PREPARATION OF PFIC STATEMENTS FOR QEF ELECTIONS

UHY Victor has expertise preparing PFIC statements for QEF elections. Contact us a for a free consultation regarding your PFIC situation:

 

Does the PFIC rules affect you?

 

Any individual who is consider a U.S person. Whether they’re American citizens, green card holders, residents, or Canadians (who reside in the U.S for more than 183 days) may be considers to be a US person for PFIC statements. Generally only U.S. persons are only considered for PCIFC statements.

This rule applies to U.S taxpayers who have invested in passive foreign investments for a certain amount of years.

What is a PFIC? 

Stands for “passive foreign investment company” (PFIC) which is a foreign-based corporation that exhibits the following criteria:

  •  75% or more of gross income in a particular year is from passive income (Income test)
  • 50% or more of the corporation’s assets produce, or are held to produce, passive income. Canadian Mutual Funds Trusts are considered to be PFICs for U.S. income tax purposes. (Asset test)

Some adjustments may be made when measuring assets: Depending on if the company is not publicly trade. For more info click here.

Most of the foreign mutual funds, exchange-traded funds, money market funds hedge funds, private equity funds, investment trusts and even some startups fall under the definition of a PFIC.

Things to keep in mind: 

If a U.S. taxpayer’s investment is characterized as a PFIC in one year, it is generally also treated as a PFIC in future years.

Annual IRS Form 8621 reporting is required for each PFIC that is directly or indirectly held by the investor, regardless of which election is made.

The majority of investors in PFICs must pay the higher personal income tax rate on all its distributions  and capital gains resulting from increases in share values, regardless of whether the lower capital gains tax rate would ordinarily apply to such income if it was derived from investments in a U.S.-based corporation.

When making a decision about what type of election you want to use for your PCIF, you gotta make sure of the time deadlines. All elections are made timely in accordance with the Internal Revenue code 1296.

 

How does it work?

U.S. persons who own PFICs must report annually each PFIC investment on a separate IRS Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund)

Thee longer a PFIC is held, the more interest you need to pay under the default method. There are two elections that may help you reduce the Impact of a PCIF.

 

How are U.S Tax holders taxed with a PCIF ?

What is a QEF election ?

QEF election is the only way that the appreciation in a fund’s value can be eligible for U.S. taxation at the more favorable capital gains rates. You need specific information to determine the annual growth. 

QEF stands for a Qualified Electing fund. Which is also a PCIF when a U.S person is a direct or indirect shareholder. The shareholder’ s QEF election is generally made on Form 8621 (“Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund”) attached to the shareholder’s federal income tax return that is filed on or before the due date of the return.Classified as “U.S. Persons” to make the Qualified Electing Fund (“QEF”) election for U.S. tax reporting service.

QEF or Market to Market election?

A mark-to-market election, or a QEF election, generally is effective for not only the taxable year of the annual federal income tax return to which the Form 8621 on which the election is made is attached, but for subsequent years as well. They both require making an election that will apply to the current year but also to all the subsequent years. When the election is made the taxpayer will need to file the form 8621. Each year.

QEF election is preferred because it is more closely aligned with the tax treatment of mutual fund investments by both the U.S. and Canadian tax systems.The statement must contain certain information required explicitly by the IRS and must be signed by an authorized person of the PFIC. But, the problem is that The QEF is the hardest one to apply to. It does not include annual distributions of the investment income. It also includes the amount of ordinary income and capital gains that would have been distributed.

 

Market to market election:

Only applicable for passive foreign investment companies. The rule implies that every share sold at the end of the year, consider as a gain can be recognized as ordinary income. Losses may be used as well but the amount used may be  limited. You’re taxed on on increases in value no matter if you sold shares or not of your mutual funds. To be an adequate candidate for an MTM election, The PCIF you own must meet the definition of a ” marketable stock”.(see if you meet the criteria on form 8621).

  You probably could make this election if you own shares of a publicly traded mutual fund.

Certain forms or requirements may be applied concerning the losses and gains of the company. For more information click here

There are also various supplementary elections that are beyond the scope of these materials.

We strongly recommend to consult a tax expert to overview more in detail the following information.

 

 

Need Help?

For more detailed information Contact us a for a free consultation regarding your FAPI issues:

UHY Victor Canada U.S. Tax Team

crossbordetax@uhyvictor.com
(514) 282-1836 x275