PFIC: Canadian ETFs and Mutual Funds After Moving to the US

Are Canadian ETFs and mutual funds PFICs after you move to the US?

Generally yes. A Canadian ETF or mutual fund that is a corporation for US tax purposes is a passive foreign investment company (PFIC) if 75% or more of its gross income is passive, or at least 50% of its assets produce passive income (Form 8621 instructions). A fund set up as a trust is not automatically outside these rules: an investment trust whose manager can change what it holds is not classified as a trust but as a business entity, which can make it a corporation for US tax purposes (26 CFR 301.7701-4(c)). Ask the fund how it is classified. A fund that holds only stocks and bonds usually meets one of these tests, but the test is applied fund by fund, so check each product rather than assuming.

The PFIC rules apply once you are a US person: the regulations define a PFIC shareholder as a US person who owns the fund directly or indirectly (26 CFR 1.1291-1). Which date that is, and what to decide before and in your first year, is in PFIC rules when moving to the US.

What makes your case not simple:

• Two countries tax the same funds. Canada usually taxed the gain on your regular-account funds when you left; the US starts from what you paid unless you make a treaty election.
• Elections are hard to undo. A mark-to-market or QEF election, and the treaty election on cost, shape every later year.
• Many funds means many forms. Each fund is its own Form 8621.
• Years already filed without Form 8621. If you have been in the US more than a year and never reported the funds, the fix covers every open year; see Form 8621 filing and missed years.

What to gather: every fund by account, purchase dates and cost in Canadian dollars, reinvested distributions, your departure-date values from the Canadian return, the year-end statements, and any US returns already filed, with any Form 8621 or election on them.

Does it matter whether the fund sits in a regular account, an RRSP or a TFSA?

Yes. The account decides whether Form 8621 is needed at all. A fund held through an arrangement treated as a foreign pension fund under a US tax treaty is exempt from the annual form when the treaty taxes the plan's income only when paid out (26 CFR 1.1298-1(c)(4)). The IRS treats RRSPs and RRIFs as pensions under the Canada–US treaty, and Article XVIII(7) lets you defer US tax on their income until it is paid out (Publication 597).

The trap is assuming the RRSP exception covers a TFSA. It does not on the sources above. How the IRS treats each plan is in Canadian registered accounts on a US return; PFICs inside a TFSA or FHSA are covered in TFSA and FHSA for US citizens.

Does the US use Canada's departure-tax value as my cost?

No, not by default. US basis is the cost of the property (26 USC 1012), so your US gain on a later sale starts from what you paid, converted to US dollars. Canada, by contrast, treats you as selling non-registered property at fair market value on your departure date and buying it back (CRA). RRSPs, RRIFs, RESPs, RDSPs and TFSAs are on the CRA's list of exceptions, so the funds inside them are not part of the departure tax. Another exception matters if you lived in Canada only briefly: if you were resident 60 months or less in the 10 years before leaving, property you owned when you last became resident, or inherited after that, is not deemed sold, so there is no departure tax on it and no treaty election to make for it.

Article XIII(7) of the treaty lets an individual taxed in Canada on that deemed sale elect to be treated in the US as if the property was sold and repurchased at fair market value at that time, for that year and all later years (treaty). That can reset your US cost to the departure value.

What the sources do not settle: how that reset interacts with the PFIC holding period used to spread gain under section 1291. Treat that as an open question for a professional before relying on it. The departure-tax side is in your investment account when leaving Canada and moving from Canada to the US.

Funds kept in a Canadian regular account: what does each path cost on the US side?

Three paths, one line each. The full comparison is in PFIC rules when moving to the US and QEF and mark-to-market elections.

A Canadian-listed ETF can be marketable stock if it trades on at least 15 days each quarter on a qualifying exchange; a mutual fund that does not trade on an exchange qualifies only under a separate rule for funds redeemable at net asset value, which among other things caps the minimum initial investment at US$10,000 (26 CFR 1.1296-2). The guides above cover the full test.

What do Canadian slips show, and what does the US need?

Canadian slips give Canadian-tax amounts in Canadian dollars, not what Form 8621 asks for. A mutual fund trust issues a T3 slip and a mutual fund corporation a T5 slip; for Canadian purposes, reinvested distributions add to your adjusted cost base and a return of capital reduces it (CRA).

A QEF election needs a PFIC Annual Information Statement from the fund each year, showing your share of its ordinary earnings and net capital gain (instructions). Many Canadian funds may not issue one. Ask the fund before counting on a QEF election.

Form 8621 in the first US year: how many forms, and when is none needed?

File one Form 8621 for each PFIC, attached to your return by its due date, including extensions (instructions). In the year you move, that return is usually dual-status; see the dual-status return in the year you move.

