# Form 8938 deposit or custodial? (US citizen in Canada)



## Rosepetal

Okay, I thought I understood what a custodial account was, but now I'm not sure.
8938 requires that we report all accounts as either "depositary" or "custodial."

If I have a non-registered (not RRSP or RESP) account with mutual funds with one of the big investment financial institutions (Fidelity, CI, etc), is that a "custodial" account for purposes of U.S. tax form 8938?

How about segregated funds? 

I understand that it's a custodial account if there are restrictions on my withdrawing funds and the financial institution has to keep tabs on it and monitor (like a retirement plan or RESP).

But is it deposit or custodial if I buy shares (like in a mutual fund) and the financial institution holds them for me and sells them when I instruct them to?

Thanks for any enlightenment, or even just reports on how others are reporting their accounts!


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## shidareume

There is no explanation of the difference between "depositary" and "custodial" given on Form 8938 or in the instructions for that form. So I don't think they can really complain about getting it wrong no matter which box you check. If they care which box people check, it would behoove them to explain what those boxes mean.

For whatever it may be worth, I simply check all my accounts as "depositary." If they have a problem with that, they will get back to me, I expect.


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## BBCWatcher

Page 9 of this guide provides definitions of depository and custodial accounts, and those definitions seems to be well sourced. I'll quote the relevant section from the guide:

_b. "Depository account"
(1) In general
A "depository account" is generally any account that is:
(i) a commercial, checking, savings, time, or thrift account, or an account evidenced by a certificate of deposit, thrift certificate, investment certificate, passbook, certificate of indebtedness, or any other instrument for placing money in the custody of a banking or similar business for which such entity is obligated to supply credit; or
(ii) any amount held by an insurance company under a guaranteed investment contract or similar agreement to pay or credit interest thereon or to return the amount held.
Reg. §1.1471-5(b)(3)(i)(A).

(2) Instruments/deposits not treated as "depository accounts"
Notwithstanding the general definition above, a "depository account" does not include:
(i) a negotiable debt instrument that is traded on a regulated market or OTC market and distributed and held through an FI (or FIs); or
(ii) an advance premium or premium deposit with respect to an insurance contract, in the case where the premium is payable at least annually and such advance premium or premium deposit does not exceed the next annual premium that will be payable under the contract.
Reg. §1.1471-5(b)(3)(i)(B); -5(b)(3)(vii)(C)(5).

c. "Custodial account"
A "custodial account" is an arrangement for holding a financial instrument, contract, or investment (including corporate stock, a note, bond, debenture or other evidence of indebtedness, a currency or commodity transaction, a credit default swap, a swap based upon a nonfinancial index, a notional principal contract (as defined in §1.446-3(c)), an insurance or annuity contract, and any option or other derivative instrument) for the benefit of another person. Reg. §1.1471-5(b)(3)(ii)._

Or, in somewhat oversimplified terms, a depository account is or closely resembles an ordinary bank account (savings, checking/current, etc.) where you hold cash as cash. A custodial account is something else.


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## Rosepetal

BBCWatcher said:


> Page 9 of this guide provides definitions of depository and custodial accounts, and those definitions seems to be well sourced. I'll quote the relevant section from the guide:
> 
> _b. "Depository account"
> (1) In general
> A "depository account" is generally any account that is:
> (i) a commercial, checking, savings, time, or thrift account, or an account evidenced by a certificate of deposit, thrift certificate, investment certificate, passbook, certificate of indebtedness, or any other instrument for placing money in the custody of a banking or similar business for which such entity is obligated to supply credit; or
> (ii) any amount held by an insurance company under a guaranteed investment contract or similar agreement to pay or credit interest thereon or to return the amount held.
> Reg. §1.1471-5(b)(3)(i)(A).
> 
> (2) Instruments/deposits not treated as "depository accounts"
> Notwithstanding the general definition above, a "depository account" does not include:
> (i) a negotiable debt instrument that is traded on a regulated market or OTC market and distributed and held through an FI (or FIs); or
> (ii) an advance premium or premium deposit with respect to an insurance contract, in the case where the premium is payable at least annually and such advance premium or premium deposit does not exceed the next annual premium that will be payable under the contract.
> Reg. §1.1471-5(b)(3)(i)(B); -5(b)(3)(vii)(C)(5).
> 
> c. "Custodial account"
> A "custodial account" is an arrangement for holding a financial instrument, contract, or investment (including corporate stock, a note, bond, debenture or other evidence of indebtedness, a currency or commodity transaction, a credit default swap, a swap based upon a nonfinancial index, a notional principal contract (as defined in §1.446-3(c)), an insurance or annuity contract, and any option or other derivative instrument) for the benefit of another person. Reg. §1.1471-5(b)(3)(ii)._
> 
> Or, in somewhat oversimplified terms, a depository account is or closely resembles an ordinary bank account (savings, checking/current, etc.) where you hold cash as cash. A custodial account is something else.


BBCWatcher, that's exactly the part of the instructions that confused me about "custodial account" because it doesn't seem to mean what I thought a "custodial account" was.

So.... mutual fund... custodial or depositary?

I guess I don't understand what a "financial instrument" is, and they don't give a definition.

From the point of view of your average non-banking person, they're all "depository," KWIM? I put money in, I take money out.


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## BBCWatcher

A mutual fund is clearly custodial per this definition. It's also often a PFIC, as it happens.


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## Rosepetal

BBCWatcher said:


> A mutual fund is clearly custodial per this definition. It's also often a PFIC, as it happens.


 Okay, I just googled PFIC and understood about one sentence in ten.

What does this mean for those U.S. tax returns? I've been reporting dividends and distributed capital gains from those mutual funds on Schedule B and Schedule D. I have a feeling you're about to tell me I have to file 10 more forms every year....


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## BBCWatcher

Have a look at IRS Form 8621 and its instructions.


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## maz57

The PFIC rules are how the US government punishes Canadians for buying Canadian mutual funds. If you are unlucky enough to have a US reporting obligation you don't want to own them unless they are held within an RRSP.


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## BBCWatcher

maz57 said:


> The PFIC rules are how the US government punishes Canadians for buying Canadian mutual funds.


Ah, no. 

