Thanks in advance for any help.
I'm a Canadian living in the US as a permanent resident. We have an existing RESP for which I've been filing 3520/3520A forms yearly. However, I did not know about the requirement to file 8621 forms until this year. Some additional background:
- I've never made a QEF or MTM election for the RESP
- I've claimed any interest income on 3520/3520A and 1040 forms
- There is has been no activity in the account since we moved to the US (nothing has been sold or bought)
- The total value of RESP is about $59,000. However, some of the funds are US equity funds. The value of the RESP less the US equity funds is under $50,000
Questions:
- Do I qualify for the "de minimus" rules (less than $50,000 of non-US funds if filed jointly) so that I do not need to file a 8621 for 2013?
- Even if I do qualify for the "de minimus" rules, should I file the 8621 to make the QEF or MTM election?
- Do I need to submit the 8621 forms for prior tax years?
With all of the recent changes I'm having a hard time understanding my obligations.
Thanks.
RESP & 8621 questions
Moderator: Mark T Serbinski CA CPA
Hi areefer,
The 8621 rules are indeed confusing.
The first step is to determine how many of your funds are considered PFICs. Any Canadian domiciled mutual fund is likely a PFIC - even if it invests in US equity.
The good news is that you haven't been buying or selling since becoming a US resident.
Now, the deminus rules simply remove the annual 8621 filing requirement - but this only applies if you are not making an election (M2M or QEF) and you haven't received an "excess distribution". In almost all cases, it is a good idea to make the M2M election as soon as you can - or, even better a QEF election. Note that a QEF election is only possible if you can get PFIC statements from the fund provider. The only Cdn mutual funds I know of that provide these are from :
Fidelity Investments for 2013 and beyond
Mackenzie Investments for 2013 and beyond
Dimensional Funds - all years
CIBC Renaissance Mutual funds (recently announced).
Step 2 is find out if you've received an excess distribution for the tax years you were in the US. Read the instructions for form 8621 to find out if you have had an "excess distribution". In general, this is when a distribution is greater than 1.25x the average distributions in the last 3 years. For example, if you've received one of this distributions in 2012, then technically, you would have to ammend your 2012 return with form 8621 since it would have been required.
I'll stop here since this is getting long - I'd recommend finding out if you've had an excess distribution and when.
Either way, you should make one of the more favourable M2M or QEF elections for tax year 2013 if you can.
I hope this helps!
The 8621 rules are indeed confusing.
The first step is to determine how many of your funds are considered PFICs. Any Canadian domiciled mutual fund is likely a PFIC - even if it invests in US equity.
The good news is that you haven't been buying or selling since becoming a US resident.
Now, the deminus rules simply remove the annual 8621 filing requirement - but this only applies if you are not making an election (M2M or QEF) and you haven't received an "excess distribution". In almost all cases, it is a good idea to make the M2M election as soon as you can - or, even better a QEF election. Note that a QEF election is only possible if you can get PFIC statements from the fund provider. The only Cdn mutual funds I know of that provide these are from :
Fidelity Investments for 2013 and beyond
Mackenzie Investments for 2013 and beyond
Dimensional Funds - all years
CIBC Renaissance Mutual funds (recently announced).
Step 2 is find out if you've received an excess distribution for the tax years you were in the US. Read the instructions for form 8621 to find out if you have had an "excess distribution". In general, this is when a distribution is greater than 1.25x the average distributions in the last 3 years. For example, if you've received one of this distributions in 2012, then technically, you would have to ammend your 2012 return with form 8621 since it would have been required.
I'll stop here since this is getting long - I'd recommend finding out if you've had an excess distribution and when.
Either way, you should make one of the more favourable M2M or QEF elections for tax year 2013 if you can.
I hope this helps!
Investors Group has also indicated that they will provide PFIC statements beginning this year (will be available sometime this month.)
Could you please tell me: Fidelity's PFIC statements are fiscal year May 1, 2012 to Mar 31, 2013. They have indicated that we can use them to prepare 8621.
I still don't understand how we can use them when a taxpayer's year is Jan 1- Dec 31, 2013.
