PFIC rules and reporting: what U.S. persons in Canada need to know
Canadian mutual funds, ETFs and money market funds are PFICs in the eyes of the IRS. The problem is expensive to unwind and easy to avoid.
One ongoing issue you need to take care of as a U.S. person living in Canada is reporting Passive Foreign Investment Companies, or PFICs. It affects your investment accounts, can get you tangled in tax headaches and can cost you a lot in accounting fees. The good news is it’s easy to avoid if you follow some simple steps.
What counts as a PFIC
As a U.S. person you have to claim worldwide income, and Canadian investments in this context are “foreign”, even though you live in Canada. If you hold Canadian mutual funds, ETFs or money market funds, these are all examples of PFICs.
If you already hold one
If you are a U.S. person and Canadian resident holding one of these in your investment account now, you can unwind it by filing the correct paperwork (Form 8621) and paying additional accounting fees. You want to do this as quickly as possible. Be aware that it is a lengthy process: CPAs estimate multiple hours per holding. Time and money down the drain.
How to stay out of trouble
Make sure your investments are not foreign to the U.S., which means investing in U.S.-based funds. Not a Canadian mutual fund that invests in the U.S., but an actual U.S.-based mutual fund or ETF. Individual shares of operating companies are another way around PFIC; those are not PFICs.
Two exceptions worth knowing
PFICs held inside an RRSP or RRIF do not have to be reported on Form 8621, because the tax treaty defers U.S. tax on those plans. The same is not true for a TFSA or RESP. And if all of your PFICs together were worth US$25,000 or less at year end (US$50,000 if married filing jointly) and you received no distributions or sale proceeds, the annual Form 8621 is not required for that year, although the PFIC tax rules still apply when you eventually sell.
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Chris is a cross-border financial advisor licensed in both Canada and the United States. He helps Americans moving to Canada and Canadians moving to the U.S. keep their retirement accounts intact and build one plan that covers both sides of the border. He writes for Cross Border Wealth in his personal capacity.
Disclosure: Chris writes in his personal capacity; his views do not represent any firm he is associated with. Cross Border Wealth does not provide advisory services. If you need advice, use the Get connected form and we will introduce you to a licensed professional.