When living in Canada, U.S. citizens usually have passive foreign investment companies (PFIC), such as Canadian mutual funds, that have specific yearly reporting requirements within the United States. The Internal Revenue Service (“IRS”) requires a U.S. person with passive offshore investments to report their earnings using IRS Federal Form 8621. PFIC reporting and cross-border tax preparation are crucial, as fines and penalties can be substantial if not adhered to prior to the taxpayer’s tax deadline.
In this article, you can learn the basics of Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund.
What is Form 8621 used for?
IRS Federal Form 8621 is used to report earnings on passive foreign investment companies (PFICs) such as mutual funds or holding companies that reside outside of the United States. The IRS requires U.S. citizens to file Form 8621 if they are direct or indirect shareholders of PFIC.
What are PFICs?
PFICs are passive foreign investment companies. Common PFICs would include, but are not limited to the following Canadian investments:
- Canadian mutual funds
- Canadian income trusts
- Canadian exchange-traded funds
A non-US company is a PFIC if it meets either of the tests below:
- Income test: 75% or more of the foreign corporation’s gross income for the taxable year is passive income (investment income such as interest, dividends, royalties, rents and annuities)
- Asset test: at least 50% of the assets held by a foreign corporation during the taxable year produce passive income (income from investments such and stocks, bonds, and cash)
The IRS first made rules for PFICs to stop U.S. citizens from avoiding tax on passive income from non- U.S. companies. They did not want investors to convert income into capital gains that would be taxed at a lower more favorable tax rate. As of 2010, under The Foreign Account Tax Compliance Act (FATCA), non-U.S. financial institutions must report information on U.S. persons. For this reason, accurately filing the form with your U.S. income Tax return is crucial to avoid the IRS imposing fees or penalties.
Who needs to file it?
A U.S. person that is a direct or indirect owner of passive investments located outside of the United States files Form 8621.
The IRS also requires dual Canadian-U.S. citizen or green card holder living in Canada to report PFICs. If you have non-U.S. financial assets with Canadian banks or brokerage firms it will need to be reported to the IRS annually.
IRS Federal Form 8621 is complex and requires a specific tax expertise that most tax advisors do not have As cross border advisors we have the required experience and expertise to file the appropriate declarations with the IRS and recommend contacting us to complete these forms if you have these specific investment vehicles.
Please note that this material is not intended to provide tax advice, and IRS Federal Form 8621 is complex that requires specific tax expertise most tax advisors do not have. As cross-border advisors, we have the necessary experience and knowledge to file the appropriate declarations with the IRS. Contact us to complete these forms if you have these specific investment vehicles.
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