Under the small-holding exception, no Form 8621 is needed for a fund for the year when all of these hold (26 CFR 1.1298-1(c)(2)):

• the total value of all your PFIC stock is US$25,000 or less in US dollars (US$50,000 on a joint return, counting both spouses' PFIC stock) on the last day of your tax year;
• the fund is a section 1291 fund, meaning no QEF or mark-to-market election is in effect for it; and
• you had no excess distribution from it and no gain on selling it that year.

Funds inside an RRSP need no form of their own, but they generally still count toward the total: it includes all PFIC stock you own directly or indirectly, including through a trust, and the only holdings left out are stock held through another US person, through another PFIC, or marked to market under another rule; a treaty pension plan is not on that list (26 CFR 1.1298-1(c)(2)(ii); 26 USC 1298(a)(3)). If your regular-account funds are small but your RRSP is large, expect to be over the limit. Other exceptions and missed years are in Form 8621 filing and missed years.

Funds inside the RRSP: is there any US tax while they stay in the plan?

Generally no, while the funds stay in the plan and the treaty deferral applies: US tax on income earned inside an RRSP or RRIF waits until it is paid out, and the funds inside need no Form 8621 (26 CFR 1.1298-1(c)(4)). Under Revenue Procedure 2014-55, an eligible individual, one who filed every required US return while a US resident, never reported the plan's undistributed earnings, and reported every withdrawal as a plan distribution, is treated as having made the deferral election, plan by plan, and Form 8891 is no longer required (Rev. Proc. 2014-55). If you ever reported RRSP growth as it accrued, you are not an eligible individual: the deferral then needs the IRS's consent, and until it applies the funds inside the plan fall outside the pension exception and each needs its own Form 8621; get that checked. Withdrawals are generally taxed as plan distributions; see RRSP and TFSA after leaving Canada.

A spouse who stays non-US, or a joint account with a parent in Canada: whose funds count?

The Form 8621 duty falls on a US person who owns the fund (26 CFR 1.1298-1). A spouse who stays a nonresident alien is generally outside it, unless you choose to treat that spouse as a US resident to file jointly, which makes both of you taxed on worldwide income for the year (Publication 519). Then the spouse's Canadian funds count toward the joint small-holding total and need Form 8621 like yours. With a joint account held with a parent in Canada, what counts is the share you actually own; whether that is half, all or none depends on who contributed and who benefits; if it is unclear, get cross-border tax help.

Example

Figures are in Canadian dollars unless marked; amounts and rates are illustrative.

A regular account, an RRSP and a TFSA

A person moves to Denver with C$150,000 of Canadian index ETFs in a regular account (cost C$100,000), C$200,000 of similar ETFs in an RRSP, and C$60,000 in a TFSA. Canada taxes the C$50,000 gain on the regular account at departure, assuming the short-term resident exception does not apply. On the US side, each regular-account ETF needs its own Form 8621, because the total PFIC value is well above the small-holding limit. The RRSP funds fall under the treaty pension exception. The TFSA funds have no exception in the sources, so they need forms too.

Selling a month after arriving

The same person sells the regular-account ETFs a month after arriving, for C$152,000. Canada adds nothing: a non-resident is taxed only on taxable Canadian property, which listed fund units generally are not, and treaty Article XIII(4) leaves gains on other property to the country of residence. The US gain starts from the original C$100,000 cost converted to US dollars, unless the Article XIII(7) election reset it to the departure value, and the PFIC rules decide how that gain is taxed, including whether any of it falls in the years before the person became a US person; see PFIC rules when moving to the US.

One small mutual fund

A person holds one Canadian mutual fund worth C$8,000 and no other PFIC. If the fund paid only ordinary distributions, nothing was sold, and no election is in effect, the small-holding exception means no Form 8621 is needed for that fund that year. If part of the fund was sold at a gain, or a distribution was large enough to be an excess distribution, the form is required regardless of the value. If the same person also holds Canadian ETFs in an RRSP, those generally count toward the limit, so the exception is likely lost even though the RRSP funds need no form of their own.

Different for you?

• Many funds, large unrealized gains, or a decision on the Article XIII(7) election: these choices shape every later year; get cross-border tax help.
• You have not decided between selling, keeping or an election: see PFIC rules when moving to the US and QEF and mark-to-market elections.
• You missed Form 8621 in earlier years: see Form 8621 filing and missed years, and get cross-border tax help.
• Your past US returns reported RRSP growth, or you have unfiled US years: the automatic treaty deferral may not apply; get cross-border tax help.
• You hold funds inside a TFSA, FHSA or RESP: see TFSA and FHSA for US citizens and Canadian registered accounts on a US return.
• You need to report the accounts themselves: see your first FBAR after moving from Canada and Form 8938 after moving from Canada.
• Canada is withholding tax on your distributions: see Canadian bank and brokerage accounts after leaving.
• Your departure-tax return is still open: see your investment account when leaving Canada.