Passive Foreign Investment Company (PFIC)
Fidelity is helping investors comply with U.S. PFIC tax rules.
Fidelity knows there is concern among investors about the U.S. passive foreign investment company (PFIC) rules. These rules could significantly affect “U.S. persons” who hold Canadian mutual funds and ETFs, so we are providing you with information about these complex rules.
We believe it is important for those who may be affected by these rules to have the information necessary to make informed decisions. However, we also believe that investors affected by these rules should not make changes to their Canadian holdings without first speaking with their advisors and a U.S. tax specialist.
Fidelity provides upon request, personalized PFIC Annual Information Statements (AIS) for all of the mutual funds for the 2023 tax year. 2023 personalized PFIC Annual Information Statements for the mutual funds will be available April 1, 2024. We will also be making available PFIC AIS factors for the ETFs.
Learn more in our PFIC overview
The following list of frequently asked questions has been created to help you better understand how PFIC rules might affect you.
Frequently asked questions on PFIC rules
1. Who are U.S. persons?
The definition of a U.S. person is broad and generally includes U.S. residents, U.S. citizens, U.S. green card holders, other persons with a substantial connection to the U.S. and certain entities organized in the U.S. It should be noted that U.S. citizens and green card holders are considered U.S. persons regardless of their country of residence. Some Canadian residents could be unaware that they have U.S. tax filing requirements.
2. What is a PFIC?
A PFIC (passive foreign investment company) is a non-U.S. corporation that has 75% or more of its gross income consisting of passive income or 50% or more of the average fair market value of its assets consisting of assets that produce passive income.
Passive income includes, among other things, dividends, interest, rent, royalties and capital gains from the disposition of securities.
The Internal Revenue Service (IRS) has confirmed that most Canadian mutual funds and ETFs are classified as corporations for U.S. tax purposes and, as such, are subject to the PFIC rules.
3. How do the PFIC rules work?
U.S. persons who own PFICs must report, annually, each PFIC investment on a separate IRS Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund). An investor or advisor can find Form 8621 here.
The U.S. taxation of PFICs can be punitive, although two elections may be available to improve the taxation:
- Mark-to-market election: Under the mark-to-market election, investors must, on an annual basis
- report all distributions (interest, dividends, capital gains, etc.) as ordinary income; and
- recognize all increases/decreases to the value of the fund as a gain/loss on their holdings as if the funds were sold at the end of each year. This gain/loss is rated as ordinary income.
- Qualified electing fund (QEF) election: Under the QEF election, investors must, on an annual basis, include their pro rata share of the mutual fund’s or ETF’s earned income for U.S. tax purposes.
Please note that T3 and T5 slips issued by Canadian mutual funds and ETFs are for Canadian tax purposes only and do not contain sufficient information to support a QEF election.
Fidelity provides investors with all of the information they need to make a QEF election on Form 8621. Importantly, on disposition, the gain on a PFIC that has followed the QEF election since acquisition is treated as a capital gain taxed in the year of disposition.
4. Which option, mark-to-market or QEF, is better?
Investors should consult their financial advisor or a U.S. tax specialist to make this decision. Generally, however, the QEF election is preferred, because it is more closely aligned with the tax treatment of mutual fund and ETFs investments by both the U.S. and Canadian tax systems.
5. What are the consequences of not making a mark-to-market or QEF election?
If the U.S. person does not make one of the two elections above (mark-to-market or QEF), the following tax treatment would apply:
- Any gains recognized on disposition of the PFIC shares and distributions received from a PFIC during the year greater than 125% of the average distributions received during the previous three years would be taxed as ordinary investment income. This income would be considered earned over the holding period on a pro rata basis.
The amounts allocated to prior tax years will be subject to U.S. tax at the highest marginal rate and also subject to a deemed interest charge.
6. If I made a market-to- market election in a previous year, can I switch to QEF election in the following tax year?
Investors should consult their financial advisor or a U.S. tax specialist to determine the IRS filing requirements and tax implications.
7. How should a PFIC be reported for a mutual fund and ETF with a fund-of-funds structure?
For a mutual fund and ETF with a fund-of-funds structure, the top-level fund and each of the underlying funds require a separate Form 8621 to be filed. Fidelity will make available a personalized AIS for mutual Funds and PFIC AIS factors for ETFs to investors which will contain reporting for both the top-level fund and the underlying funds, so U.S. persons can make the QEF election, if applicable. Investors should consult their U.S. tax specialist to understand the tax preparation costs associated with these types of holdings, as the costs may be higher than for a single fund structure.
8. How does Fidelity help simplify the PFIC reporting requirements and tax preparation costs?
Fidelity provides individually customized PFIC reporting support for all its mutual funds. Investors, upon request, will receive a personalized AIS that reflects their allocation of ordinary earnings and net capital gains, and total distributions received for each top fund and any of its underlying funds. Fidelity has further simplified PFIC reporting by providing one combined AIS to investors who held two or more series of the same PFIC within their taxation year, as well as by providing investors with the option to also receive their PFIC information in Excel to share with their U.S. tax advisors.
In addition, for mutual funds, Fidelity is pleased to provide customized supplemental information statement (SIS) along with the AIS to help facilitate the completion of Form 8621. Advisors can access their client PFIC statements for all their mutual funds by logging into My Book.
For ETF’s, an AIS will be provided on our website at www.fidelity.ca. The Fidelity ETF’s AIS provides a pro rata per unit per day share of the ordinary earnings and net capital gains of the ETF for the tax period. Investors need to multiply the number of shares they held by the number of days they held them, and by the factors in the AIS to determine their personalized PFIC reporting amounts. Visit PFIC ETF statements page for all current and historical statements.