PFIC rules apply solely to those with IRS tax filing obligations, notably U.S. citizens and U.S. residents. If those filers also happen to be Canadians, Hungarians, or Presbyterians -- or even residents of the International Space Station -- such facts are entirely incidental.

PFIC rules apply to all foreign financial vehicles that meet the definition. If they're Canadian, Russian, or Japanese investments, it doesn't matter. (Unless a tax treaty says otherwise, and the U.S.-Canada tax treaty is probably more favorable in this regard than all others.)

Somehow I'm reminded of the late great Madeline Kahn playing First Lady Pat Nixon in the "Saturday Night Live" skit "Final Days" that aired on May 8, 1976, written by Al Franken and Tom Davis. In the skit she said of her husband, "Dick wasn't anti-Semitic. He hated all minorities."  Likewise, the IRS and Congress have nothing against Canada in particular -- in fact, they rather like Canada -- but they do have some issues with PFICs generally.


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## BBCWatcher

....OK, so in an effort to be helpful -- what we should really be focused on here -- what are PFICs and what do you do about them? Why do they merit special tax treatment?

Rewind the clock a couple or three decades. Congress introduced some reporting rules that U.S. financial institutions had to follow so that gains on investment vehicles (such as mutual funds) are properly tabulated and reported to the IRS. Rather quickly some wealthy Americans figured out that they could put their money in offshore investments expressly designed _not_ to report earnings in the IRS-correct ways, thus avoiding tax they'd be paying if they were invested in otherwise identically situated U.S. investments. Understandably U.S. financial institutions were upset that their wealthiest clients were fiddling with their taxes without their help. Congress understandably was upset and closed this gigantic loophole, introducing PFIC rules that have been revised and refined ever since. So you can "thank" rich people for spoiling most things tax-related. 

The normal way that you're supposed to handle PFICs -- non-U.S. mutual funds, for example -- is through annual "mark to market" valuations, paying income tax on the _unrealized_ gains as you go along. That resets the cost basis every year, so it's not altogether a bad thing. In some cases it actually works rather well and can be a good thing. But it does require a trip through a separate form (8621), preferably prepared with the help of your favorite tax preparation software, even the free stuff. If you don't make those mark to market valuations each year then you can get hit with a fairly chunky tax bill when you sell the asset.

I should quickly editorialize a bit to point out that the U.S. is hardly alone in having a tax code that frowns (a bit) on overseas investments. Italy's tax code, to pick a random example that I'm somewhat familiar with, has that same basic characteristic if you're a resident of Italy. In Italy's case there's a pair of wealth taxes applied uniquely to overseas assets. Unfortunately there is no such thing as a truly globally tax-friendly investment, so whenever you cross a border you need to exercise some due care.

Fortunately it's generally relatively easy to avoid PFIC complications if you wish, especially for residents of Canada. Here are some of the things that do not trigger PFIC rules:

1. Assets held within Canadian RRSPs, RRIFs, and possibly other "alphabet soup" accounts that fit the treaty definition. Such assets are at least partially protected thanks to the U.S.-Canada tax treaty (they're U.S. tax deferred).

2. Cash deposits in bank/credit union accounts (e.g. ordinary checking/current and savings accounts, including certificates of deposit/fixed deposits). That includes foreign currency deposits as long as they're ordinary (not something exotic like a currency mutual fund).

3. Assets held at U.S. financial institutions in the United States, including Canadian investments such as shares in a Canadian company and U.S. mutual funds that invest primarily or exclusively in Canada (e.g. the Fidelity U.S. Canada Fund symbols FICDX and FACNX, iShares Canada symbol EWC -- note, not necessarily recommendations). Note that practically all of the largest Canadian companies have shares traded on the New York Stock Exchange or NASDAQ, so they're very easy to buy and sell using a U.S. broker that issues 1099s, etc.

4. Direct holding of individual bonds, private or public (but not bond funds). That includes Canadian Savings Bonds.

5. Direct holding of shares in banks and insurance companies (but not a mutual fund, even if it invests solely in bank and insurance company stocks) -- as long as they are genuinely banks and insurance companies and not a "bank" that's actually a holding company that's got a substantial non-bank/insurance subsidiary. (It has to be "75% a bank" or insurance company, or more.)

6. Direct holding of real estate, such as your home (but not foreign "REITs" for example).

7. Direct holding of physical assets, such as precious metals (in a safe deposit box one hopes), collectibles (e.g. artwork, baseball cards), etc.

8. Ordinary, simple insurance policies, such as simple term life insurance and long-term care insurance.

9. Assets held by a non-resident alien spouse who does not make a Section 6013(g) election to participate in a joint U.S. tax filing, though note the annual gift limit ($147,000 in tax year 2015) before one starts to reduce the lifetime exclusion ($5.43 million in tax year 2015). That is, you can give your NRA spouse a heck of a lot of money to buy anything he/she wishes, including PFICs. If he/she is not subject to U.S. income tax reporting, he/she is also not subject to PFIC rules.

10. Relatedly, household expenses -- and (ordinarily) anyone's educational and medical expenses. Spending on education, for example, is an investment. (There are some U.S. tax breaks potentially available for such spending, too.) If supporting your spouse's household expenses means he/she can save more, including in PFICs, that could be a fabulous plan.

11. A personal loan you provide to someone, typically with a promissory note. (Though the interest is usually taxable income.)

12. Traditional "defined benefit" pensions and comparable vehicles.


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## maz57

BBCWatcher said:


> Ah, no.
> 
> PFIC rules apply solely to those with IRS tax filing obligations, notably U.S. citizens and U.S. residents. If those filers also happen to be Canadians, Hungarians, or Presbyterians -- or even residents of the International Space Station -- such facts are entirely incidental.
> 
> PFIC rules apply to all foreign financial vehicles that meet the definition. If they're Canadian, Russian, or Japanese investments, it doesn't matter. (Unless a tax treaty says otherwise, and the U.S.-Canada tax treaty is probably more favorable in this regard than all others.)
> 
> Somehow I'm reminded of the late great Madeline Kahn playing First Lady Pat Nixon in the "Saturday Night Live" skit "Final Days" that aired on May 8, 1976, written by Al Franken and Tom Davis. In the skit she said of her husband, "Dick wasn't anti-Semitic. He hated all minorities."  Likewise, the IRS and Congress have nothing against Canada in particular -- in fact, they rather like Canada -- but they do have some issues with PFICs generally.


