Fidelity Investments Canada ULC, based in Toronto, will now be providing its U.S. citizen clients with tax reporting information that will make it possible for them to deal with the U.S. Passive Foreign Investment Company (PFIC) rules, a tax regime affecting ownership of Canadian funds that would otherwise impose an onerous tax burden on these individuals.
Fidelity says that it will provide PFIC annual information statements, upon request, for all of its mutual funds, starting with the 2013 tax year. These statements will allow its clients who are U.S. citizens or green card holders living in Canada to make the qualified electing fund (QEF) election on their U.S. tax returns under the PFIC rules.
Fidelity is one of the first Canadian mutual fund companies to announce that it will be providing this information to its clients.
The U.S. views non-U.S. mutual funds and exchange-traded funds as PFICs, which it defines as an investment in which either 75% of the income it produces comes from “passive investment,” or more than 50% of its assets produce “passive income.”
A U.S. citizen who receives income from a Canadian mutual fund, or a gain from its sale, would be subject to specific taxes and interest under the PFIC rules. That could mean that distributions from the fund that would normally be treated as dividends under Canadian tax rules — or increases in value of the PFIC, which would be treated as a capital gain — would be taxed instead as ordinary income on the U.S. citizen’s return.
By making a QEF election, U.S. citizen clients include only their pro-rata share of the fund’s earned income and capital gains for income tax purposes, meaning distributions from the fund or gains from sale would be taxed in a way that is similar with how mutual funds in the US are normally taxed.
The PFIC rules have hung over US citizens living in Canada since 2010, when a change in U.S. tax law meant that Canadian mutual funds and ETFs fell under these rules. This caused uncertainty and confusion among Americans living in Canada over ownership of Canadian mutual funds.
Last spring, the Investment Funds Institute of Canada (IFIC) wrote to the U.S. government asking for the removal of the application of the PFIC regime on Canadian mutual funds. IFIC argued that Canadian mutual funds, because they distributed their income and gains annually, were not a vehicle to facilitate tax abuse on the part of U.S. citizens abroad. So far, there has been no change from the U.S. in terms of the application of PFIC rules on Canadian mutual funds.