Thank you.
Could you please tell me: Fidelity's PFIC statements are fiscal year May 1, 2012 to Mar 31, 2013. They have indicated that we can use them to prepare 8621.
I still don't understand how we can use them when a taxpayer's year is Jan 1- Dec 31, 2013.
Thank you.
Thanks MGeorge.
You are correct, the US equity are still PFICs since the funds are domiciled in Canada.
I haven't received any distributions since becoming a US resident. The account has been basically ideal since we moved. The only activity in the account is interest accrual for the cash in the account and market value changes over time. I'm assuming that market gains/losses on paper are not classified as a distribution.
These are TD funds (it's a TD Waterhouse account). So I don't think I can make a QEF election.
One more question - the RESP holds a single mutual fund which has several holdings (which are other funds). Do I need to submit a single 8621 for the main fund or one for each holding?
Thanks again.
You are correct, the US equity are still PFICs since the funds are domiciled in Canada.
I haven't received any distributions since becoming a US resident. The account has been basically ideal since we moved. The only activity in the account is interest accrual for the cash in the account and market value changes over time. I'm assuming that market gains/losses on paper are not classified as a distribution.
These are TD funds (it's a TD Waterhouse account). So I don't think I can make a QEF election.
One more question - the RESP holds a single mutual fund which has several holdings (which are other funds). Do I need to submit a single 8621 for the main fund or one for each holding?
Thanks again.
That's a good question. I am really not sure. I'd be inclined to just use 1 8621 for the single mutual fund that you have.
It's a PFIC of PFICs - Maybe someone else knows. The sad thing is, it would make a difference - if you filed an 8621 for each of the underlying funds, the loss of one wouldn't offset the gains of another - but if you filed 1 8621 for the whole fund - the gains and losses all get combined.
I'll let you know if I find out the answer to this (I have a bad feeling I know what it is...)
It's a PFIC of PFICs - Maybe someone else knows. The sad thing is, it would make a difference - if you filed an 8621 for each of the underlying funds, the loss of one wouldn't offset the gains of another - but if you filed 1 8621 for the whole fund - the gains and losses all get combined.
I'll let you know if I find out the answer to this (I have a bad feeling I know what it is...)
I think for my case, I'll just file a single 8621.
I don't have any pricing/quantity information for all of the holdings in the mutual fund. I only have the % of those holdings in the fund. So all of my gains/losses are aggregated to the main mutual fund anyways.
Let me start filling the form out....I'll probably have more questions as go through the details.
Thanks.
I don't have any pricing/quantity information for all of the holdings in the mutual fund. I only have the % of those holdings in the fund. So all of my gains/losses are aggregated to the main mutual fund anyways.
Let me start filling the form out....I'll probably have more questions as go through the details.
Thanks.
Hi sunnysga,
Just to clarify, did you have 7 mutual funds in your RESP, and therefore you filed 7 8621 - or did you hold 1 fund that was a "fund of funds".
I think what areefer is talking about is a single mutual fund that holds mutual funds.
I think Fidelity only holds individual securities, so I think you're talking about an RESP with 7 funds in it. Right?
Just to clarify, did you have 7 mutual funds in your RESP, and therefore you filed 7 8621 - or did you hold 1 fund that was a "fund of funds".
I think what areefer is talking about is a single mutual fund that holds mutual funds.
I think Fidelity only holds individual securities, so I think you're talking about an RESP with 7 funds in it. Right?
Yes, I have 7 funds within the RESP. They are all "direct". However, within 1 of the 7 funds, there are multiple (8) indirect funds. The only way I would have even known about the indirect funds (because they never show up on the quarterly statements), is because one of the 7 PFIC statements I received show the "direct" fund on the top part of the page with its associated pro rata shares $, and on the bottom of the page there is a listing of 8 "indirect" funds each with their pro rata shares. So, my assumption is that these indirect funds are part of that main direct fund that is also listed on the page. I will fill out one 8621 for that "combined" PFIC statement. My reasoning: nowhere in any of my other regular statements does it give any inkling of the indirect funds. So I would have no way of knowing cost basis, or begin date or anything of the indirect funds in which to calculate using excess distribution method (since I never knew to elect anything different, and it is only this year that I can even get PFIC statements).