We know all that, but thanks anyway. The OP lives in Canada so that's why we're talking about Canada. (But the SNL joke is funny!)

As far as I can tell, the PFIC rules are Congress' (and the IRS') handout to the US mutual fund industry which doesn't like foreign competition. Congress likes Canada in the same way we all like our dogs; everything's fine as long as they behave properly.

My admonition to the OP stands: if you have a US filing obligation don't buy a Canadian mutual fund outside of an RRSP. Cross-border tax experts agree on this one. Most Canadian funds don't even publish the information which would be required to do PFIC reporting. Doesn't it seem a just a little overbearing to you that Canadian residents who also happen to have a US filing obligation are effectively prevented from investing in home country funds? This is yet another reason to get rid of US citizenship ASAP in my opinion.


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## Rosepetal

Holy moly. I am so screwed. 

Gotta get in that line to renounce my citizenship. I feel really bad about it. It's not the taxes, it's the filing requirements. 

I have been in Canada more than 20 years. I've got kids to educate here. I'm 10-15 years from retirement. I can't stick the whole of my savings in interest-bearing accounts since they're basically not paying any interest these days. I don't know enough to invest in stocks directly. 
Can't invest in U.S. mutual funds... I have a small account in the US from before I moved, and they won't let me invest or move the money around because they're not licensed to sell in my province (Ontarians and BCers, you bigger provinces might not face this problem) 

I've been faithfully reporting my mutual funds on my US taxes (wrongly, apparently... but I have reported that income and any capital gains from selling!) and on my FBAR for years. No blowback from the U.S. side. 

So hoping I can fly under the radar till I can renounce. If they come after me, I'm gonna have to go to that tax advocate ombudsman and cite that taxpayer's rights thing... there's one in there that says you have the right to be properly informed about your filing obligations and how to do it.

Wish me luck.


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## BBCWatcher

Rosepetal said:


> I can't stick the whole of my savings in interest-bearing accounts since they're basically not paying any interest these days.


Did anyone suggest that?

Calm down and read the list again. It's a long list.



> Can't invest in U.S. mutual funds...


Sure you can. Find another U.S. broker -- Schwab for example.

You can also buy PFICs. You just have to report them correctly, and it's not _particularly_ hard.


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## maz57

Rosepetal said:


> Holy moly. I am so screwed.
> 
> I've been faithfully reporting my mutual funds on my US taxes (wrongly, apparently... but I have reported that income and any capital gains from selling!) and on my FBAR for years. No blowback from the U.S. side.


Maybe the thing to do is just continue reporting like you always have. If the IRS isn't complaining then they must be OK with what you are doing presently. 

FBAR is no problem because you are just reporting the account and the value, not what's in it.


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## BBCWatcher

maz57 said:


> If the IRS isn't complaining then they must be OK with what you are doing presently.


Ah, no. I'm afraid it doesn't work that way on either side of the border. The IRS isn't very often "OK" with anything -- they don't actually approve very much. They just merely decline to raise objections at particular moments in time.

By the way, if you do decide to renounce, can you truthfully sign Form 8854 if you have outstanding PFIC issues?  Yes, they thought of that one. 

Renunciation can never fix the past, though it can shine some more light on it.


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## maz57

BBCWatcher said:


> By the way, if you do decide to renounce, can you truthfully sign Form 8854 if you have outstanding PFIC issues?  Yes, they thought of that one.


Re: signing 8854. I would, but others, maybe not. Practically speaking, unless you are a billionaire covered expat, no one cares, not even the IRS. It sounds as if the OP reported the income and c.g. He merely has an annoying paperwork problem. not a tax problem. 

I heard of one person who was so disgusted with the whole situation they just scribbled "NO US ASSETS" on their 8854 and filed it. They never heard a thing so persumably the IRS was OK with that. Don't know whether they signed it or not.

I know it makes you queasy to color outside the lines but it doesn't bother me one bit and works well. Its also very satisfying.


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## maz57

BBCWatcher said:


> Renunciation can never fix the past, though it can shine some more light on it.


That may be so, but it sure as hell can fix the future!


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## BBCWatcher

maz57 said:


> That may be so, but it sure as hell can fix the future!


Sometimes yes, sometimes no. It's much like divorce, and, as many divorced spouses can tell you, divorce often doesn't fix the future.


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## Rosepetal

Look, I know it's kind of shooting the messenger for me to rail at you, since you're putting in all this time giving free advice to random Internet folk, but it's not as easy as you suggest, and in case any other folks in my situation (long time resident in Canada US citizen) read this, I'm going to give a few notes on the



BBCWatcher said:


> Did anyone suggest that?
> 
> Calm down and read the list again. It's a long list. .


I read it. Basically, my options are as I said... put the whole nest egg in interest-bearing accounts of one kind or another when interest rates are 1-2% for this kind of account. 
The advice about investing through a US-based financial institution isn't as easy as you think. Canada and the US cracked down together on cross-border investing around, oh, I think it was early 2000s. The brokerage houses have to be licensed in Canada to sell to Canadian residents, and it's not worth their while to bother with us. See below:



BBCWatcher said:


> Sure you can. Find another U.S. broker -- Schwab for example.


You recommended Schwab. I went to their website. The very first thing they list under "information you will need to open an account" is a US permanent resident address. I reside in Canada and the only way I can give a US permanent address is to lie. 



BBCWatcher said:


> You can also buy PFICs. You just have to report them correctly, and it's not _particularly_ hard.


Okay, I will try. But I just had a look at that form 8621, and if you think it's not particularly hard, you're much smarter than I am. Any form with 12 pages of instructions, asking me things like "Type of PFIC and amount of any excess distribution or gain treated as an excess distribution under section 1291, inclusion under section 1293, or inclusion or deduction under section 1296," when I don't even really understand what a PFIC is, is pretty hard.

I wouldn't even mind that, if I had any faith that the IRS really knew what they were doing. Given that I've called them numerous times over the past 20 years and been told varying bits of conflicting advice, I have a feeling that filing this 8621 is just going to annoy them because whoever's reading my file doesn't have a clue about it either!

