There certainly had significant changes to US tax law over the last few years. These changes have also had a profound impact on the filing of US tax returns for US expats living in Canada.
PURPOSE: This article outlines in detail the tax filing requirements of U.S. citizens living in Canada, specially those who have already moved to Canada or those who have lived in Canada throughout their entire life. However, those who are immigrating (moving or retiring) to Canada and emigrating (departing) from Canada will have additional tax filing requirements and planning items to review in the year they move into or outside of Canada.
CAUTION: Please note that the preparation of cross border tax returns for US citizens in Canada involve a significant amount of technical and professional experience. The potential for very costly filling penalties is extremely high for anyone that attempts to file these type of tax returns without proper experience or guidance from a cross border tax professional. Not only is a deep understanding of both the Canadian and US tax system required but a further understanding and application of the US-Canada Tax treaty required to file such returns..
Introduction
US expat citizens are required to continue filing US tax returns even though they are not living as residents in the US. Essentially, regardless of where you live in the world, if you are a US citizen, you will be required to file US tax returns.
Whether you born in the US or born of US parents and now live in Canada, or have moved from the US to Canada, you will be required to file both Canadian and US tax returns while a resident of Canada. Note that the discussions related below with respect to filings and required forms are for those that are fully compliant and caught up on their US filings. If you are a US citizen living in Canada that still needs to catch up on your tax returns please review the Streamline tax program for more information on becoming compliant. This will also allow you to receive your economic impact stimulus payment as an expat of the US.
Basic Filing Requirements
Two basic filings will be required of US Citizens living in Canada:
T1 – Canadian income tax return
1040 – US income tax return
Unless the taxpayer is under the respective income filing thresholds, a US citizen living in Canada will have to file both a Canadian and US income tax return each year. Due to the recent COVID-19 outbreak Canadian and US tax deadlines have been extended.
Tax filing deadlines for 2023 are as follows:
Regular Canadian T1 income tax return deadline is April 30, 2023
US 1040 income tax return deadline is June 15, 2023 with extension available via form 4868
In normal tax filing years US Citizens living abroad are granted a 2 month automatic extension to June 15th. No prescribed form is required to elect for this extension.
US Tax Forms and Schedules Required for Expats
The most common tax forms for U.S. citizens living in Canada who are required to file their US. 1040 personal income tax return. However, they are many other forms that may apply to a U.S. taxpayer’s tax situation that are beyond the scope of this article.
Form 1040 – This is the annual income tax form that U.S. citizens living in Canada must submit. It contains the taxpayer’s name & social security number, spouse’s name & social security number if any, address, dependents, and taxable income. The form compiles statistics for the year and summarizes earnings and tax calculations.
You may choose to file your tax return under any of the following filing status: single, married filing jointly (MFJ), married filing separately (MFS), or head of household (HOH).
It is generally advantageous from tax perspective for the taxpayer and their spouse living in Canada who are dual citizens of Canada and the United States to file the US 1040 tax return as MFJ. On the other hand, US citizens married to Canadian non-US citizen spouses living in Canada would be better off filing their tax return as MFS in most situations. However, they may opt to file their tax return as MFJ with their non-US spouse in a few situations which is very uncommon. A US citizen who is married to a non-US spouse and has a US dependent can utilize the option of HOH to file their tax return in a few situations as long as the eligibility criteria is met.
Schedule 1 thru 6 – These schedules as they were introduced in the last few years to help consolidate information lines on the 1040 jacket and other forms. Most of the information on these schedules will come from other forms discussed below.
Schedule A – Itemized Deductions: This schedule computes all of the itemized deductions that you may claim, such as medical and dental expenses paid, state and local taxes (income or general sales taxes, real estate/personal property taxes), home mortgage interest paid, gifts to charity, casualty and theft losses, and other itemized deductions.
Many itemized deductions will diminish at high income levels and since the standard deductions have grown considerably in last few tax years; make it appear that claiming the itemized deductions on schedule A for US expatriates living in Canada may not be advantageous.
Furthermore, Canadian tax rates are considerably higher than US tax rates, therefore, most US citizen expats living in Canada pay no or very little US taxes since the majority of their US tax is offset by Canadian taxes through foreign tax credits regardless of standard or itemized deductions claimed on their tax return.
Schedule B – Interest and Ordinary Dividends:
The taxpayer’s investment income for the year is shown in this schedule. This form also includes a section that expat tax filers frequently overlook. The bottom of sched B contains questions about foreign financial accounts, FBARs, and 3520s.
