Can you make a QEF election without the PFIC Annual Information Statement?
Hello from Debra Rudd.
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Can you make a QEF election without the PFIC Annual Information Statement?
This week’s topic comes from reader K:What if the company or fund does not provide a QEF investor statement, are there other ways for one to confirm that the company or fund complies with IRS requirements for QEFs? What happens if there was an incorrect election made on Form 8621 and it turns out it does not qualify for a QEF treatment? How would we correct?This is a common question. If the fund doesn’t provide you with the statement you need to make the QEF election, but you somehow get the same information that would be provided on the statement, shouldn’t you still be able to make the QEF election? After all, you would be reporting the income correctly according to the QEF rules. The IRS says no.
Some background on QEFs
A Qualified Electing Fund is a PFIC for which a valid QEF election has been made. Under the QEF rules, your PFIC is taxed much like a partnership, meaning that income retains its character (capital gains are taxed as capital gains, for instance) and is passed through to the shareholder for current inclusion in income. You will pay less tax under the QEF rules than you will pay under the punitive Mark to Market (MTM) rules of IRC § 1296 or the extremely punitive excess distribution rules of IRC § 1291. You will want to make the QEF election (if you can) because it has the best outcome for a PFIC.QEF election requirements
For your QEF election to be valid, the PFIC must comply with “such requirements as the Secretary may prescribe” for the purposes of determining the amount and character of income attributed to the shareholder. IRC § 1295(a)(2). What, exactly, are those requirements? The answer is found in the Regulations, at Regs. § 1.1295-1(g):For each year of the PFIC ending in a taxable year of a shareholder to which the shareholder’s section 1295 election applies, the PFIC must provide the shareholder with a PFIC Annual Information Statement. The PFIC Annual Information Statement is a statement of the PFIC, signed by the PFIC or an authorized representative of the PFIC, that contains the following information and representations[.]The Regulations provide a detailed list of the information that must be present on the PFIC Annual Information Statement.
PFIC Annual Information Statement requirements
There are four main pieces of information that a PFIC Annual Information Statement must have. First, the PFIC Annual Information Statement must tell you the start and end dates of the time period to which the statement applies. Regs. § 1.1295-1(g)(1)(i). Second, the PFIC Annual Information Statement must contain any one of the following three things:- The shareholder’s portion of the ordinary income and capital gains from the fund, or
- Information that allows the shareholder to calculate her portion of the PFIC’s ordinary income and capital gains for the year, or
- A statement that the foreign corporation has permitted the shareholder to examine its books so that the shareholder can calculate her portion of the ordinary income and capital gains. Regs. § 1.1295-1(g)(1)(ii).
No exceptions to PFIC Annual Information Statement requirement
The Regulations are clear: you must receive a PFIC Annual Information Statement to make a QEF election:A shareholder that makes a section 1295 election with respect to a PFIC held directly or indirectly, for each taxable year to which the section 1295 election applies, must . . . receive and reflect in Form 8621 the PFIC Annual Information Statement described in paragraph (g)(1) of this section, the Annual Intermediary Statement described in paragraph (g)(3) of this section, or the applicable combined statement described in paragraph (g)(4) of this section, for the taxable year of the PFIC ending with or within the taxable year for which Form 8621 is being filed. If the PFIC Annual Information Statement contains a statement described in paragraph (g)(1)(ii)(C) of this section, the shareholder must attach a statement to its Form 8621 that the shareholder rather than the PFIC provided the calculations of the PFIC’s ordinary earnings and net capital gain. Regs. § 1.1295-1(f)(2)(C).If you do not receive the statement, you cannot make the election. The statement may, rather than telling you your ordinary income and capital gains, simply tell the IRS that you looked at the company’s books to determine the ordinary income and capital gains attributable to you, but you must receive the statement that contains all the required information, it must be signed by a representative of the PFIC, and you must attach it to Form 8621 to make the QEF election.
@Simon
My unofficial “I haven’t reviewed every last detail of your situation and this is not tax advice to you” 🙂 take on this: It sounds like you probably do not need to report the PFICs in the RRSP, because you have never previously reported income from the account and so you fall under the new IRS guidance that allows the RRSP to be tax-deferred.
Thanks Debra,
I did get Annual Info Statements from the fund for my RRSP account. And the documentation clearly states that it is QEF qualified. Starting in 2013 the fund started making income distributions which were automatically reinvested into the fund as new shares. However, I have never sold any shares and taken any money out of the RRSP account. So I have never reported any income from the account.
In my case:
1) With the PFIC in my RRSP Account, do I still need to make the QEF election and make a purging election?
2) Do I need to make annual QEF tax payments in the future or just in the years I sell shares out of the RRSP account?
Thank you much for your insight.
@Simon the QEF election can apply to a mutual fund if that fund provides the investor with the PFIC Annual Information Statement. Without that statement, no QEF election can be made. Most funds do not provide this to the investors, however. Regarding RRSPs, under the recent IRS guidance you typically would not have to report income from the underlying investments of this type of account. There can be exceptions, however. If you are required to report income from the account (I believe this could be the case if you had previously been reporting income from it before the new IRS guidance came out), and if the fund provides you with the necessary statement, you should be able to make the QEF election. However, be cautious — if you’ve owned the mutual fund for years before making a QEF election, you will need to make a purging election simultaneously with making the QEF election or your PFIC will be taxed both under Section 1291 AND the QEF rules.
Hi Debra, Thank you for explaining the QEF election in simple laymen language.
Does the QEF election also apply to an investment in a PFIC mutual fund? And does this also apply to an investment in a PFIC mutual fund held in a Canadian RRSP?