Passive Foreign Investment Company (PFIC) Annual Information Statements

PFIC Annual Information Statements allow investors to disclose financial information in order to make appropriate tax elections when filing their U.S. federal income tax returns.

PFIC stands for Passive Foreign Investment Company. A PFIC, defined by Section 1297(a) of the United States Internal Revenue Code (“IRC”), is a non-U.S. corporation that has primarily “passive” income and assets. In this context, the term “passive” means that the corporation’s income consists primarily of returns on investments (e.g., interest, dividends, capital gains) rather than profits from the operation of an active business. The concept of “foreign investment company” applies because the U.S. Internal Revenue Service considers Canadian mutual fund trusts and open-end investment companies to be foreign corporations for U.S. tax purposes. 

U.S. tax rules on PFICs apply to U.S. persons who hold Canadian investment funds. A U.S. person includes, but is not limited to, U.S. citizens (whether or not they are U.S. residents), certain persons with U.S. permanent resident status, U.S. corporate entities, and certain U.S. trusts and estates. U.S. persons are usually required to file a U.S. tax return even if they are residents of Canada or another country. Canadian residents with close ties to the U.S. may also be required to file a U.S. tax return. Please consult a U.S. tax specialist if you have any questions regarding your tax status.

Each year, U.S. persons who own PFIC units must report each directly or indirectly owned PFIC on a separate IRS Form 8621 (“Form 8621”). This form also allows taxpayers to make various tax elections based on eligibility.

The main purpose of the PFIC Statements is to allow investors to elect to have a PFIC treated as a Qualified Electing Fund (QEF) when filing a U.S. tax return. That said, Form 8621 allows for several other tax elections that are beyond the scope of this FAQ. Please consult a U.S. tax professional to determine which election would be most advantageous based on your situation and the funds held.

Under the QEF election, a U.S. person is taxed on their share of the income earned by the NBI investment fund for U.S. tax purposes. This share is split between ordinary earnings and net capital gains. Depending on the type of taxpayer, net capital gains may be eligible for a lower rate of tax. Investors are permitted to increase their tax basis in the investment fund by the amount reported as either type of income. By electing to have a PFIC treated as a QEF, an investor may also avoid being subject to tax deficiency interest charges on amounts otherwise deemed to be earned during the investor’s holding period.

A QEF tax election is frequently advantageous because, for certain types of taxpayers, it allows for the taxation of capital gains at a lower rate than without a tax election in place. PFIC Statements provide investors with the information they need to make this tax election. Please consult with a U.S. tax specialist to determine whether or not this tax election is advantageous for each investment fund held.

Investors make this election when they file IRS Form 8621 and attach it to their U.S. tax return no later than the deadline, including the request for a filing extension. Investors are responsible for filing IRS Form 8621 and submitting it to the U.S. tax authorities within the prescribed time frame. Please consult a U.S. tax specialist to file the form or refer to the U.S. Internal Revenue Service (www.irs.gov) website by entering “Form 8621 Instructions” in the search bar.

Other tax elections are possible, but they are beyond the scope of this FAQ. However, if a U.S. person does not make a tax election, the Excess Distribution Method will apply. Under this method, gains realized on the sale of a PFIC and certain distributions received from a PFIC are taxed as ordinary earnings. In addition, a portion of the gains and/or distributions may be subject to tax at the highest marginal rate, regardless of the rate otherwise applicable to the U.S. investor. Generally, when the value of a PFIC has increased during the holding period, the Excess Distribution Method is often the least advantageous tax treatment for the investor.

In general, all Canadian investment accounts are affected by the PFIC rules. Many tax advisors believe that the PFIC rules should not apply to investment funds held in retirement savings accounts such as Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs). Non-retirement accounts, such as Tax-Free Savings Accounts (TFSAs) and Registered Education Savings Plans (RESPs) are generally subject to the PFIC rules. We recommend that investors consult with a U.S. tax advisor to determine what types of accounts are subject to the PFIC rules.

NBI intends to issue PFIC Statements for a wide range of its investment funds. For the 2022 tax year, NBI will file a PFIC Statement for certain NBI investment funds (“NBI Funds”) and all NBI exchange-traded funds (“NBI ETFs”). A list of all Statements available this year can be found on the NBI website at https://www.nbinvestments.ca/regulatory-documents.html. For the 2023 and subsequent tax years, PFIC Statements will be available for the vast majority of NBI Funds and ETFs.

Because of our internal and external service providers’ recordkeeping systems, PFIC reporting cannot be provided at the individual account level. NBI has decided to offer PFIC Statements at the investment fund level so that investors can have the information and forms they need to file their U.S. tax returns and make a QEF election for the appropriate tax year.

For each PFIC held, investors must have the following documents in order to file a U.S. tax return: 

1) PFIC Statement(s) for the NBI fund(s);

AND

2) The account statement(s) provided by their financial advisor for the tax year.

PFIC Statements provide information on the prorated share of the fund’s ordinary earnings and net capital gains per unit per day.

Here is an example of how to calculate the prorated per day per unit amount attributable to the investment when making a QEF tax election:

You purchased 100 units of NBI “A” Fund (the “Fund”) on July 1, 2021, and an additional 100 units of the Fund on November 1, 2021. You did not sell any units of the Fund during the year. The Fund’s tax year ends on December 31, 2021. 

The Fund’s ordinary earnings factor was $0.001 per unit per day, and the capital gains factor was $0.002 per unit per day.

Ordinary earnings and capital gains for 2021 for the Fund held are as follows:

Ordinary earnings: ($0.001 × 184 days × 100) + ($0.001 × 61 days × 100) = $24.50

Capital gains: ($0.002 × 184 days × 100) + ($0.002 × 61 days × 100) = $49.00

Use the same calculation method to determine your share of ordinary earnings and capital gains for the Fund’s underlying funds, if applicable.

For assistance in doing this type of calculation, please consult a U.S. tax specialist.

Each year in early April, PFIC Statements for NBI Funds and NBI ETFs will be available at https://www.nbinvestments.ca/regulatory-documents.html  

If you have any further questions, please contact your financial advisor or a U.S. tax professional.

The information and opinions herein are provided for information purposes only and can be modified without notice. The opinions are not intended as investment advice, nor are they provided to promote any particular investments and should in no way form the basis for your investment decisions. National Bank Investments Inc. has taken the necessary measures to ensure the quality and accuracy of the information contained herein at the time of publication. It does not, however, guarantee that the information is accurate or complete, and this communication creates no legal or contractual obligation on the part of National Bank Investments Inc. U.S. investors should consult with their own U.S. tax professionals for advice on the application of U.S. federal tax rules. 

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