For example, when the IRS requires an expat to report all of his or her income sources on a schedule C, it is referred to as a “schedule C” filing in the United States. This form depicts the taxpayer’s investment income for the year. This form also includes a section that many expatriate tax filers overlook.
This schedule outlines investment income of the taxpayer for the year. This form also contains a section often missed by expat tax filers. At the bottom of schedule B includes questions about foreign financial accounts, FBARs and 3520s.
These questions are required to be answered.
Schedule C – Profit or Loss From Business (Sole Proprietorship): This schedule computes any profit or loss from a sole proprietorship. A sole proprietorship is any business run and controlled by oneself that is not incorporated as a legal entity such as a corporation or partnership. It doesn’t have to be a business with people or an office. If a single-member LLC is run by oneself, the schedule must nevertheless be completed.
If the sole proprietorship earns $400 or more of net profit, self-employment (SE) tax is to be calculated on schedule SE. US citizen expats living in Canada who are dual residents in Canada will not have to pay both Canadian Pension Plan (CPP) and US self-employment taxes.
Under the US-Canada social security totalization arrangement, social security taxes on self employment income are only levied in the country of residence of the taxpayer. Accordingly, US citizens and taxpayers who reside in Canada are only liable to pay the Canadian CPP contributions, rather than US self-employment taxes on self-employment earnings. To do so, a treaty position disclosure on the required form must be completed and filed with Form 1040.
Schedule D – Capital Gains and Losses: are reported on schedule D. Fairly self-explanatory, capital gains transactions are reported on this schedule including both public and private assets. A big difference between the treatment of capital losses between Canadian and US income tax rules is that Canadian tax rules do not allow a deduction for capital losses against any income that is not capital gains. On the US side, those filing separately are allowed to deduct $1,500 and those filing MFJ are able to deduct $3,000 of capital losses against other non-capital income respectively.
A common mistake made by those filing their own cross border return or by those with a lack of experience is an incorrect calculation of capital gains for both US and Canadian purposes. Because the reporting of income on the Canadian and US income tax return need to be converted to respective currencies, the gain and loss on both sides of the border will need to be properly calculated at appropriate rates. We convert income items such as pension, employment and business income on an average rate throughout the year.
However, capital gains need to be converted at actual rates. For example: Let’s say a Canadian resident purchased $10,000 of US stock in previous years when the FX rate was $1.10 USD/CAD. She then sells it in the current year when the stock is worth $11,000 and the FX rate is 1.30 USD/CAD. Her Canadian gain is not $1,000 x the average rate for the year (often the mistake made on tax returns we see prepared by others), but rather it is $3,300 calculated as follows: proceeds of $14,3000 ($11,000 x 1.3) less cost basis of $11,000 (10,000 x 1.10). However, her US gain in this case would simply be $1,00 ($11,000 less $10,000).
The Canadian gain is simply higher because of the change in exchange rate from the time the stock was purchased to when it was sold. It’s important to properly calculate capital gains this way for expats as the movement of currency exchange rates can significantly affect the amount of gain/loss reported on each respective tax return.
Schedule E – Supplemental Income and Loss:
This schedule reports a variety of different types of income. In general schedule E reports income and losses from rental real estate, royalties, partnerships, S-corporations, estates and trusts.
Schedule F – Profit or Loss From Farming:
Schedule F reporting income and losses from farming activities. Fairly straight forward.
Schedule SE – US Self employment taxes are calculated on this form. As outlined above, in most cases SE tax is not imposed on self-employment income earned by US citizens living in Canada.
As such, no SE taxes would be calculated on this form for Canadians. In these cases a disclosure will be required to included in the return to ensure no SE tax will be owed.
Form 1116 – Foreign Tax Credit: The IRS Form 1116 is a crucial tax return form for US citizen expats living in Canada who wish to claim a foreign tax credit on income taxes paid in Canada using this form.
A simple mistake on this form may result in tax material misstatement and double taxation. The tax treaty between the United States and Canada assists in minimizing the double taxation between two countries. As a result, the form 1116 is critical to comprehend when preparing US tax returns for individuals who live in Canada.
Essentially, form 1116 allows a US taxpayer to claim a foreign tax credit for income tax paid on income to another country. In this guide we will discuss form 1116 in context of Canada and the US, however in many situations a US taxpayer will have an 1116 claim for foreign taxes from multiple countries.
