If the income on form 8621 is from a QEF election, then I report The PFIC statement items as "other - form 8621 income". The gains and losses are on schedule D so, these go on the gain line of 3520A.

This is what I have done for the past 3 filings and I haven't heard anything.
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MGeorge is neither an accounting nor taxation professional.

CdnAmerican
Posts: 229
Joined: Tue Aug 30, 2011 12:15 am

Post by CdnAmerican » Sun Feb 14, 2016 6:47 pm

Also a bump for this thread too. This one fits my experience with the 3520 for an RESP.
Not a professional opinion.

DrJFM
Posts: 9
Joined: Wed Jun 05, 2013 6:53 pm
Location: PEI

Post by DrJFM » Sun Feb 21, 2016 4:49 pm

[quote="DaveM"]Just some thoughts, regarding some of the above, after a year spent on this subject:

The accountant that initially helped me with the first RESP 3520/A forms suggested making myself (as Trustee) the U.S. agent. And, in fact, the IRS 2014 3520A Instructions on p5 give a good template (which can be entered as a Statement) for declaring yourself the U.S. agent.

This makes sense for more than one reason: First, few RESP promotors are going to want to or even know about being a U.S. agent (mine certainly didn't). Second, you avoid having to send a lot of trust documents into the IRS with the forms.
[/quote]

Much of this template is ueseful information. However this concept of self appointing yourself as the US Agent of the trust is NOT A VALID PROCESS. The IRS Instructions for 3520A clearly spell out aspects of what an agent must be ie
"A U.S. agent is a U.S. person (defined later) that has a binding contract with a foreign trust that allows the U.S. person to act as the trust's authorized U.S. agent (see the instructions for Part I, Lines 3a through 3g, later) in applying sections 7602, 7603, and 7604 with respect to:Any request by the IRS to examine records or produce testimony related to the proper U.S. tax treatment of amounts distributed, or required to be taken into account under the grantor trust rules, with respect to a foreign trust orAny summons by the IRS for such records or testimony."

The later instructions for Part I, Lines 3a through 3g further detail the necessary CONTRACTUAL arrangement between the trustee and the Agent -- even giving a sample contract that is signed by the trustee.

I my opinion and in my 5 years of filling, I always indicate that there is no AGENT and fill out the requisite details this requires. The Trustee is the institution holding the RESP. The Trust is detailed in your paperwork and is typically something like RESP Trust Agreement # xxxxxxx followed by your individual account # . Mine is "RESP Plan Number 103301 (Account # XXXXXX)".

Page one is signed (someone has to be accountable and it is you) with "Substitute 3520-A per line 33 of Form 3520" as the title.
Other pages are signed and use as title " Account Holder/Grantor"

Since I don't own the Government Grant money or the gains on such (Read the rules on closing out an RESP) I have limited my Corpus to my balances less the government grants. I failed to add the interest and appreciation in earlier years to my corpus. The CRA wants most earnings to go to the kids' education (again, read about early collapse of an RESP)but for US tax purposes, once I paid tax on earnings and interest, it should be post tax dollars and for US purposes should join Corpus. Wish I had just kept adding to Corpus.....

Finally, I put the difference in exchange rate from prior year closing balance on Part III Line 10 (Left hand side) ie Line 1 to 7 from prior year End of Tax Year directly transcribed. Line 10 is the difference between this amount and the corresponding total using the current year exchange rate. This makes the total at line 11 = total assets using current year exchange rate. This year, the entry in line 10 was negative ie a currency exchange loss and was shown in parenthesis eg (7,400). I did not attach a separate statement to explain line 10 but merely write on the line before the entry "Currency Exchange Gain (Loss)"

Your mileage may vary and all such other disclaimers apply. Just relating what I do and some thoughts. I just started dealing with RESP withdraws. If you think the early depositing years are bad -- wait until your begin withdrawing. My son is US/Canadian dual citizen in University and it is not a pretty tax form picture (all ending with no tax owed, just a father with even more grey hair).

MGeorge
Posts: 300
Joined: Fri Jun 22, 2012 9:23 am
Location: Canada

Post by MGeorge » Wed Mar 02, 2016 2:32 pm

Thank you DrJFM for your addition to this post.
I agree with your comments about assigning myself as the agent, although I keep doing it to cut down on paperwork and I don't expect I'll have any problems with it. I do not have a contract to be the agent.

I am curious about why the withdrawals would be challenging from a reporting point of view. Is it just because your kids are US citizens? My kids are not US citizens (I am). I use 3520/3520A for my TFSA, and have taken withdrawals, and have simply listed them as distributions from the trust. Would it be different for RESP withdrawals? Aren't we just removing after tax money and gifting it to our own kids for educational purposes (ie. no gift tax applies)?

I appreciate your comments.
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MGeorge is neither an accounting nor taxation professional.