9. Are investors at any U.S. tax disadvantage when investing in a mutual fund or ETFs that regularly distributes return of capital (ROC)?
An investor that makes a QEF election for a mutual fund or ETF that regularly distributes ROC will not be at any U.S. tax disadvantage.
The investors will report their pro rata share of ordinary earnings and net capital gains, as shown on the AIS, as additions to their U.S. tax basis. If the investor makes the QEF election, all cash distributions from the mutual fund or ETF will be treated as tax-free ROC for U.S. tax purposes, to the extent of previously taxed income reported on the AIS or to the extent of the investors’ remaining basis in that mutual fund. A U.S. tax specialist should be consulted to ensure the basis calculation considers all of these circumstances.
10. How do these rules affect different types of accounts, such as non-registered accounts, TFSAs and RRSPs?
These rules affect investments in non-registered accounts, TFSAs and RESPs. For PFICs held in retirement savings accounts such as RRSPs and RRIFs, most tax advisors suggest the PFIC rules should not be applicable. However, Fidelity recommends speaking to a U.S. tax advisor.
11. Why did Fidelity select April 30 as its PFIC fiscal year-end for some mutual funds and ETFs and December 31 for others?
Fidelity selected April 30 as the PFIC fiscal year-end for majority of its Funds. An April 30 year-end allows Fidelity sufficient time to complete the PFIC analysis and schedules for all its mutual funds and ETFs well before the time that most individual investors would request their PFIC information. To comply with certain U.S tax rules, mutual funds launched after the 2019 U.S. tax year are expected to have a December 31 PFIC year-end.
12. What are the tax implications for a U.S. person holding mutual funds and/or ETFs with an April 30 PFIC fiscal year end and/or a December 31 PFIC fiscal year end which may differ from their own?
Each investor will report any PFIC having a year-end that falls within the investor’s tax year-end.
In the case of a Fidelity mutual fund and ETF, an investor who has a tax year-end that differs from an April 30 year-end Fund or ETF holding will simply experience a timing difference. For individuals with a calendar year-end, there will be an eight-month deferral of PFIC income to the subsequent year, meaning PFIC income from May 1 to December 31 is deferred until the following year. This timing difference is eliminated once the position in the Fidelity PFIC is fully disposed of.
For individuals with a calendar year-end holding a December 31 year end mutual fund, there is no timing differences as the reportable PFIC income matches the investor’s tax year. Investor buying and selling activity will also fall within the Fund’s reporting period and will accurately be reflected in an investor’s AIS.
For the relevant tax year(s), information provided by Fidelity on an investor’s AIS for mutual funds and/or a Fidelity ETF’s AIS can be used to complete your tax returns, as provided.
13. What are the tax implications for a U.S. person where the PFIC fiscal year-end of the top-level fund is different from the PFIC fiscal year-end of its underlying fund(s)?
Due to certain mutual funds having fund-of-funds structure, top-level fund(s) and underlying fund(s) may have different PFIC fiscal year-ends. The top-level fund(s) and each of the underlying fund(s) require a separate Form 8621 to be filed per U.S. tax regulations.
Top-level fund(s) and each of the underlying fund(s), with the same or different PFIC fiscal year ends, can be reported as provided on your personalized AIS.
Investors should speak to their U.S. tax specialist to discuss how to individually report each of the underlying fund(s) for U.S. tax purposes.
14. What if investors hold an April 30 PFIC fiscal year end mutual fund or ETF and dispose of it after April 30, but before their tax year-end?
Investors who dispose an April 30 year end mutual fund after April 30, but before their taxation year-end, will simply pick up their remaining PFIC income in the subsequent tax year-end. Their next AIS will reflect the number of days the PFIC was held between May 1 and the date of disposition.
For ETFs, as noted above, investors will need to track their purchases and dispositions as the ETF AIS contains only fund level information.
Investors should speak to their U.S. tax specialist to discuss how to report the disposition of the PFIC for U.S. tax purposes.
15. What are the tax considerations for an investor who buys, either directly or indirectly, a PFIC with an April 30 PFIC fiscal year-end, after April 30, but before their tax year-end?
Investors who acquire an April 30 year end mutual fund after April 30 either as a direct holding or as an underlying fund, but before their tax year-end, will not be allocated a pro rata share of the ordinary earnings and net capital gains of that PFIC until the following tax year.
However, investors in this situation will be provided with certain information on their Annual Information Statement so that they can complete IRS Form 8621 in the year of acquisition and discuss the appropriateness of a QEF election with their U.S. tax specialist in light of their personal tax circumstances.
For ETFs, as noted above, investors will need to track their purchases and dispositions as the ETF AIS contains only fund level information.
16. Why were there two PFIC AIS generated for the same tax year?
If an April 30 year end mutual fund or ETF terminates before the investor’s tax year end, a separate PFIC AIS is provided for that shortened tax period, from the first day of the following tax year to the day the fund is terminated.
17. How is a U.S. cost basis calculated?
The calculation of the U.S. cost basis is similar to the calculation of the Canadian adjusted cost basis, but additional considerations apply. For instance, if a QEF election is made, any amounts included in income (including those reported on underlying funds in fund-of-funds situations) increase the U.S. cost basis. Cash distributions under a QEF election decrease the cost basis, while distributions that are reinvested in the PFIC (“property distributions”) do not. A U.S. tax specialist should be consulted to ensure the basis calculation considers all of these circumstances.