But thanks for the heads up about this issue. Better to know than not, eh? You're the best!


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## BBCWatcher

Rosepetal said:


> You recommended Schwab.


I didn't necessarily recommend Schwab. It's an example. I recommend shopping around.

There was a whole thread containing the names of 10+ U.S. brokers that are reportedly U.S. expat friendly, but for some reason it disappeared. 

With respect to Schwab specifically, you have to go to their international site then phone them at the number they give you when you select "Open an Account" then "Canada." Apparently there are some provincial-level complexities there, though if you call them first that's not soliciting, and that's important.



> Okay, I will try. But I just had a look at that form 8621....


There's your first mistake. 

Let the interview-style tax preparation software do the work for you, even the free stuff. Yes, there are people who still grind their own flour when they want to end up with a cake, but probably you'll want to try some other path first, especially if this is your first cake.  TaxAct, for example, claims to support IRS Form 8621, even in their free edition.


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## maz57

Remind me again why the US likes to torture its expats with ridiculous rules and even more ridiculous forms (none of which have anything to do with actual tax owing). 

It just doesn't seem that sinister to me that someone might move somewhere and buy an off-the-shelf mutual fund if they have some money to invest. And if you live in Canada why the heck would you want to buy a US mutual fund?


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## BBCWatcher

By the way (and please do double check this), I think it's also possible to avoid triggering PFIC rules if:

1. You have a foreign (e.g. Canadian) brokerage account and;

2. The only assets held within that account are U.S. assets, for example Exchange-Traded Funds that are purchased on the NYSE or NASDAQ.

You would avoid keep funds in the foreign brokerage's money market account since that could be considered a PFIC.

Note that I'm trying to list only financial assets that _clearly_ do not trigger PFIC rules -- that there's not even any debate about. I'm quite sure that I've only provided a partial list.

I also see that some Canadian financial institutions sell shares in their stock directly to the public. Those are called Share Purchase Plans (SPPs). According to the list I found, the following financial institutions have SPPs: Bank of Montreal, Bank of Nova Scotia, CIBC, Laurentian Bank, Manulife, National Bank, and Sun Life. There may be others. Direct holding of bank and insurance company stocks is clearly PFIC-safe, as I understand it. I'm certainly not suggesting you pour your entire net worth into Canadian financial institutions, but as a component of your overall savings some investment could be quite reasonable. It looks like the highest minimum to open an SPP with any of these companies is C$500, and most of them are C$100 (or even C$0)....

....So, how can you create and contribute to a PFIC-compliant Canadian Financial Sector mutual fund? Just open SPPs with all those companies and contribute the same Canadian dollar amount to each and every SPP, without fail, every month. (Your first contribution might have to be higher than otherwise planned to get the SPPs open.) That's all a mutual fund is, a basket of underlying assets. So if you make automatic monthly contributions to that collection of stocks, directly, just like that you've created the Rosepetal Canadian Financial Stocks Mutual Fund(TM). (All of those companies also have DRIPs, meaning that you can have the stock dividends automatically reinvest in purchasing additional shares. Those dividends will be Canadian taxable first, with a Foreign Tax Credit for Canadian income taxes against your U.S. tax liability.)

Anyway, it's an example, and there are many.


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## BBCWatcher

maz57 said:


> It just doesn't seem that sinister to me that someone might move somewhere and buy an off-the-shelf mutual fund if they have some money to invest.


It's not sinister, but there could be tax consequences. _As there always could be_. If a Canadian moves to France (investing in France), then back to Canada, there could be tax consequences.

Americans can do practically anything they want, including invest in PFICs. But there are potential tax consequences to many of life's choices. Americans also help other Americans in legally avoiding tax should they be so interested.



> And if you live in Canada why the heck would you want to buy a US mutual fund?


Oh, that's easy. Because it's the best, lowest cost, safest financial market in the world, and U.S. citizens enjoy preferential access to that market (no mandatory withholding).

I live in Singapore and wouldn't ever want to touch anything local here. The financial market offerings are expensive s**t. (U.S. markets are quite popular here, even considering 30% withholding that most people deal with.) Canada is better but still nothing compared to the United States.

Sorry to be blunt, but there you go, you asked. Many things are nice about the United States, and many things aren't. But you picked something that's nice about the United States: the world's lowest cost, best financial products.

And yes, you can buy an almost infinite variety of Canadian dollar-correlated financial assets in the United States. That's not at all a problem. You could even buy stock in the old Air Canada and Laidlaw, two Canadian companies, and watch your shares become worthless. Not that I'm bitter about that.


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## maz57

Rosepetal said:


> Holy moly. I am so screwed.
> 
> Gotta get in that line to renounce my citizenship. I feel really bad about it. It's not the taxes, it's the filing requirements.
> 
> I have been in Canada more than 20 years. I've got kids to educate here. I'm 10-15 years from retirement. I can't stick the whole of my savings in interest-bearing accounts since they're basically not paying any interest these days. I don't know enough to invest in stocks directly.
> Can't invest in U.S. mutual funds... I have a small account in the US from before I moved, and they won't let me invest or move the money around because they're not licensed to sell in my province (Ontarians and BCers, you bigger provinces might not face this problem)
> 
> I've been faithfully reporting my mutual funds on my US taxes (wrongly, apparently... but I have reported that income and any capital gains from selling!) and on my FBAR for years. No blowback from the U.S. side.
> 
> So hoping I can fly under the radar till I can renounce. If they come after me, I'm gonna have to go to that tax advocate ombudsman and cite that taxpayer's rights thing... there's one in there that says you have the right to be properly informed about your filing obligations and how to do it.
> 
> Wish me luck.


Despite BBC's fear mongering, the reach of the IRS into Canada (or anywhere else outside of the US for that matter) is greatly exaggerated.

By all means look further into your US tax situation and do the best you can without wasting large amounts of time and money but don't lose sleep over it. But if you have lingering US assets and don't intend to return, I'd quietly move it all into Canada. Residual US assets are really the only leverage the IRS has over a permanent expat. Also become a Canadian citizen ASAP if you haven't already done so.


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## BBCWatcher

maz57 said:


> Despite BBC's fear mongering....


