PFIC reporting on Cdn domiciled Mutual Funds

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jenfin
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PFIC reporting on Cdn domiciled Mutual Funds

Post by jenfin »

I just read that RBC Global Asset Management will start making PFIC annual information statements available to US clients to permit QEF reporting on 70 mutual funds. Can others be far behind? Not sure who else is doing this. Also is anyone aware of any Canadian domiciled mutual funds that do this or plan to .... or must we continue to use US domiciled funds?
nelsona
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Post by nelsona »

Jenfin,
How would a canadian resident -- even though a US citizen -- legally buy US domiciled mutual funds? My understanding is that US dealers are not permitted to to sell these cross-border.

Just curious as to how you would be doing this.

And if you are doing it legally, then why bother with Cdn mutuals at all.
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 »

We are taliking non-retirement accounts here of course.
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 »

This is great news! The list is getting longer now with regards to PFIC statements. So far we have:

1. Dimensional Fund Advisors
2. Fidelty Investments
3. MacKenzie Investments
4. CIBC Renaissance Funds
5. Clarington Investments
6. Purpose Investments (ETFs and MFs)
7. Now RBC Global Asset Management.

The reason I think this is a big is because RBC has index funds, most of the others providing PFIC statements are high fee actively managed funds.

Thank you for sharing!
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MGeorge is neither an accounting nor taxation professional.
nelsona
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Post by nelsona »

MGeorge, for the benefit of those of us living in US and not having to deal with this (until we move back), could you remind us why QEF reporting is so important?

And, does a fund company making PFIC statements mean that all their funds will be a QEF. Could the ststement also report that some funds are not QEF?
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 nelsona,

Sure. The PFIC annual information statement is what allows us to make the QEF election. This permits favourable tax treatment because it allows the Canadian mutual fund in this case to increase in value, and this gain gets the favourable rates if held for more than a year. The other benefit is if you are able to make the QEF election, if the fund loses value, you get to claim the capital loss. Without the QEF election, one is stuck with the default mode of taxation (the excess distribution method) or the mark-to-market election. Gains are highly taxed, losses aren't allowed.

As you probably know, the mark-to-market election forces the taxpayer to realize any increase in the value of the fund at the end of the year, and this is taxed as ordinary income. No one would generally chose the "excess distribution" method over the mark-to-market election because of the highest tax rate applies to the gain as well as an interest charge. Losses are never allowed to be claimed for mark-to-market or excess distribution.

Any fund company that produces a PFIC annual information statement is doing so, so that the QEF election is possible. The information on this form is exactly what is asked for for a QEF election. It applies only to the fund named on the PFIC statement.

The key difference is a QEF gain or loss goes straight on to schedule D, just like a US mutual fund. For a US taxpayer living in Canada, the gains are more closely aligned for US tax purposes and Canadian tax purposes, so there is less risk of getting taxed twice (this double tax can happen with a mark-to-market election).

Best Regards.
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MGeorge is neither an accounting nor taxation professional.
nelsona
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Post by nelsona »

Thanks, I did not realize that neither M2M nor excesss distribution did not allow for losses.

So, when you say that a Fundo family (eg Fidelity) is producing PFIC statements, has it been your experience that it does so for ALL that family?
Or would it be best to wait until a fund has begun providing a statement for a particular year and then begin investing in that fund.
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 »

That only leaves jenfin's comment implying that there is a choice for a Cdn resident to legally trade in US-domiciled funds....
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
jenfin
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PFIC

Post by jenfin »

Apologies.....I didn't mean to cause this grief....I meant to say ETFs !!!!!!!!!
nelsona
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Post by nelsona »

Ahhhh!
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 »

In my experience, All of the fund companies that I've listed previously except RBC - who just anounced today, offer PFIC statements for the entire fund line up. RBC did provide a list of the funds which have PFIC statements though - so it would be worth checking the list before investing.

One more thing about losses. There is a such thing as a mark-to-market loss, but this only allowed to the extent of previously reported gains. For example:
Year 1: Buy a fund for $1000, and make a mark to market election.
On Dec 31 of that year it is worth $1050. $50 is reported as the mark-2-market gain.
Year 2: At the end of the second year, the fund value drops to $900. $50 is the "unreversed inclusion" from last year, so the reported loss is limited to $50.
Year 3: At the end of the year, the fund value goes up to $1200. Now the cost base is $1000 + $50 - $50 = $1000 (the unreversed inclusion got reversed). Now a gain of $200 is reported as ordinary income.

If a QEF election could have been made on the example above, one could simply report a long term gain of $200 in year 3 on schedule D.
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MGeorge is neither an accounting nor taxation professional.
michsim
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Post by michsim »

If I understand right the qef statement supplied by the fund , for those who provide it, replaces the funds t5 or t3 on the canadian side i.e. On the canadian side the t5 dividends , cap gains etc are reported as income on the Canadian return (same for t3) but on the U.S. return the information supplied by the company to comply with the qef election is what gets reported as income rather than the information found on the t5 or t3 which woul be used for Canadian reporting. Or am I wrong and instead all T5,T3and qef info go on the U.S. return.
Thank you for your contribution to this discussion Mcgeorge and Nelsona
MGeorge
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Location: Canada

Post by MGeorge »

Hi michsim,

On your US return, you report the QEF information, and as well, you need to keep track of the cost base of the funds. The QEF allows the fund to keep its status as a capital asset, which means that you track the cost base, and when you sell, you report the gain or loss on schedule D of your US return as if it were a US based mutual fund. The tricky part is, if the QEF reported income is different than the income actually distributed by the fund (ie, that income reported on T3) then, you must adjust the US cost base to account for the difference. It is quite possible for the fund to distribute more or less than what was reported on the QEF statement, so you have to track this for US purposes.

The T3 and T5 information is for Canadian reporting only, and is simply not useful for US reporting. In fact, on the QEF statement, the last data item is the amount of money the fund "actually" distributed, this allows you to make your cost base adjustments more easily.

I hope this is helpful. Best Regards!
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MGeorge is neither an accounting nor taxation professional.
michsim
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Joined: Thu Mar 08, 2007 11:45 am

Post by michsim »

Ok thank that makes sense.
kylewkemp
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Location: California

Post by kylewkemp »

Hi,

I am going to make a mark-to-market election for some Canadian mutual funds (non-registered). I've attempted to account for the reinvested dividends in the adjusted basis in section Part IV line 10 b) to get the proper gain. Does anyone know if this is the proper way of doing this? I read in another forum someone suggested that a different forum is required for each monthly dividend reinvestment.

Also n Part I line 2 do we have to list the dates of dividend reinvestment?
Kyle
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