DrJFM
Posts: 9
Joined: Wed Jun 05, 2013 6:53 pm
Location: PEI

Post by DrJFM » Wed Mar 02, 2016 8:54 pm

Dear MGeorge (and any others fighting w these things)

Yes, as you suspected, my RESP beneficiary is a US/Canadian Dual Citizen student who is reluctant to renounce (expensive too) US citizenship until certain he may not want to study in US (and would save out of country tuition as a US citizen).

He had to file 3520 as beneficiary (sign it, really, after I fought through it), attach my substitute 3520A and will file US income return shortly. Since the Canada education grant has never been taxed, it is income in both countries. Due to 15 years of moderately poor record keeping, stock market ups and downs and combining and rolling over 2 seperate RESP's into one Family RESP. my numbers are not real clean and the computation of interest on pre-tax monies looked a bear. I filled it all in to the best of my abilities and suspect that I will not hear anything back -- not enough money involved to get the IRS interested.

I made a withdraw of corpus ( ie my contribution) and that part was handled as you suspected -- like a return of capital and no tax implications other than filling out my own 3520 Part III line 24 listing the distribution. I put the transferred (e) FMV and the distribution (c) FMV both equal and that make column (f) equal to zero. Should be good.

Several years ago I stopped contributing and my non-US wife opened separate RESPs to complete our educational savings. I rolled my accounts for 2 kids into one account for the family (one less 3520/3520A). No new deposits, moved it to basically money market holdings and earn only (very little) interest to report each year. Ultimately I forgo stocks and possible decent gains to simplify my reporting and minimize potential errors. The Gov. grant at a cool 20% instant "Interest" still makes it somewhat worthwhile and the RESP makes sure I do have some money set aside for their education. Hopefully, my wife's RESPs will show appreciation too.

My RESP withdraw dealings should be simpler now that I have done it once. I intend to zero it out as fast as is reasonable without loading my son w a tax burden for the retained earnings and grant monies. If I close it out before he burns up the earnings and grant, I have to pay them back to the Canadian Gov.

Your plan for your eventual RESP withdraws sound straightforward. But there is the page 3 line 9 3520A listing of "how much of the trust do you own" . I never considered myself as owning the Govenment 20% match -- since I would have to pay that back if not used by beneficiary for education. The trust will then be dispensing this pre-tax money to the students. If you balance your account so that you "own" it all each year, then it is more straight forward. I didn't, although I increase what I own by the yearly interest (and some past long ago gains). All my withdrawls went to either me or a US citizen beneficiary so I needed to balance things out w some detail ie do part III of 3520 for my son. If I was dealing w a TFSA, I would have 100% ownership and agree withdraws would be only to me as owner and should be post tax money. Gets a bit messy if you are not reporting all interest and gains as it grows, though. The IRS wants to tax unrealized gains (and what then of currency fluctuations?). I just said the heck w it and don't do the TFSA.

I am retired w US Social Security and a US IRA still in the states or I would likely renounce. Even in my Self Directed RSP I avoid Canadian Mutual Funds and stick to common stocks on the US exchanges for the most part. I have forgone a Canadian tax free savings account while helping my wife max hers out. I file married filling separately in the US. Thank heavens my wife is not a US citizen too! What I resent most is the time, hassle and stress associated with this all when I have never ended up with any significant US tax liability after all the reporting.

At least places like this forum help me (all of us?) vent a little as well as working out an approach we are comfortable with. Serious tax cheats can afford accountants and lawyers. Here we have "the blind leading the blind" but seems like few reports of major negative consequences to date.
Cheers.

MGeorge
Posts: 300
Joined: Fri Jun 22, 2012 9:23 am
Location: Canada

Post by MGeorge » Fri Mar 04, 2016 10:26 am

Thanks DrJFM,

I echo your sentiments about the hassle of all this reporting. My wife is not a US citizen and should probably put our RESP only in her name, but as a dual citizen myself, born in Canada something bothers me in principle about not owning an RESP for my kids, so I'll probably endure this for now.

I appreciate your explanation about the complexities of the withdrawals. I have a been claiming the 20% grants currently as they are received in the account, and I'm starting to realize that this may not be correct because technically, I don't have any financial interest in the grant money (I can't withdrawal it, unless it is to pay for school). There was a contributor on the Isaac Brock Society website who concluded after significant consultation that her RDSP grants were not taxable when received in the account, but they were when distributed to her child. It is almost like the grant money has to "vest" before it is taxable. Is this consistent with your understanding?

Also, when the grant money is claimed as a taxable benefit to me - would it be "general limit income" for the purposes of foreign tax credits, or is it "Passive limit income". I sure hope it is general limit because I have significant general limit foreign tax credit carry-forwards and I'm depending on this to offset the taxes on the grant money. I have very little passive foreign tax credits as these get swallowed up by my TFSA and RESP income and I have barely enough Cdn taxable savings to generate more excessive tax credits. I live in Quebec, so I pay a lot of income tax...

