Treating funds in RESPs as PFICs?

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beyre
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Joined: Tue Feb 18, 2014 7:31 pm

Treating funds in RESPs as PFICs?

Post by beyre »

I'm a U.S. citizen living in Canada, and my hubby's a dual citizen. He (unfortunately) opened an RESP two years ago, not realizing the tax reporting complexities. We're planning to just close the RESP to avoid future hassle, but in the meantime will we need to file a form 8621 for the funds within the RESP if the total balance is less than $25k U.S., or can we just file the 3520/3520-A? I've read through the flow charts, but I can't really wrap my mind around the PFIC rules. Thank you!
nelsona
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Post by nelsona »

You need both forms.
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 »

Hi beyre,

I am wondering about the significance of the mutual funds being less than $25k USD in your message. Are you referring to the new "de minimus" rules that allow a taxpayer to not file 8621 for a PFIC if it is below $25k?

If so, this exception only applies if you haven't done any of the following:
1. made a QEF or "mark to market" election
2. sold any PFIC shares
3. received what is defined as an "excess distribution".

Either way, if you're closing the RESP, you'll have to file 8621 anyway as nelsona said.

Some things to consider: As you know, filing 8621 and 3520/3520A is a pain - you may want to close the RESP just because of the filing pain. However, there are some circumstances where an RESP might not cause any US tax liability. Have you considered this?
beyre
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Joined: Tue Feb 18, 2014 7:31 pm

Post by beyre »

Thanks much for your replies! I have a feeling it won't create a huge tax burden to keep the RESP open, but it's more the confusion factor. I don't really know how to find out for sure if my two funds within my RBC RESP are PFICs (needing form 8621), but I guess better safe than sorry, right? This is so far from my line of expertise, ridiculously complex IMO, and I'm not confident my U.S. accountant is handling everything appropriately. If I can figure out how to fill out these forms correctly, then it may be worth holding onto the RESP. But, I feel like closing it might cut my potential penalty losses, since my confidence level that I'm doing this correctly is down close to zero, lol! But, losing all the grant money sure is a shame.
MGeorge
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Location: Canada

Post by MGeorge »

Hi beyre - yeah, it is a tough one. Check out some of the posts here, one is called "taking a stab at 3520 for a TFSA" which is relevant for RESPs as well. There are a few others you can search for as well.

Since your RESP with with RBC - it is very likely that the mutual funds are PFICs. As far as I know, any non-US mutual fund or ETF is a PFIC.

I use a self-directed brokerage RESP, then I hold US based ETFs in it and individual stocks. Fidelity Investments now offers "PFIC statements" which allows a QEF election on 8621 - this lessens the potential tax exposure.

With the CESG money - this income is "general limit income" for foreign tax credit purposes on form 1116. You may be able to offset the CESG liability with foreign tax credits. Just food for thought.
nelsona
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Post by nelsona »

Question, if an RESP is not going to create much of a tax burden, that implies it is not goping to generate much income. The grant IS taxable.

Why go thru the bother?

Wouldn't a simply non-custodial (not trust) account do the trick. Attribution rules don't apply if structured properly, and thus are taxed (that is not taxed) at the kid's rate.

Plus no spending rules.

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

Even for me, who doesn't really view the extratreporting as intrusive and burdensome, wouldn't want the hassle.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
beyre
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Post by beyre »

Thanks so much for your feedback. Great things to consider. Very tempted to avoid the hassle and cut our losses ($3000 grant money so far) and close the RESP, but won't I have to pay taxes on grants already deposited into my account previously even if I close out account today--i.e. I'll be taxed on them for 2013, and then also lose them in 2014? Boy, this is mind-numbing.
MGeorge
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Location: Canada

Post by MGeorge »

Hi Nelsona,
You make some good points. I guess it really depends on an individual's situation. I pay so much tax on my work income (living in Quebec) that I always have extra "general limit" FTC carry forward. It just wipes out the CESG liability. I get 30% matching for the RESP contributions which I wouldn't want to miss out on.

As the account grows the passive income might start to cause a problem for me, which at the moment, I don't have protection against.
nelsona
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Post by nelsona »

beyre, from what you are saying, it appears that you were not always a US taxpayer, is that correct? If that is the case, then it is also likely that one who becomes a US taxpayer, would have other options (transfer to to another family non-US member) which would not result in losing previously recieved grant money. Is that not possible?

If you have always been a US taxpayer (ie you are a US citizen for a long time, and less likjely to have a Cdn relative), and are now just finding out about the taxability of your RESP, that is another matter. Not having paid US tax on previous grant money is a good planning technique going forward.

I'm trying to address, at the same time as your questions, any idea that someone might actuallly want to set up a new RRSP as a US taxpayer.

Mgeorge, while in inclined to agree that the Grant is Gen Limit for FTC purposes, what type of income is it for tax purposes? That might not coincide with gen limit income.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
beyre
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Joined: Tue Feb 18, 2014 7:31 pm

Post by beyre »

Nelsona,
I am a U.S. citizen, only having lived in Canada now for 2.5 years. No Canadian relatives to speak of, aside from my hubby who's dual. Like you suggested in your second option, I had no idea about TFSA and RESP tax consequences until about 6 weeks ago, and now I'm scrambling. We are closing his TFSA this week to avoid future hassle (after 2014 filing), and debating the closing of his RESP. What do you mean about not having paid previous U.S. taxes on grant money being a good strategy? My understanding is that I'll need to catch up somehow on my RESP and TFSA forms from previous years (both opened at very end of 2011), including all grant money to date. Is there another option? You are more than kind to offer your advice to us lost and drowning souls, lol!
MGeorge
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Joined: Fri Jun 22, 2012 9:23 am
Location: Canada

Post by MGeorge »

Hi nelsona,

I have just assumed that the grant money is "other income". I file using TaxACT, and it automatically generates a list of other income and it allows me to write in "Canadian Goverment Grants". Other items on the list are 8621 income, and the foreign earned income exclusion.

...I hope it is general limit.
MGeorge
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Location: Canada

Post by MGeorge »

I just had a look at publication 514 - I believe "general limit" is the best fit.
mmogoogle
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Post by mmogoogle »

You make some good points. I have a feeling it won't create a huge tax burden to keep the RESP open.
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