#PFIC and Canadian mutual funds revisted – Are they or aren’t they?

The purpose of this post is to highlight four articles on PFICs and how they may apply to the lives of Americans Abroad.

1. A post written by a CPA – Good practical advice on how to deal with them

The above tweet references a nice post by Tax Samurai. It’s a “no nonsense” post that discusses:

– the December 2013 8621 requirements (or not)

– whether a Canadian mutual fund is a PFIC or not (noting that the IRS has not ruled that a Canadian mutual fund is a PFIC)

Of particular interest is:

The remaining of this article is written under the assumption that Canadian mutual funds (treated as trusts under Canadian law) are PFICs. It is however noteworthy to note that while Canadian mutual funds definitively meet the “passive” part of the PFIC definition (income test & asset test discussed below), it is debatable that it is a corporation.

The IRS says that it is a corporation if it is not a trust (Section 301.7701-2(a))1

A Canadian mutual fund might or might not be an investment trust as described in 26 CFR 301.7701-4 (c)(1) – in which case the mutual fund will not be a PFIC2.

The IRS has not ruled on whether Canadian mutual funds are trusts or corporations in the context of PFIC (and the ruling found was a private ruling letter, hence even in exact same context, would not set precedent to other taxpayers) – so no precedent exists.

In 2 instances, the IRS ruled that Canadian mutual funds were corporations:

– Private Letter Ruling 200024024: http://www.irs.gov/pub/irs-wd/0024024.pdf

– Memo (UILC: 2103.00-00): http://www.irs.gov/pub/irs-wd/1003013.pdf

The IRS has not issued a revenue ruling on the subject so in theory it would still be possible to roll the dice on that but the above should show strong indication that the IRS sees most Canadian mutual funds as corporations.

Also, if unsure if you have a PFIC, you can make a protective statement (described under “Protective statement regime” on page 5 of the instructions http://www.irs.gov/pub/irs-pdf/i8621.pdf – if it later turn out to be a PFIC, the protective statement allows the taxpayer to make a late election)

2. A post written by a CPA – how to deal with the basic 1291 PFIC fund

3. Richardson submission to the Senate Finance Committee – Attempt to explain the punitive nature of PFIC Taxation/Confiscation

4. Stephanie Ray (a law student) writes on the policy aspects of treating Canadian mutual funds as PFICs