If, as a US Citizen or US Resident, you own mutual fund units, you will likely fall under the definition of Passive Foreign Investment Company (SPEP), better known as PFIC (Passive Foreign Investment Company) in accordance with US tax law. Although this type of investment is considered a trust for Canadian purposes, it is instead treated as a foreign corporation for US purposes.
To this end, a Form 8621 must be completed annually for each mutual fund unit held within your plans (except RRSPs and RRIFs), each being treated as a PFIC. The rules governing PFICs are complex and require annual calculations to determine the portion that will be subject to US tax. However, choices are available to limit its scope.
Several choices are available, including Mark-to-Market Method and Qualified Electing Fund (QEF). Usually, the latter will be used. This allows a simplified version of Form 8621 to be filed. Thus, the treatment applied in Canada and the United States will be similar and will considerably reduce the negative effect of the PFIC. On the other hand, your financial institution will have to provide you with a “PFIC Annual Information Statement” otherwise, the choice cannot be made.
If you hold a significant stake (more than 50%) in a foreign company (outside the United States), it will instead be considered a Controlled Foreign Corporation (CFC), to be declared on a form 5471. Also, other forms may apply to you depending on your situation. This will be the case if you have a TFSA. Finally, as a US citizen, you will normally be required to file the Report of Foreign Bank and Financial Accounts (FBAR) form and Form 8938, Statement of Specified Foreign Financial Assets if you exceed certain thresholds.
Do not hesitate to make an appointment with one of our tax experts or to drop your file on our virtual platform, it will be our pleasure to assist you in the preparation of Form 8621. Being specialized in American tax, we are used to processing these forms and choosing the QEF.