The United States PFIC rules require information disclosure and detailed income reporting for certain foreign investment structures owned by U.S. persons. U.S. tax administration is generally carried out by the Internal Revenue Service (IRS).
Pursuant to an IRS letter ruling from January 22, 2010, non-U.S. mutual funds and non-U.S. ETFs held by U.S. persons are considered PFICs. Accordingly, a Canadian mutual fund and a Canadian ETF (whether in the legal form of a trust or corporation) will be treated by the IRS as a PFIC if either of the following tests is satisfied:
A U.S. person includes a U.S. citizen or resident alien (“green card” holder) of the United States, as well as domestic corporations, estates, and partnerships. Note that the IRS may consider a person to be a resident alien for tax purposes, even though that person is no longer a U.S. resident.
U.S. persons are generally required to report worldwide income to the IRS. Further, a unique reporting and taxation regime applies to PFIC holdings.
Assuming a U.S. person holds a Canadian mutual fund or a Canadian ETF that meets the definition of a PFIC, they are required to annually report the PFICs that they hold using IRS Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund. An individual form must be filed for every PFIC the U.S. person owns. Form 8621 should be filed with the individual’s U.S. tax return, which is generally due by April 15 every year. There is an automatic filing due date extension if you are a U.S. person and are resident in Canada on April 15 of the calendar year. In these cases, the deadline is June 15 of the following year. The 2023 tax filing deadline is extended to Monday, June 17, 2024, since June 15 falls on a weekend. Further extensions may be available in specific circumstances.
The rules will apply to PFIC holdings within non-registered accounts, Tax-Free Savings Accounts, Registered Education Savings Plans, and Registered Disability Savings Plans.
There are three primary methods of PFIC reporting available for U.S. persons.
The U.S. person may elect to annually report and be taxed upon their pro rata share of the PFIC’s earnings and net capital gains. At the first such election, the PFIC is generally deemed to have been sold at fair market value (FMV), with accrued gains from prior years realized and taxed as ordinary income.
A PFIC annual information statement containing the QEF details is required from the mutual fund company or brokerage to make this election. The taxpayer’s accountant would use this information to complete and file Form 8621 each year for each PFIC held. For a PFIC structured as a fund holding other funds, the U.S. person must file a separate QEF for each such fund, the top fund, and any underlying funds held.
Note that where the QEF election was not made in the first year of owning the PFIC, the U.S. person must elect to dispose of the PFIC shares or units and immediately reacquire them while simultaneously electing under the QEF. The election would result in a gain that will be taxable as an excess distribution, though the investor would benefit from the more tax-favored QEF election in future years.
The U.S. person includes in their income the excess/decline of the PFIC’s FMV over its adjusted basis (FMV of the PFIC at the end of the previous year). This election treats the mutual fund or ETF as being disposed of for tax purposes at the end of every taxation year. The inclusion is regular income or a regular loss, though losses may only be recognised where the mark-to-market election was recognised in a prior year.
Numerous qualification criteria (beyond the scope of this article) must be satisfied in order to make this election.
If the taxpayer chooses not to make an election or takes no action, the PFIC will be treated as a 1291 fund (per section 1291 of the Internal Revenue Code), and a complex tax treatment ensues.
Distributed income is taxed in the normal way. Punitive rules apply to annual “excess distributions” that exceed 125% of the average distributions over the preceding three taxation years. Generally, this will capture proceeds of disposition. This is not treated as a capital gain but instead is charged at the highest U.S. tax rate at the time, apportioning the gains over the holding period years and applying an interest-charge levy for implied underpaid taxes.
Registered retirement plans, including RRSPs, RRIFs, and their equivalent locked-in versions, are generally exempt from the PFIC regime. RESPs, TFSAs, and RDSPs have not been exempted from the PFIC regime.
Previously, to benefit from the tax sheltering in an RRSP/RRIF, a U.S. person must have filed, on an annual basis, IRS Form 8891, U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans. On October 7, 2014, the IRS issued a revenue procedure that eliminated the need to file Form 8891 to benefit from the tax sheltering. The new procedure became effective in January 2015 and applies automatically even if the individual failed to file Form 8891 in previous taxation years, provided the individual was (and continues to be) compliant with their U.S. tax-filing obligations. On this latter point, individuals must have attempted compliance for each taxable year or request IRS approval to late-file an election, with failure to comply resulting in onerous penalties. Note that in 2012 and 2013, an interest in an RRSP or RRIF must have been reported on IRS Form 8938, Statement of Specified Foreign Financial Assets, in conjunction with Form 8891.
Beginning in 2014, the IRS no longer requires individuals who hold an interest in an RRSP or RRIF and who are required to file Form 8938 to complete Form 8891. Generally, a U.S. taxpayer must file Form 8938 with the IRS if the individual holds an aggregate of US$50,000 or more at the end of the year or US$75,000 or more at any time during the year in foreign accounts. On a go-forward basis, it appears that where the exemption from filing Form 8891 applies, IRS Form 8938 and FinCEN (U.S. Treasury’s Financial Crimes Enforcement Network) Form 114, Report of Foreign Bank and Financial Accounts, must be used to disclose an interest in an RRSP or RRIF.
Invesco has submitted the following funds for PFIC factor reporting for the tax year 2023. Ernst & Young was engaged to assist in the preparation of the PFIC factors for the selected Invesco funds. The list of funds submitted for PFIC factors is subject to change annually at Invesco’s discretion. In order to obtain the PFIC factors on the funds listed below, please reach out to your advisor or contact Invesco at 1.800.874.6275.
Canadian Dollar Cash Management Fund
U.S. Dollar Cash Management Fund
Invesco American Franchise Class (formerly Invesco U.S. Companies Class)
Invesco Canadian Core Plus Bond Fund
Invesco Developing Markets Class (Formerly Invesco Emerging Markets Class)
Invesco Global Balanced Fund
Invesco Global Balanced Class
Invesco Global Bond Fund
Invesco Global Companies Fund
Invesco Global Diversified Income Fund
Invesco Global Dividend Class
Invesco Global Equity Income Advantage Fund
Invesco Main Street U.S. Small Cap Class (formerly Invesco U.S. Small Companies Class)
Invesco Oppenheimer International Growth Class (formerly Invesco International Companies Class)
Invesco 1-3 Year Laddered Floating Rate Note Index ETF (PFL)
Invesco 1-5 Year Laddered Investment Grade Corporate Bond Index ETF (PSB)
Invesco Canadian Dividend Index ETF (PDC)
Invesco NASDAQ 100 Index ETF (QQC)
Invesco S&P 500 Equal Weight Index ETF – CAD (EQL)
As U.S. tax compliance issues are complex, it is prudent to obtain the proper advice from a U.S. tax expert.
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The information provided is general in nature and may not be relied upon nor considered to be the rendering of tax, legal, accounting or professional advice. Readers should consult with their own accountants, lawyers and/or other professionals for advice on their specific circumstances before taking any action. The information contained herein is from sources believed to be reliable, but accuracy cannot be guaranteed.
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