Canadian residents who are classified as “U.S. persons” under U.S. tax law are subject to certain tax rules. One important area of U.S. tax law applies to investors who own a passive foreign investment company (PFIC). U.S. tax rules have applied to those who own PFICs since 1986. And in 2010, the Internal Revenue Service (IRS) classified Canadian mutual funds as corporations for U.S. tax purposes.
PFIC tax rules are complex and strict. With this in mind, Sentry Investments offers information and support in order to help ensure investors understand and comply with these rules and mitigate the tax consequences. We offer annual PFIC statements across our entire mutual fund line-up (with the exception of Sentry REIT Fund and Sentry REIT Class; for further information regarding these funds, please refer to this letter.
Note: Investors affected by these rules should speak with their advisor and a U.S. tax specialist before making any changes to their Canadian holdings.
A. PFIC stands for “passive foreign investment company”. A PFIC is a foreign (non-U.S.) corporation that meets one of the following two tests (1): 75% or more of its gross income is passive income; or (2) 50% or more of the corporation’s assets produce, or are held to produce, passive income. Canadian mutual fund trusts are considered to be PFICs for U.S. income tax purposes.
A. U.S. persons who own PFICs. U.S persons include U.S. citizens and “green card” holders, as well as individuals who meet the “Substantial Presence” test under the Internal Revenue Code (and do not qualify for the “Closer-Connection Exception”).
A. U.S. persons holding investments in Canadian mutual fund trusts (“U.S. Holders”) are required to file Form 8621 to report their investment in a PFIC. Please see the IRS's 'Form 8621, Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund'. U.S. persons can make one of two elections on the Form: either a Qualified Electing Fund election or a Mark-to-Market election.
A. The QEF election is made by completing and attaching Form 8621 to the investor’s federal income tax return filed by the due date of the return, including extensions.
A. The PFIC Annual Information Statement enables U.S. Holders who have made a QEF election to compute their taxable income, if any, attributable to their investment in the fund. For assistance, please see the instruction form.
A. The PFIC Annual Information Statement will include per unit information regarding ordinary income and capital gains that should be reported on the U.S. Holder’s U.S. tax return, as well as the amount of any distributions to the shareholder during the taxable year of the PFIC and the first and last days of the taxable year of the PFIC to which the Annual Information Statement applies.
A. U.S. Holders can make a QEF election as of the date they buy units.
A. Yes, but rules apply to U.S. Holders who do not have a QEF election in effect with respect to PFIC units throughout the period they own such units. U.S. Holders may make a QEF election in a subsequent year provided they elect to treat the PFIC units as being sold on the first day of the year in which the QEF election is made and pay the deferred tax owing with respect to any resulting gain from the deemed sale. The QEF regime will apply to the PFIC units for the subsequent taxable years. U.S. Holders should consult their own tax advisor with respect to the U.S. Federal, state, local and other tax consequences of making such a QEF election.
A. If U.S. holders make a QEF election and owned units of the fund prior to the effective date of the QEF election, then they may also choose to make a deemed sale election. A deemed sale election requires the investor to recognize any gain from a “deemed sale” of the U.S. Holders’ Fund units as of the first day of the QEF election year (January 1 of such year), and report the gain as ordinary income on Form 8621. Such gain will be allocated over the U.S. Holders’ holding period up to the date of the deemed sale and taxed at ordinary income tax rates plus an interest charge. The gain, if any, is the difference between the “deemed sale price” and the U.S. Holders’ adjusted cost basis. The deemed sale price to be used is the fair market value of the fund units on the first day of the fund’s year as a QEF (i.e., January 1 of the taxable year with respect to which the U.S. holders make the QEF election). The U.S. holders’ adjusted basis in the fund units will be increased by the gain on such deemed sale.
For more information, please visit the IRS website or email
Any U.S. federal tax information contained in this document (including any attachments) is not intended to promote, market or recommend to another party any transaction or matter addressed herein. This information should not be construed to be legal or tax advice. Please consult your own legal and tax advisor.