In most cases, yes. A Canadian mutual fund or ETF is generally a passive foreign investment company, which brings Form 8621 and harsher default tax rules. Funds inside an RRSP or RRIF are exempt, and small holdings can skip the form.
Lou is a tax-preparation tool, not a tax advisor. This article explains general rules for US citizens and green card holders who live in Canada. For advice on your situation, work with a qualified tax professional.
Americans in Canada are often surprised to learn that the plain index fund in their brokerage account is a problem for US tax purposes. It is one of the costliest surprises in cross-border investing.
What a PFIC is#
A passive foreign investment company is a foreign corporation that mostly earns passive income or holds passive assets. The US generally treats Canadian mutual funds and ETFs this way. The rules exist to stop US taxpayers from deferring tax on investments held through foreign funds.
Why it matters#
Unless you make an election, default rules apply to a gain or a large distribution from a PFIC. The income is spread over your holding years and taxed at the top rate, plus an interest charge. That can produce a bill much larger than ordinary capital gains tax.
Each fund generally needs its own Form 8621 each year.
The treatments#
- The default rules. If you make no election, the harsh rules apply.
- Mark-to-market. You report the yearly gain or loss as if you sold at year end. It is only available for certain funds.
- Qualified electing fund (QEF). The fund must give you specific yearly information. Most Canadian funds do not.
When you do not have to file Form 8621#
- Funds inside an RRSP or RRIF do not need the form. The PFIC rules except funds held through an arrangement treated as a foreign pension fund under a tax treaty.
- Small holdings. You can skip the form for a fund taxed under the default rules when all your PFIC holdings together are $25,000 or less on December 31 ($50,000 or less on a joint return), and you did not sell or get an excess distribution.
- TFSA, FHSA and RESP do not get an exception. A fund held in a TFSA is still a PFIC.
Check before you buy#
Many Americans in Canada hold individual stocks or US-listed ETFs instead of Canadian funds. Individual shares of a company are not PFICs. A Canadian-listed fund generally is. Check how a fund is treated before you buy, and speak with a qualified cross-border professional about your situation.
Where Lou fits#
Lou flags funds on your slips instead of ignoring them. You choose how each fund is treated, and Lou computes the tax and interest, applies the $25,000 and RRSP exceptions when they fit, and fills Form 8621. More detail is in the PFIC guide. If you hold an RRSP, see also the RRSP and RRIF guide.
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