Can only work with what we have!
Can only work with what we have!
So how does the M2M election work for the first year?
Part I, #5 - do I select "c" and set the value to 0?
Part IV, #10b - what do I use as the cost basis? Is it the value when we first moved to the US, or some other value?
I've also read some other posts where, for the first year of the M2M election I need to treat it as a section 1291 fund?
Thanks.
Part I, #5 - do I select "c" and set the value to 0?
Part IV, #10b - what do I use as the cost basis? Is it the value when we first moved to the US, or some other value?
I've also read some other posts where, for the first year of the M2M election I need to treat it as a section 1291 fund?
Thanks.
I'm not sure about which cost basis you would use.
Logically, I would think the cost base was the day you moved to the US. But again - I don't know.
Part 1 #5 yes - this is always $0 in the first year of M2M.
If you had always been in the US, then the nasty excess distribution (sec1291) regime would apply for the period you held the fund up until Dec 31, 2012, then it would be considered a deemed sale on Dec 31, 2012, and your 2013 MSM cost basis becomes FMV on Jan 1, 2013.
Logically, I would think the cost base was the day you moved to the US. But again - I don't know.
Part 1 #5 yes - this is always $0 in the first year of M2M.
If you had always been in the US, then the nasty excess distribution (sec1291) regime would apply for the period you held the fund up until Dec 31, 2012, then it would be considered a deemed sale on Dec 31, 2012, and your 2013 MSM cost basis becomes FMV on Jan 1, 2013.
So, if I make an M2M election for the 2013 year (which I will to avoid 1291):
1) I need to apply the "excess distribution" to the unrecognized disposition gains of the mutual fund from my cost basis to its FMV on Dec 31, 2012
2) for M2M calculation in 2013, I can use the new adjusted cost basis (FMV Jan 1, 2013) and FMV on Dec 31, 2013
I'm still having a hard time wrapping my mind around the fact that I didn't have to submit a 8621 in prior years since I didn't have any distributions or recognized gains. But now I need to pay tax + interest on unrecognized gains in disposition of the mutual fun for all those prior years!
1) I need to apply the "excess distribution" to the unrecognized disposition gains of the mutual fund from my cost basis to its FMV on Dec 31, 2012
2) for M2M calculation in 2013, I can use the new adjusted cost basis (FMV Jan 1, 2013) and FMV on Dec 31, 2013
I'm still having a hard time wrapping my mind around the fact that I didn't have to submit a 8621 in prior years since I didn't have any distributions or recognized gains. But now I need to pay tax + interest on unrecognized gains in disposition of the mutual fun for all those prior years!
I agree - that doesn't seem fair at all - but taxation of PFIC is designed to be harsh.
The odd thing is, say you moved to the US on Jan 2, 2013. If you had sold and repurchased your mutual fund investment while still in Canada on Dec 31, 2012 - you wouldn't have a problem.
I'd be tempted to just use the value of the mutual fund on Jan 1, 2013 as your ACB for M2M purposes - but strictly speaking this may not be correct.
While you're in the US, if you want a non-PFIC investment in Canadian Equity, there is an ETF from Ishares (US) called EWC. I used this one instead of Ishares (Canada) XIU - and they are virtually identical - except one is a PFIC and the other isn't.
The odd thing is, say you moved to the US on Jan 2, 2013. If you had sold and repurchased your mutual fund investment while still in Canada on Dec 31, 2012 - you wouldn't have a problem.
I'd be tempted to just use the value of the mutual fund on Jan 1, 2013 as your ACB for M2M purposes - but strictly speaking this may not be correct.
While you're in the US, if you want a non-PFIC investment in Canadian Equity, there is an ETF from Ishares (US) called EWC. I used this one instead of Ishares (Canada) XIU - and they are virtually identical - except one is a PFIC and the other isn't.