In general terms form 1116 calculates the amount of foreign income that is taxed on your US tax returns and the corresponding foreign tax (in this case Canadian) on this income.
There are 3 “pools” of income that get calculated on separate 1116 forms:
- General income – pension income, employment, business income, etc.
- Passive income – investment income, dividend income, interest, capital gains, etc.
- Resourced income – this 1116 calculates a foreign tax credit on income that is not taxable in the US pursuant to the treaty.
Some examples includes US source interest, US source capital gains and tax on Canadian pension income in excess of 15%
Global Intangible Low-Rate Income Tax – More on this below
Generally form 1116, in reach respective pool, calculates how much of a foreign tax credit you will get on each “pool” of income. Note however that you will only receive a foreign tax credit for the lesser of the actual tax you paid on foreign income and the amount of US tax paid on the same income.
The nuance of 1116 tax calculations is beyond the scope of this guide, however if you have specific questions on these forms please leave your comments below and I’ll try to answer them as best as I can. Also note that in addition to the 3 pools outline below, there is also 1116 AMT forms. More on Alternative Minimum Tax forms below.
Form 2350 – This form allows you to request an extension of time to file your tax return. This form is limited to situations where taxpayers file form 2555 and in most cases it is much more efficient to simply file form 4868 to request a further extension. More on deadlines and extensions for US citizens abroad below.
Form 2555 – This form is quite common on cross border tax returns, however in most cases we do not use form 2555 for our Canadian/US clients. This form allows for a deduction, in certain cases, for foreign (non-US) earned income. Unless the client only has employment income we tend to use foreign tax credits and form 1116 to reduce US taxes to nil on Canadian source income versus using form 2555. The reason for this is that if we use form 1116 for earned income so we can carry forward general source foreign tax credits for use in subsequent years.
Note that specific elections need to be made if you decide to stop using form 2555 to exempt foreign income in the US. Also, a simpler version of the form 2555-EZ is also available to those that are eligible.
Form 4506-T – Filing of this form results in a request for a US 1040 transcript. We file this form in order to satisfy reviews of foreign tax credits from CRA. When a US-Canada taxpayer claims a foreign tax credit on their Canadian tax return for taxes paid in the US on CRA often asks the taxpayer, through a pre or post assessment review, for verification that they paid income tax on reported income. This transcript, once received, satisfies this request from CRA.
Form 4868 – This form allows a taxpayer to request an extension to file a tax return. Note however that US citizens living abroad have an automatic extension of 2 months from the regular US deadline.
Form 5329 – This form calculates any additional tax on IRA plans that are assessed in cases such as early or non-qualified withdrawals. Many of our clients own both Canadian and US retirement plans and in limited cases this form needs to be filed. One interesting item to note is that traditionally penalties imposed on late IRA distributions were not allowable to be claimed as a foreign tax credit in Canada. Due to changes in administrative policies at CRA, now penalties on IRA distributions can be claimed as part of your Canadian foreign tax credit claim.
If the company is controlled by a US person or groups of US persons it’s likely considered a “controlled foreign company” for US purposes. If so, the taxpayer will be subject to certain additional tax rules such as Subpart F income rules and GILTI rules. In short, any active business income (GILTI) or inactive income (subpart F) will be subject to US tax regardless of whether it was distributed to the shareholders. In certain cases however we can mitigate any additional US tax owing by properly planning before the tax returns are due or by applying foreign tax credits to the taxpayer’s 1040 to claim a credit for Canadian corporate taxes already paid (this is a very complex area that requires professional assistance).
If a Canadian corporation is not controlled by US persons, but that particular US tax taxpayer does have an interest in the corporation, the 5471 is still required to be filed, just with less forms and calculations.
To add a further note to the 8621 discussion above. If a Canadian corporation is considered a CFC it will not also be considered a PFIC, and therefore will only be required to file form 5471 and not form 8621.
IMPORTANT NOTE: the 5471 discussion above is very general in nature and does not take into account all the complexities of CFCs or PFICs. If you are a US citizen that has an interest in a non-US private company please reach out to a cross-border tax professional for advice.
Form 6251 – This form calculates whether a taxpayer will be subject to Alternative Minimum Tax (AMT). The purpose of AMT is to ensure taxpayer pay a minimum level of tax on their tax returns when in certain years, due to large deductions or low rate income. For example, if a taxpayer’s regular rate of tax on income is 15% and the calculation AMT rate is 20%, the taxpayers additional AMT will be 5%. Essentially their overall (minimum) tax rate would be 20%.
