Tax Nightmare: PFIC and Form 8621

03/23/2011 | E. Pluribus Unum

[E. Pluribus Unum]

I recently invested in Central Fund of Canada (CEF) in my IRA and taxable accounts. This fund holds physical gold/silver in a 60%/40% ratio.

I just figured out that this stock is treated by the IRS as a Passive Foreign Investment Company, with punitive tax implications.

Does anybody have any experience with this type of investment? Should I dump it while I have only owned it a couple of months and have a 15% gain?

Any help would be greatly appreciated.

[CHICAGOFARMER]

These guys look like the understand the implications
http://www.rpifs.com/offshoretax/otpfic.htm

Here is a discussion on Canadian stock
http://www.assetprotectioncorp.com/taxonforeignstock.html

Here is a CPA forum. Be careful they tend to be overly cautious
http://www.accountantforums.com/foreign-stock-taxation-t12474.html

http://www.cdnbusinessdirectory.com/taxes/33800-foreign-stock-taxation

Here are two that discusses a retirement platform
http://www.cdnbusinessdirectory.com/financial-planning/41696-foreign-stock-ira-taxation-issue

http://www.beansmart.com/financial/Foreign-Stock-in-IRA-Taxation-Issue-2623-.htm

[E. Pluribus Unum]

Thank you very much!

[E. Pluribus Unum]

I contacted the fund, and it turns out that since they have no ordinary earnings and no capital gains you owe no tax until you sell, but you do have to fill out the form every tax year.

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Hello E. Pluribus Unum:

Thank you for your interest in Central Fund of Canada Limited.

Please go to our website, www.centralfund.com and click on "Financials".
Down the page, you'll come to Notice of U.S. Tax Information for U.S.
Persons.  This is a statement we send out to brokers and shareholders to
inform you that Central Fund has No Ordinary Earnings and No Net Capital
Gains to pass onto our shareholders because we do not sell our bullion.
At the bottom of this statement , you will find a link to the IRS Form 8621
and instructions for completing it.  You should file the IRS Form 8621 in
the first year that you hold CEF and in the year that you realize any gains
on the sale of the shares.  The Form 8621 simply tells the IRS that you have
invested in a Passive Foreign Investment Company (PFIC) which has no income
and no capital gains from its holdings.

Just check off Box A of Part I (QEF Election) and then in Part II, 1a, b and
c AND 2a, b and c are all 'zero'.  The zero comes from the Statement telling
you that Central Fund has NO ordinary earnings  and NO capital gains.
Central Fund is a Canadian company and you can ask your US tax advisor for
help with this if need be.

Please get in touch if you have further questions.

Yours truly,
Marda Jeffrey, Investor Services
Central Fund of Canada Limited
905-648-7878

[costbasis]

I suggest you check into the rule that IRA’s cannot invest in collectibles, including metals like gold and silver bullion unless they are in the custody of a qualified trustee as described in Internal Revenue Code Section 408(m). Such investments are taxed as immediate distributions from your IRA. It appears to me that holding a PFIC stock that holds bullion may fall within this rule.

[dfletch01]

In general, PFICs held in a Traditional or Roth IRA don’t have any consequence to your since they’re tax-deferred anyway.

However, for the PFIC shares held in the taxable account, you’ll want to:
(1) Report your holding each year on Form 8621;
(2) Make a QEF election under Part II or a “Mark to Market” election under Part III of Form 8621. If you don’t make one of those elections, you’ll get whacked with the punitive “interest charge” upon disposition.

[costbasis]

Correction: I was able to find out that holding gold/silver bullion in the PFIC form of ownership will NOT trigger the Sec 408(m) collectibles rule, so you don’t have to worry about that.