I'm certainly not fear mongering.


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## maz57

If you are a Canadian who wants to set yourself up to be whipsawed by exchange rates, buy anything valued in US dollars. You felt the pain with Air Canada; I felt mine with some really nice US dollar valued bonds. 

Those nice, stable, low cost, US investments can turn into a nightmare fast with the currency fluctuations. In theory, you could also make money, but the little guys always seem to be on the wrong side of currency swings. No need to introduce another level of uncertainty (and risk) into your investing.

I do own some nice, low cost, currency neutral, Canadian funds, however.


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## BBCWatcher

maz57 said:


> If you are a Canadian who wants to set yourself up to be whipsawed by exchange rates, buy anything valued in US dollars....


I think you missed what I wrote. But let's use an example....

Let's suppose you have Canadian dollars, and you do the following:

1. You convert your Canadian dollars to U.S. dollars (in a cost-efficient manner);
2. You buy Canadian maple syrup assets traded on NASDAQ;
3. You hold those Canadian maple syrup assets for 12 months, in which time the exchange rate changes but the Canadian dollar price of maple syrup doesn't change;
4. You sell your Canadian maple syrup assets on NASDAQ;
5. You convert your U.S. dollars to Canadian dollars (in a cost-efficient manner).

So, if you started with C$10, how many Canadian dollars do you get back (leaving transaction costs aside)?

If your answer is "C$10," congratulations, you figured it out! Canadian maple syrup moves with Canadian dollars. As the U.S. dollar-Canadian dollar exchange rate bounces around, Canadian maple syrup's U.S. dollar price bounces right along.

You can invest _as heavily as you wish_ in Canadian dollar-denominated and/or correlated assets within U.S. financial markets. (Or euro, pound, yen, or even something exotic like Kenyan shillings. Anything you prefer.) In fact, you can invest so heavily in Canadian dollars that you can buy currency futures and options, and if the Canadian dollar rises or falls even just a bit, you can get an awful lot more Canadian dollars than you started with. All of that is possible, easy, and cheap in U.S. financial markets. They're huge, and they're liquid. The location of the trading market has _nothing whatsoever to do_ with your decision about how heavily (or not) you want to invest in things that move in lockstep (or better) with Canadian dollars.

....Now that I've written that, does it make any logical sense whatsoever to tie your future _100%_ to _any_ single currency? No, that's not sensible if you're a long-term investor. Diversification is a very good idea, including some _reasonable_ amount of currency diversification. (One could also hold the same fundamental view here with respect to passport diversification. They are similar concepts.) You tend to get some currency diversification even if you hold shares in major Canadian companies since most of them do business internationally, but it really is quite possible that the Canadian dollar could tank and stay tanked for a long time versus major currencies. And that'd be bad for your retirement or other savings goals if you bet 100% on Canadian dollars. Or maple syrup.



> You felt the pain with Air Canada; I felt mine with some really nice US dollar valued bonds.


No, not really. You suffered a percentage decrease in bond value in Canadian dollar terms (or a lower effective yield). I suffered a 100% loss on not one but two Canadian companies that went bankrupt. Unless those bonds defaulted entirely, my loss beats yours. 



> Those nice, stable, low cost, US investments can turn into a nightmare fast with the currency fluctuations.


Nope. Invest 100% in Canadian assets if you wish, traded in U.S. markets. (But that's not generally wise, in Canada or not. See above.)



> In theory, you could also make money, but the little guys always seem to be on the wrong side of currency swings. No need to introduce another level of uncertainty (and risk) into your investing.


Nope. No other level. You can invest in exactly the same way, with exactly the same asset and currency weightings as you'd desire if you were buying assets within the smaller Canadian financial market.

For example, if you buy shares in the Canadian bank Toronto Dominion, it doesn't matter in currency terms whether you buy them on the New York Stock Exchange as symbol TD or on the Toronto Stock Exchange as symbol TD. (See, it even has the same symbol.) TD moves with TD, and vice versa. If the only thing that changes is the exchange rate, then TD and TD instantly adjust to hold value (in Canadian dollar terms). If they didn't move that way then somebody would make an unlimited amount of money (in either currency) buying TD in Toronto and quickly selling TD in New York, or vice versa. That doesn't happen -- or, more precisely, the fact it can and occasionally does happen means TD and TD instantly snap back into currency alignment.

Now, you have the _option_ to allocate your assets differently (and with different currency risk profiles) if you're taking advantage of U.S. financial markets since there are, indeed, so many more options. But there is absolutely no obligation to do so. If you want to bet exclusively on Canada, go right ahead -- in Toronto or in New York.

Yes, there is a currency conversion cost in both directions. Even so, U.S. financial markets are still best in the world, assuming you're taking reasonable steps to choose low-cost fund transfers and not doing something you'd never want to do. That's certainly true here in Singapore. The currency costs don't change the basic facts about the cost attractiveness of U.S. financial markets.


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## Bevdeforges

Why should folks resident in Canada, or anywhere else, want to invest in "foreign" financial products in the US? If our lives and financial well being is in our country of residence, it makes no sense to deal with the exchange risk of investing elsewhere (particularly for something like retirement).
Cheers,
Bev


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## Rosepetal

Hey, thanks to all for the advice. 



maz57 said:


> By all means look further into your US tax situation and do the best you can without wasting large amounts of time and money but don't lose sleep over it.


Best advice of all, and I'm going to follow it.

BBCWatcher, I think all the stuff you've said might be useful if I wanted to become an active investor and/or a cross-border tax adviser. But it would obviously take me way more time than I'm willing to invest in my money management. 

And interview-style tax software is definitely not going to help me if I can't understand the questions and/or don't have answers to the questions. I have to point it, it was a question relative to the 8938 on my tax software that brought both you and me to the IRS instructions for the form 8938.

So I'm going to continue filing as I have been, using my Canadian tax info forms on my mutual funds, reporting on U.S. Schedule B and Schedule D when I've got income and capital gains to report. 

And looking into renunciation down the line.


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## BBCWatcher

Bevdeforges said:


> Why should folks resident in Canada, or anywhere else, want to invest in "foreign" financial products in the US? If our lives and financial well being is in our country of residence, it makes no sense to deal with the exchange risk of investing elsewhere (particularly for something like retirement).