Form 8960 – This form calculated the original Obamacare net investment income tax. This additional tax was introduced a few years ago to help fund the US medical system under Obamacare. Canadians are also subject to this additional income tax. The additional income tax of 3.8% is on income above certain thresholds, $125,000 for those filing single or married filing separately and $250,000 for those filing jointly. Note that this 3.8% tax is only on investment income above these thresholds.
However, this additional tax is not part of “regular income tax” and therefore not able to be reduced by a foreign tax credit via form 1116. Hence, taxpayers with investment income over the thresholds above may face additional US tax that cannot be offset by Canadian taxes.
Form W9 – This form, often requested by investment and banking institutions is simply a request from a US citizen for their US Social Security Number. This form is held by the institution requesting the form and is not sent to the IRS or treasury department. You’ll notice from the forms above that many of the “deduction” forms are not included. This is because in most cases, regardless of how much you reduce US taxes on a 1040 you have more than enough Canadian taxes to offset this amount. There are certainly cases where we need to use deductions on specific forms or those on schedule A, however these cases are not very common for expats.
The guide above outlines what to forms file on a US 1040 income tax return while a resident in Canada. The filing of Canadian returns for US residents is not outline in great detail. However to help provide some insight I’ve outlined some of the main points and additional forms a US citizen would want to review when filing their Canadian return:
T1 Canadian Income Tax Return Forms for Expats:
T1135 – Similar to the FBAR forms outline above the Canadian tax authorities also want to know about your foreign assets. Form T1135 was discussed above.
T1142 – In situations where Canadian residents receive distributions from foreign trusts or estates they need to fill form T1142 to report both the capital and income portion of the distribution. Because many Americans living in Canada will, at some point in their lifetime, receive distributions from a US estate or trust, we tend to file this form fairly often.
T1161 and T1243 – In cases where a Canadian may leave Canada and become a non-resident of Canada for tax purposes (often by moving to the US), these forms are required to be filed on their Canadian exit return. Generally speaking, when a Canadian becomes a non-resident of Canada most of their worldwide assets (excluding certain assets such as Canadian real estate) are deemed to be disposed as if they were sold. Form T1161 and T1243 report these assets in that particular year.
T2203 – For taxpayers that provide professional services or do business in another province or country this form is required to properly calculated where this income will be taxed.
T2209 – This is a very important form for Americans with Canadian filing requirements. This form allows you (similar to form 1116 above for the US 1040) to claim a foreign tax credit for foreign taxes paid to other countries. For example, an American living in Canada earning US pension income will be taxed in the US first on this income. They will also be taxed in Canada on this income, but they will receive a foreign tax credit on form T2209 for the US taxes already paid or accrued, hence eliminated double tax on this income.
Note that many of the forms above carry high penalties if not filed in a timely manner.
Other Issues
Often, our American clients have taxable income from various states. Whether it’s income from rental properties or part year tax returns for those moving up to Canada. State tax returns are often required in addition to the Canadian and US income tax return.
The discussions above relate to filing requirements of US citizens only. Often Canadians that are not US citizens have to also file a US tax return, namely a 1040NR income tax return for nonresidents of the US. Canadians may need to file a non-resident income tax return in the following cases:
Reporting of gambling winnings
In cases where a Canadian or US taxpayer needs to made a revision or correction to their US or Canadian income tax return, form 1040x or form T1adj are available respectively to make these adjustments.
Taxpayers and their advisors would be wise to take note of the summary of some of the more relevant forms which may need to be filed below, all in addition to their regular tax return Form 1040, “U.S. Individual Income Tax Return”. This is especially so for U.S. taxpayers living abroad.
FinCEN Form 114, “Report of Foreign Bank and Financial Accounts (FBAR)”
FinCen Form 114 (“FBAR”) is a report that must be filed with the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”). It is not covered by the Internal Revenue Code (IRC). The Bank Secrecy Act of 1970, commonly known as the “BSA,” governs its filing. Form FBAR must be electronically submitted on the FinCEN website (http://bsaefiling.fincen.treas.gov).
The FBAR form is submitted to the IRS by each United States person who holds a financial interest in (directly or indirectly), signing authority over, or has any authority over foreign (non-U.S.) financial accounts with a total value of more than $10,000 at any time throughout the calendar year.
