Knowledge & Education Center

How US PFIC Rules Can Impact Your Clients

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Cardinal Point’s Terry Ritchie discusses the impact of U.S. PFIC (Passive Foreign Investment Company) tax rules on U.S. citizens living in Canada who hold Canadian mutual funds or ETFs. The challenge is that under U.S. tax law, the earnings and dividends from these PFICs are not taxed the same way in the U.S. as they are in Canada, resulting in very high tax rates.

The PFIC rules require the filing of Form 8621 for each PFIC owned. The taxpayer can make one of two elections. The first would be to treat the PFIC as a “qualified electing fund” (QEF). The QEF election lets the taxpayer distinguish between capital gain and ordinary income of the PFIC. However, Ritchie knows of only one Canadian mutual fund company that files the QEF. The second option is the mark-to-market election, in which all the year’s earnings are taxed as ordinary income at the highest marginal tax rate in the U.S. Ritchie’s advice to those in this situation is to avoid holding Canadian mutual funds/ETFs, find the Canadian mutual fund company that offers QEF statements, or own a portfolio of individual securities.

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