Best Regards,

MGeorge.
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MGeorge is neither an accounting nor taxation professional.

JohnHenderson
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JohnHenderson
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Post by JohnHenderson » Wed Oct 19, 2016 5:57 am

Even in my Self Directed RSP I avoid Canadian Mutual Funds and stick to common stocks on the US exchanges for the most part. I have forgone a Canadian tax free savings account while helping my wife max hers out. I file married filling separately in the US. http://www.smartpluss.org/ Thank heavens my wife is not a US citizen too!

jayaamit
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Joined: Thu Jun 02, 2016 9:54 pm

Post by jayaamit » Fri May 26, 2017 4:07 am

[quote="DrJFM"]Dear MGeorge (and any others fighting w these things)

Your plan for your eventual RESP withdraws sound straightforward. But there is the page 3 line 9 3520A listing of "how much of the trust do you own" . I never considered myself as owning the Govenment 20% match -- since I would have to pay that back if not used by beneficiary for education. The trust will then be dispensing this pre-tax money to the students. If you balance your account so that you "own" it all each year, then it is more straight forward. I didn't, although I increase what I own by the yearly interest (and some past long ago gains). All my withdrawls went to either me or a US citizen beneficiary so I needed to balance things out w some detail ie do part III of 3520 for my son. If I was dealing w a TFSA, I would have 100% ownership and agree withdraws would be only to me as owner and should be post tax money. Gets a bit messy if you are not reporting all interest and gains as it grows, though. The IRS wants to tax unrealized gains (and what then of currency fluctuations?). I just said the heck w it and don't do the TFSA.

[/quote]

This is my first year as a US Person and dealing with the RESPs and forms 3520 and 3520-A and these threads are a life-saver. I have spent several days researching this, and from what I understand for RESPs I am going to put 100% ownership (50/50) and put the Government grants as a "Liability" in Pt III Line 13 (Contributions, Gifts, Grants etc. Payable). This way, I (and my wife) would still own 50/50 ownership each with Assets being our Contributions, Income on our Contributions, Income on Govt Grants and the Liabilities being Govt. Grants. Whenever our kid receives the EAPs and the govt. grant is received as a distribution - in that year we would mark that as the income. I read in few places that this is how Grants are treated - they are always treated as liabilities and moved to income column in the year of distribution. Not sure if my understanding is correct and would love to receive inputs on this approach.

Based on the above approach, I was wondering if we could mark even the income as a liability mainly because the way the RESP is structured by Knowledge First Financial (our RESP provider) is that if the kid doesn`t go to College then they take away the income earned as well as return the grants to the govt, and all we get back is our principal. So, ideally, even the income is a liability till the trust conditions are met. Once the trust conditions are met then these liabilities are moved to the income column. If this works for income also then ideally we could avoid paying taxes every year and let the kid (beneficiary) pay the tax in the year of distribution on all the income distributed that year including the grant money.

I also found one of the accountant`s website that has the similar approach of marking the grants as liabilities as per this link: http://madanca.com/training/trusts-3520-3520a/ There are 3 downloadable PDFs in this page and an example of this accountant fills out the 3520a for the RESPs.

What does everyone think of this approach for treating the government grants? And, can this be applied towards the income as well so that the income is actually taxed in the hands of the beneficiary? (This will only apply towards the RESP and not on the TFSAs as TFSAs are not structured this way). Also, IMO not all RESPs are structured this way. Self-directed RESPs by Questrade for example will not be the same and you control and can get the income out even when you collapse the RESP and the only thing you would lose from a self-directed RESP would be the govt grant should the kid decide not to go to college.

Please let me know your inputs as I am yet to fill these forms for this year (I have applied for extension but going crazy trying to figure out the right approach).

CdnAmerican
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Joined: Tue Aug 30, 2011 12:15 am

Post by CdnAmerican » Sun Feb 04, 2018 5:12 pm

Hi all - just a yearly bump for this thread, with a question.

If you have a withdrawal from a TFSA or RESP, I assume that is what the IRS calls a "distribution" on the 3520. This year, on my TFSA, I withdrew US$8 solely to see what would happen when I make larger withdrawals.

In Part III of the 3520, #24, I put in the amount of the cash withdrawal ($8) in column c and e. This means that column f is zero, of course.

I answer No on #25, as there is no loan associated.

On #27, the calculation for total distributions received is zero.

This doesn't make sense; it would seem that the total distribution should be $8. Have I done something wrong? The only thing I can think of is that 24(e) should be zero, as that would make the calculation work, but it doesn't seem to match the description of that column.

Thanks!
Not a professional opinion.

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