- It’s important to note that the US $10,000 threshold is defined as a whole, not per individual accounts.
- The FBAR does not contain information about taxable income.
This form identifies the Individuals who can control the flow of money in non-U.S. bank accounts and is integrated with a variety of law enforcement techniques to identify money laundering, organized crime, terrorism financing, other financial crimes and any other criminal activity.
Individuals who are corporate officers, trustees, or have control over a financial account may be required to submit their personal and business accounts on their FBAR filings.
The IRS can impose one of two civil penalties on an individual who fails to submit the FBAR:
- A non-willfulness penalty of up to US $10,000, may be imposed on any U.S. person who violates or causes any violation of the FBAR filings and recordkeeping requirements; or/li>
- A willfulness penalty of $100,000 or 50% of the balance in the account at the time of the violation, whichever is greater may be imposed on any U.S. person who willfully fails to file the FBAR.
Criminal penalties may also be imposed.
Schedule B “(Form 1040A or 1040), Interest and Ordinary Dividends”, Part III Foreign Accounts and Trusts includes questions regarding the requirement to file an FBAR.
Form 926, “Return by a U.S. Transferor of Property to a Foreign Corporation”.
To report transfers of certain property to foreign corporations, a U.S. citizen or resident, a U.S. domestic corporation, or a U.S. domestic estate or trust must complete and file Form 926.
A form 926 may be required to report a transfer if, for example, a U.S. citizen resident in Canada has gone through a corporate reorganization and transferred property (i.e., shares) to a new Canadian entity as part of that transaction.
If the taxpayer fails to file the form, a penalty equal 10% of the fair market value (FMV, not an elected transfer price for Canadian tax purposes) of the property at the time of the transfer will be levied. Unless the failure to file is due to intentional neglect, the fine is restricted to $100,000.
Form 3520, “Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts”
This form is completed by a U.S. citizen who has had a transaction with (i.e., a contribution to or distribution from) a non-U.S. trust, or acquires a gift or bequest/ inheritance from a non-U.S. person. If you do not file Form 3520 on time, the penalty of either $10,000 or 35% of the gross value of the property transferred to a foreign trust or distributions received from a foreign trust is imposed in the first instance of failing to submit this form.
A TFSA and RDSP may be considered foreign trusts for U.S. tax purposes (a question of fact). RRSPs, on the other hand, are expressly excluded.
The IRS Rev. Proc. 2020-17 has granted an exemption to some types of accounts, including Canadian RESPs, that were previously classified as trusts for purposes of form 3520 filing.
For tax planning reasons, legally formed Canadian resident family trusts have been quite popular in Canada. Such trusts would be caught under these rules if distributions are made to a U.S. resident beneficiary. Consider an example, if a Canadian resident family trust pays out a distribution of $50,000 to a beneficiary who had moved from Canada and now resided in the U.S. but missed to file the Form 3520, a penalty of $17,500 may be levied.
Form 3520-A, “Annual Information Return of Foreign Trust With a U.S. Owner”
When a U.S. citizen is determined to be the owner of a foreign trust under the rules of the U.S. grantor trust, this form is completed. This would be applicable when a person who is a citizen, green card holder, or resident alien of the United States transfers property to a Canadian trust in such a way that he or she is considered to still own or have control over the trust assets. A Canadian alter-ego trust is one possible case, as the settler continues to control the property and it may revert back to him at any moment.
The greater of US $10,000 or 5% of the gross value of any foreign trust’s assets deemed to be owned by the grantor under the grantor trust rules is assessed as a penalty in the event of first instance of non-filing.
The IRS Rev. Proc. 2020-17 has granted an exemption to some types of accounts, including Canadian RESPs, that were previously classified as trusts for purposes of form 3520-A filing.
The filing and completion of Form 3520/3520-A is time-consuming, so you’ll need expert assistance. It’s critical to consult your cross-border accountant or lawyer before making any decisions.
Form 5471, “Information Return of U.S. Persons With Respect to Certain Foreign Corporations”
This form must be completed and filed when a “United States shareholder” (i.e. a U.S. citizen, U.S. resident and green card holder with at least 10% of the combined voting power of a foreign corporation) has a reportable interest in a controlled foreign corporation (CFC). Any non-U.S. or foreign corporation not incorporated in the U.S. is a CFC, as long as more than 50% of the votes or more than 50% of the worth is controlled by “United States shareholders.”.