Good grief. There is NO exchange risk (unless you want some)!

Let's try this another way....

1. I buy a Canadian mutual fund that invests in a collection of global multinational companies: 20% Microsoft, 20% Starbucks, 20% Toronto Dominion, 20% Unilever, and 20% Sony.

2. I buy a U.S. mutual fund that invests in a collection of global multinational companies: 20% Microsoft, 20% Starbucks, 20% Toronto Dominion, 20% Unilever, and 20% Sony.

3. The Canadian dollar-U.S. dollar exchange rate changes.

Question: What just happened to the U.S. dollar price of the U.S. mutual fund relative to the Canadian dollar price of the Canadian mutual fund?

Answer: It instantly and automatically adjusted to reflect the exchange rate difference. The underlying assets are exactly the same, so they must have the same price in both Canadian dollars and U.S. dollars. If they didn't, somebody would quickly step in and arbitrage away the difference.

This isn't actually complicated!

Now, as it turns out, the value of global multinational companies (including most Canadian ones) isn't _heavily_ influenced by the value of the Canadian dollar relative to major currencies. So that "Canadian" mutual fund you're buying using Canadian dollars isn't actually very Canadian, and you do have exchange risk. The exchange risk gets reflected in the valuations of the underlying assets themselves. But whether you buy those assets in Toronto, New York, or London doesn't actually matter -- they're still the same assets with the same valuation at any moment in time in any currency, including Canadian dollars.

I thought my maple syrup example would work, but perhaps not.  There seems to be confusion that this stuff is _more_ complicated than it actually is. No, it's actually pretty simple.

TD is TD, whether purchased in Toronto or New York. Assuming I convert currencies promptly on both the buy and the sell, there is no currency risk beyond the currency risk inherent in holding TD stock itself. (And there is some currency risk in TD itself because TD gets a lot of its revenues in currencies other than Canadian dollars and has many expenses in currencies other than Canadian dollars.)

If you want truly zero currency risk then you have to invest in actual Canadian dollars in some form, not "Canadian" mutual funds. The only thing "Canadian" about a "Canadian" mutual fund is that it's sold in Canada (and with a higher expense ratio typically), not that its asset composition is different.


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## BBCWatcher

Rosepetal said:


> And interview-style tax software is definitely not going to help me if I can't understand the questions and/or don't have answers to the questions.


True, but why don't you give it a try before taking the pessimistic view?

All the decent (or better) interview-style tax preparation software products (free and fee) have online help. If a question is confusing, you click on a button or link that provides more information. That may provide enough guidance.

There are some truly tough questions in tax compliance, on either side of the border, but the tax prep software packages are rather good at reducing the number of tough questions.


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## shidareume

TaxAct doesn't have Q&A mode for Form 8621. They only have the raw form, with no extra instructions or help. So one is completely on one's own there.

At least TaxAct has the form at all. TurboTax doesn't, and neither does IRS Free Fillable Forms.


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## shidareume

BBCWatcher said:


> Rewind the clock a couple or three decades. Congress introduced some reporting rules that U.S. financial institutions had to follow so that gains on investment vehicles (such as mutual funds) are properly tabulated and reported to the IRS. Rather quickly some wealthy Americans figured out that they could put their money in offshore investments expressly designed _not_ to report earnings in the IRS-correct ways, thus avoiding tax they'd be paying if they were invested in otherwise identically situated U.S. investments. Understandably U.S. financial institutions were upset that their wealthiest clients were fiddling with their taxes without their help. Congress understandably was upset and closed this gigantic loophole, introducing PFIC rules that have been revised and refined ever since. *So you can "thank" rich people for spoiling most things tax-related. *


No, the fault lies squarely with Congress. A bad law cannot be excused by the nature of the problem it was meant to solve. Congress could have come up with some way to deal with this problem without causing disproportionate burdens to fall on non-rich Americans living abroad, which is what instead has happened with the combination of PFIC rules and citizenship-based taxation. They either didn't think or didn't care about the consequences of their actions, and have refused all entreaties to do anything about it since.

In fact, rich people don't have to care about any of this, because they can afford the accountants to do the PFIC paperwork, or else find other, complicated ways around this PFIC regime (like the ones you have suggested). It is the ordinary middle-class person abroad who gets screwed here, as always. And that is purely the lawmakers' responsibility.


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## D.Glasby

BBCWatcher said:


> Ah, no.
> 
> PFIC rules apply solely to those with IRS tax filing obligations, notably U.S. citizens and U.S. residents. If those filers also happen to be Canadians, Hungarians, or Presbyterians -- or even residents of the International Space Station -- such facts are entirely incidental.
> 
> PFIC rules apply to all foreign financial vehicles that meet the definition. If they're Canadian, Russian, or Japanese investments, it doesn't matter. (Unless a tax treaty says otherwise, and the U.S.-Canada tax treaty is probably more favorable in this regard than all others.)
> 
> Somehow I'm reminded of the late great Madeline Kahn playing First Lady Pat Nixon in the "Saturday Night Live" skit "Final Days" that aired on May 8, 1976, written by Al Franken and Tom Davis. In the skit she said of her husband, "Dick wasn't anti-Semitic. He hated all minorities."  Likewise, the IRS and Congress have nothing against Canada in particular -- in fact, they rather like Canada -- but they do have some issues with PFICs generally.


It may not be specific to Canadians, but it does feel like punishment or a Catch-22. The only reason I converted all my US investments to Canadian was I was told by several institutions (such as UBS) that new federal laws no longer allowed them to manage my investments since I was a permanent resident of another country. They could hold them, but not buy or sell anything. Were they wrong?


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## Bevdeforges

BBCWatcher said:


> Good grief. There is NO exchange risk (unless you want some)!.


Afraid I don't agree at all with your take on the situation. 

My investments (i.e. IRA) in the US are denominated in US$. It doesn't actually matter what the underlying value of any of the individual investments is. My fund is worth $X and if I need the money (to live on, say) in Canada, or the UK or France, I have to convert whatever amount I withdraw from the fund for transfer to where I live and need the funds. If I happen to need the funds when the exchange rate is unfavorable, I'll get less CAN$ or GBP or € for my withdrawal, pay the same tax (unadjusted for the exchange rate) to the US (because it's from my IRA) and then pay whatever exchange and/or transfer fees on the transaction.

