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?
Selling non-registared Cdn Mutual Funds vs PFIC reporting
Moderator: Mark T Serbinski CA CPA
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!
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).
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).
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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.
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