In the overview of the series, we advised that in addition to filing income tax returns, U.S. citizens residing outside the U.S. are required to file various reports in respect of foreign holdings. Failure to file these reports can result in onerous penalties. In part VI of the series, we will discuss the requirements to file Form 8621: Interest in Mutual Funds.

I. Foreign Bank and Financial Account Report, FBAR -Form 114

II. Statement of Foreign Financial Assets, Form 8938

III. Interest in Foreign Canadian Corporation, Form 5471

IV. Interest in Foreign Partnerships, Form 8865

V.  Interest in Foreign Trust, Form 3520

VI. Interest in Mutual Funds, Form 8621

The following is a brief overview of when a U.S. taxpayer needs to file Form 8621, and reporting details.

Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund

U.S. persons, who have an interest in a PFIC (passive foreign investment company) need to file Form 8621.

What is a PFIC?

A PFIC is a foreign holding company that possesses passive investments with at least one U.S. shareholder. Passive investments comprise of foreign-based mutual funds, money market accounts, pension funds, partnerships and other pooled investment vehicles.

Based on the definition of a PFIC, Canadian mutual funds and ETF’s may qualify as ‘PFICs’. Therefore, U.S. persons, even if Canadian residents, owning these investments may need to complete and file Form 8621.

Who must file Form 8621?

The following U.S. taxpayers need to report their income from PFICs on Form 8621:

  • U.S. citizens, whether residing in the U.S. or outside the U.S.;
  • Resident aliens (green-card holders); and
  • Certain other visa holders with PFIC investment.

There is no minimum ownership requirement in the case of Form 8621. Therefore, even a minimal investment will require reporting.

What is the deadline for filing Form 8621?

The U.S. shareholder (person, partnership, or other entities) need to attach Form 8621 along with the annual income tax return. Therefore, the taxpayer should file both by 15th of April each year.

What information is reportable on Form 8621?

Basically, interest in and distributions from a PFIC are reportable on Form 8621. Only one PFIC is reportable on a Form 8621, thus each PFIC is reported separately.

A U.S. person must provide general information about the investments on form 8621. Additionally, calculations of any excess distributions that will be taxable under the PFIC rules can be done on this form.

Excess distributions from PFICs are considered ‘ordinary income’ rather than as capital gains. Unlike, distributions from U.S. based foreign mutual fund investments which are considered as ‘capital gains’. These PFIC distributions are subject to ordinary U.S. income tax rates, which are higher than capital gains tax rates.

Additionally, taxes and interest are deemed to be owed for each tax year during which the investment was held preceding the disposition of the foreign mutual fund (PFIC investment) at ordinary income tax rate. This along with the interest due during the holding period of the investment firstly leads to U.S. citizens and others subject to PFIC reporting. Secondly, paying comparatively higher taxes on foreign investments purchased from a foreign corporation than a U.S. investment purchased from a U.S.-based corporation.

The U.S. person can make certain elections on Form 8621 itself regarding how he/she wishes to report the income.

What are the penalties in case of non-compliance?

There is no specific penalty for failure to file Form 8621 since it is coordinated with Form 8938 filing requirements. A U.S. individual can either disclose the PFIC as a part of the other foreign financial assets on Form 8938, or report the  particular foreign financial asset on another form, such as: Form 8621.

This situation arises since the U.S. person needs to file Form 8621 if he/she holds interest in PFICs, but filing Form 8938 is necessary only if the aggregate foreign financial accounts balance exceeds the threshold limit of US$10,000.

Therefore, if a U.S. individual fails to disclose the PFIC investment on either Form 8621 or Form 8938 he/she can be subject to a $10,000 penalty.

Having said that, failure to file Form 8621 can also result in the suspension of the statute of limitations. This would result in the IRS having unlimited amount of time to audit the U.S. shareholder’s tax return and assess tax if the U.S. shareholder fails to file the required Form 8621.

AG Tax LLP Can Help

If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of U.S. and Canadian tax laws as well as cross-border compliance.

Furthermore, as a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.

We can assist with:

  • Canadian Personal and corporate tax returns
  • Cross Border Taxation and Business Planning
  • U.S. Personal and Corporate Taxation
  • Disclosure of Foreign Assets and other information filings
  • Retirement planning
  • Estate Planning, Inheritance tax advice

To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:

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