If I were invested in a retirement fund in my country of residence, I withdraw Y in local currency, pay whatever taxes may be due to my local government, and I'm done. (Yes, I'm ignoring any US tax consequences of the transaction because the basis for comparison is a "normal" local citizen using a "normal" type of retirement fund.)
Cheers,
Bev


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## BBCWatcher

Bevdeforges said:


> It doesn't actually matter what the underlying value of any of the individual investments is.


What on earth does that mean? Of course it matters! If you predominantly or exclusively(*) support a euro-based lifestyle, for example, then you care about the value of those investments expressed in euro.

But whether you buy and sell shares of Alcatel (for example) in Paris or New York, in a trading currency (only) of euro or dollars, it doesn't matter. It's still Alcatel, a company headquartered in France (for the moment), and those shares have whatever value they have. Alcatel shares will hold (or yield) their euro-expressed value no matter where you buy those shares.

If you're observing otherwise, then congratulations, you have stumbled into an infinite money making opportunity involving basic arbitrage. 

OK, if that still isn't making sense, let's try a bottle of French wine. Let's suppose that bottle has a price of 20 euro, and the euro price doesn't move. You take the bottle to the United States, then you bring the bottle back to France. What price would that bottle fetch in France? Still 20 euro.

OK, you buy the bottle in Manhattan. You use your MasterCard issued by a French bank. Assuming zero transaction costs, what amount appears on your MasterCard statement when you buy that bottle? It's 20 euro. You take the bottle back to France, and then you sell the bottle of wine. How much do you collect? Still 20 euro.

Next month you fly back to Manhattan, and the wine dealer there has restocked. The dollar-euro exchange rate has changed. You buy the same wine again, converting euro instantly to dollars as your purchase currency (but only that). How much appears on your MasterCard statement? Still 20 euro.

Yes, OK, in the real world bottles of wine in Manhattan don't instantly adjust price when the exchange rate changes. But on Wall Street the prices of shares of stock in Alcatel really do instantly adjust as the exchange rate fluctuates, and the prices on that same asset in New York and Paris always stay aligned, at every moment. (If they didn't, traders would rapidly fix that.)

Hopefully by now this is all clear -- I really hope so.

(*) As it happens you cannot actually do that. Oil, for example, has some U.S. dollar orientation, and everybody directly or indirectly consumes oil.


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## BBCWatcher

Let's back all the way up here for moment. Two basic points:

1. There's absolutely no barrier to buying whatever you want. If you want to buy a Canadian or French mutual fund, you can. Like anything else involving finances and income, there may be tax consequences. In the case of the U.S. tax code there's simply a trip (using your favorite tax preparation software, preferably) through IRS Form 8621.

2. Though it's not a requirement, if you want to avoid a trip through Form 8621 there are _myriad_ options. Here's yet another example of an approach that is most probably non-PFIC:

(a) You open an account with your favorite brokerage. Let's suppose it's TD Waterhouse in Canada, for example;

(b) You buy and sell any/all of the following within your brokerage account: (i) anything traded on the NASDAQ or NYSE (including shares in Canadian companies and low cost U.S.-based exchange traded-funds that invest in Canada, such as symbol EWC); (ii) any bonds you like; (iii) shares in any foreign companies you like, in any country, as long as they're not passive investment companies (companies that are not real, operating companies but are instead things like investment trusts, fund managers, etc.)

In other words, among the things "mere mortals" might buy, you just stay away from non-U.S. mutual funds. ("Non-U.S." here simply means not publicly traded on a U.S. exchange.) But you don't _have_ to -- it's only a tax return.

Now, as it happens I have yet to find any non-U.S. mutual fund -- even considering transaction costs -- that is even worth buying if you're a U.S. citizen who can buy on U.S. exchanges. Good grief, the funds (called unit trusts) are _terrible_ in Singapore -- extremely expensive, poor liquidity -- and this is supposed to be Asia's top financial center. I suppose I could get all emotional and bothered that I've got some more paperwork to do if I invest in one of these utterly crappy unit trusts, but that wouldn't actually be rational behavior. Maybe your mileage varies, but I haven't seen the point yet, and I've looked pretty hard. In some sense Congress is doing Americans a favor, steering them away (a bit) from a lot of investment crap out there. Yes, of course, there are some awful funds available in the U.S. too, but there are some really, really excellent ones only available in the U.S.

But OK, if you want to complain about this one, feel free. I've got complaints about the U.S. tax code, but this one isn't anywhere near top of my list.


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## ForeignBody

*Expat Tax: This (new) forum is for tax related queries and discussions for all expats.*

Why does every topic have to turn into an argument about semantics??


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## Rosepetal

BBCWatcher said:


> Let's back all the way up here for moment. Two basic points:
> 
> 1. There's absolutely no barrier to buying whatever you want. If you want to buy a Canadian or French mutual fund, you can. Like anything else involving finances and income, there may be tax consequences. In the case of the U.S. tax code there's simply a trip (using your favorite tax preparation software, preferably) through IRS Form 8621.


It's not just the reporting, in this case, if I understand correctly what you've told me about re-adjusting the cost basis every year and paying on unrealized capital gains.

Let's say I have $10,000 in a Canadian mutual fund. Let's say the price of shares does not budge all year. But the Canadian - US dollar exchange goes from .85 to 1.00 during the year. This is not unreasonable and it has actually happened.
So on one year's US tax return, my investment was worth $8500 in US dollars and now it is worth $10,000. I have a paper capital gain of $1500 that I owe US taxes on. It's not even an unrealized capital gain... it's purely generated by the exchange rate.

And I guarantee that Rev Canada will not allow me to use this as a foreign tax credit. They will say that the US is violating the tax treaty and they won't allow a tax credit on tax the US shouldn't be charging. Well, good luck to me using that tax treaty argument with the IRS. 

I repeat, I really don't mind paying US tax on my US-based assets. Fair enough. I don't mind proving to the US that I have paid Canadian taxes on my Canadian assets. But when the US starts making it impossible for me to satisfy my US filing and tax obligations without going through ridiculous contortions and avoiding perfectly legitimate, above-board investments in Canada, I've got to either fudge a little bit on the tax forms (by ignoring form 8621) or jump ship and renounce my citizenship.