For example, if you’re a U.S. citizen living in Canada who has formed your own incorporated family business, you must complete this form.
The fine for failing to file Form 5471 on time is US$10,000 in the event of first instance, but if the form isn’t filed within 90 days of an IRS request to submit it, the penalty may be as much as US$50,000.
If the IRS identifies a U.S. person is an entity, it automatically applies the penalty. If a US citizen is identified an individual, the IRS will not automatically (yet) impose the penalty; nevertheless, there is a risk that it may be imposed.
Form 5472, “Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business”
Form 5472 is used to report the information that must be provided in connection with reportable transactions during the tax year of a reporting corporation with a foreign or domestic related party. It’s critical to submit the Form (exceptions apply) for each reportable transaction with each affiliated party.
A reportable transaction is defined as a monetary and certain non-monetary transaction that occurs between the reporting company, a 25% foreign owner, and any foreign or domestic party related to the owner. These transactions covers, but is not limited to, the following payments: sales of inventory, real estate transactions, cost sharing arrangements, rents and royalties, management fees and commissions, loans, capital contributions and distributions and any services rendered.
There is no de minimis threshold for reportable transactions. Even, a loan of $5 made by a Canadian shareholder to a U.S. affiliate might necessitate the filing of Form 5472.
This form allows the IRS to scrutinize for transfer pricing concerns.
Any reporting corporation that does not submit the Form 5472 on time and in accordance with regulations will be levied a fine of $10,000. An additional penalty of can be imposed if this form is not submitted in a timely manner once notification by the IRS has been provided.
Form 8865, “Return of U.S. Persons With Respect to Certain Foreign Partnerships”
This form is the partnership equivalent of Form 5471.
Depending on the category of the filer, penalties can be imposed in the range from US $10,000 (up to a maximum of US $50,000 after an IRS request to file notice has been received) to a fine equal to 10% of the fair value of the property contributed to the partnership (may subject to potential US $100,000 limit unless the failure is due to intentional neglect).
Form 8938, “Statement of Specified Foreign Financial Assets”
An IRS Form 8938 filed with U.S. 1040 personal income tax return is similar to an FBAR. As the Form FBAR is not submitted with the IRS, a U.S. citizen taxpayer may be FBAR compliant but still fail to disclose foreign income earned from foreign financial accounts and assets on their 1040 personal income tax return. Form 8938 was created to deter this.
Form 8938 is required to be filed by a U.S. citizen living in Canada or abroad:
- if filing a joint return and the total value of your specified foreign asset is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year, or
- filing a return other than a joint return and the total value of your specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year
There are two main distinctions between Form 8938 and the FBAR. The Form FBAR reports other people’s financial accounts (i.e. signing authority or other authority) while Form 8938 only reports the taxpayer’s sole accounts and/or joint accounts with US citizen spouse. The FBAR, on the other hand, is much more limited in scope, covers only financial accounts, whereas Form 8938 is more comprehensive in that it covers financial assets as well.
A foreign financial asset that is not a foreign financial account is a private company share. Other possible foreign assets may cover an interest in foreign trust, a foreign estate, a foreign deferred compensation plan, a foreign pension plan or foreign life insurance policy.
A U.S. citizen who fails to file Form 8938 may be fined up to $10,000 and may face a additional penalty of up to $50,000 if he/she continues to neglect to submit this form after IRS notice for request to file. Any tax underpayment due to undisclosed assets may be subject to a 40% penalty, as well as special statute of limitation rules.
Form 8621, “Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund”
A Form 8621 must be filed by a United States person who is a direct or indirect shareholder of a passive foreign investment company (a “PFIC”) for each individual PFIC with which they have an interest in (there are in fact five circumstances under which filing is necessary). There is no requirement for a minimum ownership stake. If you own 1 share in a PFIC, you would have a filing obligation.
A foreign corporation is a PFIC if either at least 75% of the corporation’s gross income for its taxable year is passive investment income, or (ii) at least 50% of the average percentage of assets owned by the foreign corporation during the taxable year are assets that generate passive income or are kept for the purpose of generating passive revenue.
For US tax purposes, Canadian mutual funds trusts, mutual fund corporations, exchange traded funds, and corporate class assets may be classified as PFICs and reported on Canadian T3 or T5 tax slips.
Depending on the PFIC regime in effect, penalties associated with Form 8621 might be more or less severe. A minimum penalty of $10,000 may be imposed in most cases.
