New rules for U.S. taxpayers with mutual funds

By Terry F. Ritchie and James Sheldon | January 22, 2014 | Last updated on September 15, 2023
3 min read

If your U.S. taxpayer clients hold Canadian mutual funds outside registered accounts, listen up.

On December 31, 2013, the IRS released Treasury Decision 9650, which includes temporary regulations regarding Passive Foreign Investment Companies, or PFICs. A PFIC exists when 75% or more of its gross income for the taxable year consists of passive income, or at least half its assets produce, or are held for the production of, passive income.

Effectively, this includes almost all Canadian mutual funds and Canadian-traded ETFs held in non-registered accounts.

Read: Does your client have U.S. tax risk?

Thanks to FATCA, one of the provisions states that any United States person who holds a PFIC must “file an annual report containing information as may be required by the Treasury Secretary.” That includes U.S. resident taxpayers in Canada.

Forms to fill

If your U.S. client owns a PFIC, she must file IRS Form 8621, Return by a Shareholder of a Passive Foreign Investment Company or Qualifying of Electing Fund.

She can take one of two elections. The first is the Qualified Electing Fund (QEF) and the second is the Mark-to-market Election. If she chooses the QEF election, each year, she must include her pro-rata share of the PFIC’s ordinary earnings as ordinary U.S. gross income, and any net capital gain as a long-term capital gain.

To find out that information, the taxpayer would have to contact the Canadian mutual fund company to request an annual information statement. A few Canadian fund companies provide a PFIC Annual Information Statement, but the majority does not.

Read: Mackenzie helps investors file American taxes

If she can’t get that information, she could take the Mark-to-market election. In this case, she would recognize the annual gain or loss of the shares as if they had been sold at the end of the year. For U.S. tax purposes, this should be treated as ordinary income and not a long-term capital gain. Under current U.S. rules, this income would be taxed at highest marginal rate of 39.6% (or 43.8%, if the 3.8% Medicare surtax applies).

Worse, if a U.S. resident taxpayer in Canada had to pay this tax, the payment would not be eligible for a Canadian foreign tax credit.


The regulations are part of FATCA, so the act’s disclosure requirements could expose U.S. taxpayers in Canada who haven’t filed IRS Form 8621 with their annual U.S. tax returns.

Advisors must be more diligent in determining whether clients truly are U.S. resident taxpayers, and remind them of their obligations. For our part, we won’t open accounts until prospects provide copies of their passports and sign IRS Form W-9 (Request for Taxpayer Identification Number and Certification).

If you have U.S.- or dual-citizen clients in Canada, discuss these issues with them and be prepared for the changes in tax compliance and the enforcement implications.

With offices in Toronto, Calgary, Vancouver, Boca Raton, Fla. and Irvine, Calif., Terry F. Ritchie is the director of Cross-Border Wealth Services and James A. Sheldon is the co-founder at the Cardinal Point Group of Companies.

Terry F. Ritchie and James Sheldon