If Cdn mutual funds aren't PFICs, are they foreign trusts?
Moderator: Mark T Serbinski CA CPA
If Cdn mutual funds aren't PFICs, are they foreign trusts?
Title says it all. If Cdn mutual funds aren't PFICs, does it follow that they are foreign trusts instead? Or is there a third possibility?
The IRS considers Canadian mutual funds to be corporations for US income tax and reporting purposes.
[url]http://www.irs.gov/pub/irs-wd/1003013.pdf[/url]
Canadian mutual funds are almost certainly PFICs. If your mutual fund is not investing in other entities, then it's not much of a mutual fund. Review the PFIC rules.
[url]http://www.irs.gov/pub/irs-wd/1003013.pdf[/url]
Canadian mutual funds are almost certainly PFICs. If your mutual fund is not investing in other entities, then it's not much of a mutual fund. Review the PFIC rules.
I'm aware of that opinion. However, notice that it says that it does not constitute a precedent, and that it only ruled that the particular mutual funds in this person's case were PFICs. It remains unclear to me at least whether all Canadian mutual funds are PFICs.
In principle someone with an understanding of the relevant code could determine whether a particular mutual fund satisfies the US defintion of corporation. So my question is, if it didn't, does that then immediately imply that it's therefore a trust?
In principle someone with an understanding of the relevant code could determine whether a particular mutual fund satisfies the US defintion of corporation. So my question is, if it didn't, does that then immediately imply that it's therefore a trust?
Due to recent changes by the IRS taking a position that a CND mutual fund SHOULD GOING FORWARD be classified as a corp rather than a trust for US tax purposes, despite that fact that many CND mutual funds are classified as trusts fro CND tax purposes this has negative aspects for USC holding CND mutuals.
Previous you would have a US reporting obligation with respect to PFIC's that were reporting a distribution from a PFIC, or sold shrs of a PFIC or made certain elections, NOW teh new reporting obligation will arise solely from holding a CND mutual fund. Now distributed income and capital gains could be treated as ordinary income rather that investment income at the highest marginal federal rate ( rather than at a prf investment income rate as before) and unrealized gains could attract a non deductible penalty interest charge, some say this applies even if teh PFIC is held in an RRSP ( I feel this may not be entirely tue due to treaty treratment).
My opinion is do NOT hold CND mutual funds if you are a US resident regargless of whether its a corp or otherwise.
Previous you would have a US reporting obligation with respect to PFIC's that were reporting a distribution from a PFIC, or sold shrs of a PFIC or made certain elections, NOW teh new reporting obligation will arise solely from holding a CND mutual fund. Now distributed income and capital gains could be treated as ordinary income rather that investment income at the highest marginal federal rate ( rather than at a prf investment income rate as before) and unrealized gains could attract a non deductible penalty interest charge, some say this applies even if teh PFIC is held in an RRSP ( I feel this may not be entirely tue due to treaty treratment).
My opinion is do NOT hold CND mutual funds if you are a US resident regargless of whether its a corp or otherwise.
JG
JGCA,
You said, "the IRS taking a position that a CND mutual fund SHOULD GOING FORWARD be classified as a corp".
What happens if you held a Canadian MF for 3 years and then sold in 2011? Can you treat the entire gain as ordinary income in 2011? (After all, it wasn't really classified as a PFIC before this 2011. I would think the only impact is that the 2011 gain no longer qualifies as a long-term gain at 15% rate.) Or would you still need to spread the gain out over the 3 years using a 35% rate plus interest penalties for the first 2 years, then ordinary income for 2011?
Thanks.
You said, "the IRS taking a position that a CND mutual fund SHOULD GOING FORWARD be classified as a corp".
What happens if you held a Canadian MF for 3 years and then sold in 2011? Can you treat the entire gain as ordinary income in 2011? (After all, it wasn't really classified as a PFIC before this 2011. I would think the only impact is that the 2011 gain no longer qualifies as a long-term gain at 15% rate.) Or would you still need to spread the gain out over the 3 years using a 35% rate plus interest penalties for the first 2 years, then ordinary income for 2011?
Thanks.
Let me make sure I understand this correctly. A Canadian MF sold in 2011 (when they were now considered PFICs per the IRS rule change in 2010) would be eligible for the 15% LT cap gain rate with no PFIC penalty regime? Would you need to file the 8621? Is this the interpretation of the professional community or IRS opinion or merely speculation? Thank you!
you were required to file an annual report disclosing the MF so I gather you did not report so in 2010. To file form 8621 to qualify as QEF to treat the income as passive you need a lot of info from the MF annually , so unless you have it and the MF qualifies you can not file this form by yourself. I would therefore file as a corp to be safe unless you filed the QEF election in 2010.
JG
I think we're talking apples & oranges. As I understand it, there are 3 options to report a PFIC and all are problematic:
1) QEF - as you point out, this is almost impossible since Cdn MF's don't typically provide the necessary information.
2) Mark-to-market - This would be ideal IF the fund owner had the clairvoyance to know back in 2008 and 2009 that in 2010 the IRS would change its interpretation that Cdn funds should be corps and not trusts. Too late to do this now.
3) Default method - a screw-job with the gains spread out and taxed at the highest marginal rate (35%) plus interest penalties.
You say, "going forward, the MF should be classified as a corp". I gather a MF sold in 2011 would be subject to the default method (given that the other 2 methods are no longer feasible)? That makes sense for 2011, but would the gain still need to be spread out over prior years (2008-2010) and subject to 35% plus interest even though it would not have been considered a PFIC in those years (since the IRS did not change its interpretation until mid-2010).
Thanks.
1) QEF - as you point out, this is almost impossible since Cdn MF's don't typically provide the necessary information.
2) Mark-to-market - This would be ideal IF the fund owner had the clairvoyance to know back in 2008 and 2009 that in 2010 the IRS would change its interpretation that Cdn funds should be corps and not trusts. Too late to do this now.
3) Default method - a screw-job with the gains spread out and taxed at the highest marginal rate (35%) plus interest penalties.
You say, "going forward, the MF should be classified as a corp". I gather a MF sold in 2011 would be subject to the default method (given that the other 2 methods are no longer feasible)? That makes sense for 2011, but would the gain still need to be spread out over prior years (2008-2010) and subject to 35% plus interest even though it would not have been considered a PFIC in those years (since the IRS did not change its interpretation until mid-2010).
Thanks.
As you see its really problematic, going forward to me means all the gains would be subject to the new regime, however your cost in the MF would include any prior income that was accrued to you that you never received that would be added to your cost basis that will certainly help in the tax on the capital gain you realized on the disposition you had in 2011, I do not see how else you could take prior years items into consideration since they do not allow you to work it backwards only going forward.
JG