PFIC: Canadian Mutual Funds
Most Canadian mutual funds and many Canadian-listed ETFs are classified as Passive Foreign Investment Companies (PFICs) under US tax law. PFIC status triggers punitive tax treatment including excess distribution rules, interest charges on deferred gains, and mandatory Form 8621 filing. This is one of the most expensive traps for cross-border investors.
Key Points
- A PFIC is a foreign corporation where 75%+ of income is passive or 50%+ of assets produce passive income.
- Almost all Canadian mutual funds and many Canadian ETFs meet the PFIC definition.
- The default excess distribution regime applies an interest charge and taxes gains at the highest marginal rate.
- A Qualified Electing Fund (QEF) election or Mark-to-Market election can reduce the tax burden.
- Form 8621 must be filed for each PFIC, potentially generating dozens of forms.
Action Items
- 1.Identify all Canadian mutual funds and ETFs in your portfolio that qualify as PFICs.
- 2.Consider making a QEF or Mark-to-Market election for each PFIC.
- 3.File Form 8621 for every PFIC holding, even if there were no distributions.
- 4.Evaluate whether to liquidate Canadian fund holdings and reinvest in US-listed equivalents.
- 5.Consult a cross-border tax specialist, as PFIC calculations are highly complex.
Frequently Asked Questions
Are Canadian-listed ETFs that track US indexes also PFICs?
Often yes. If the ETF is organized as a Canadian trust or corporation (which most are), it meets the PFIC definition regardless of the underlying holdings.
What is the QEF election and should I make it?
A QEF election taxes you currently on your share of the PFIC's income, avoiding the punitive excess distribution rules. It requires annual income statements from the fund, which not all Canadian funds provide.
Can I avoid PFIC issues entirely?
Yes. Hold only US-domiciled funds and ETFs in your investment accounts. US-listed index funds (e.g., Vanguard, iShares US) are not PFICs.
Not sure which forms apply to you?
Answer a few questions and DualFiler will identify your tax persona, required forms, and potential penalty exposure.
Start the Wizard