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## Bevdeforges

Rosepetal said:


> I repeat, I really don't mind paying US tax on my US-based assets. Fair enough. I don't mind proving to the US that I have paid Canadian taxes on my Canadian assets. But when the US starts making it impossible for me to satisfy my US filing and tax obligations without going through ridiculous contortions and avoiding perfectly legitimate, above-board investments in Canada, I've got to either fudge a little bit on the tax forms (by ignoring form 8621) or jump ship and renounce my citizenship.


I think this sums up pretty well the frustration so many feel with the way the US taxation rules work. And, there is little evidence that the IRS seems to bother with many of us "small fry" living overseas. Generally speaking, if you give it a "good faith" effort to show that you don't owe any inordinate amount of tax, they'll let many of these things slide.

Which does get back to the original question posed in this thread: deposit or custodial?

Does anyone out there have any actual experience of just reporting any and all accounts as "deposit" (if that's how you use them) and having the IRS come back to question your choice?
Cheers,
Bev


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## BBCWatcher

Rosepetal said:


> It's not even an unrealized capital gain... it's purely generated by the exchange rate.


That is possible, that year. But the cost basis is reset (with a U.S. dollar basis), and that's not nothing.

Of course you can also just as easily have a "windfall loss" when the currency moves the other way, and those losses have their nice uses.



> They will say that the US is violating the tax treaty and they won't allow a tax credit on tax the US shouldn't be charging.


Well, if they say that they'd be incorrect as it happens. To my knowledge CRA has a fair number of reasonably talented individuals who don't make it a habit of providing incorrect tax information, at least not intentionally.

But you do get a Foreign Tax Credit on the U.S. side when Canada gets around to levying income tax (as Canada typically does eventually on interest, dividends, and capital gains). That U.S. FTC has a fair amount of flexibility because it can be carried backward one year or forward up to 10. Note that Canada does tax, in the year paid, interest and dividends on assets held in ordinary accounts. Those end up as FTCs on the U.S. side.

Keep in mind you also still have a personal exemption, standard deduction (or itemized deductions), and possible other exemptions, credits, deductions, etc. As I understand it, "mark to market" can work very well indeed for those with not-_too_-large unrealized gains (and with, for example, Foreign Earned Income Exclusion-shielded income). It's possible to end up with non-U.S. taxed PFIC passive income and a bankable Foreign Tax Credit to boot. That ain't bad if so. There are also some tax bracket benefits associated with "mark to market" accounting. (U.S. capital gains tax rates are progressive.)

It's when you don't mark to market (or wait longer to mark to market) that PFICs become..."interesting."



> ....I've got to either fudge a little bit on the tax forms (by ignoring form 8621) or jump ship and renounce my citizenship.


OK, but there's no "got to" here. You're (presumably) a competent adult with free will and several choices. Some options are legally compliant, and some are not.


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## shidareume

Once again, you seem to be focused only on the money, and are missing the bigger point, which is the complexity. Have you ever had to fill out Form 8621 yourself? Do you really think it is a reasonable thing to expect ordinary people without advanced accounting certifications to do?

And again, tax prep software does not help with 8621. At best they offer an electronic version of the form, but with no extra guidance or help whatsoever. It is no easier than having to fill out the paper form. And of course the IRS refuses to answer questions related to PFICs.

Also, mark-to-market "windfall losses" cannot be used, while mark-to-market gains are immediately taxed. Heads they win, tails you lose.


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## BBCWatcher

shidareume said:


> Once again, you seem to be focused only on the money, and are missing the bigger point, which is the complexity.


Really? Then why did I most of time and effort explaining most of the ways one can (if one wishes) avoid a trip through IRS Form 8621?



> Also, mark-to-market "windfall losses" cannot be used, while mark-to-market gains are immediately taxed.


That's a significant overstatement in at least two ways:

1. Losses can and do offset previously recognized mark-to-market gains.

2. Mark-to-market gains are _taxable_...but not necessarily taxed. They end up in "Other Income" on Line 21 (IRS Form 1040, 2014 edition). If, as I explained, all or most of your income is FEIE-shielded (for example), and your mark-to-market gains are not _too_ large, then this is very good news indeed because those gains end up in the zero percent tax bracket and you've reset your cost basis.

To illustrate point #2, let's use an example. Let's suppose you're a distinctly middle class overseas American holding $10,000 in a foreign mutual fund, and it gains $1000 in value every year. (Assume no interest and dividends for simplicity.) You hold that fund for 20 years. You also work overseas and earn a salary of $50,000 per year that grows over those 20 years to $80,000 per year. And maybe you have $500 in miscellaneous other income, such as interest income. All perfectly standard stuff here describing a heck of a lot of overseas Americans.

Scenario A: You make mark-to-market elections of $1000 per year for 20 years. Your earned income is fully shielded (through the FEIE), and your $1000 is reported on Line 21 and fits well within your personal exemption, even tossing in the $500 of interest income. You owe zero U.S. tax every year, though you may accumulate some excess FTCs on your $500 of passive income. You then sell the mutual fund, now worth $30,000, and you still pay zero U.S. tax because the cost basis is $29,000 that year. You may pay some foreign income tax on the sale, of course, but that tax then becomes a Foreign Tax Credit you can use to offset U.S. income tax (if any) on past or future foreign passive income. All good stuff. It's very hard to beat zero plus excess credits -- nothing to complain about there financially.

Scenario B: In this alternate universe PFIC rules don't exist. You sell the mutual fund, and you have a $20,000 gain (cost basis $10,000). You pay foreign tax first, but if the U.S. income tax rate is higher then you'd pay some U.S. income tax because you cannot shield a $20K gain within a single tax year. You only get a U.S. Foreign Tax Credit to the extent the foreign tax rate is higher. That's all worse than Scenario B, clearly.

Yes, that's a "strange" outcome that you might not realize at first. But Scenario A is financial reality for many, and it's a really good one.


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## Bevdeforges

I think we've flogged this one to death....:deadhorse:
Cheers,
Bev


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