Canadian ETF’s and Mutual Funds Are Not PFIC’s.

Canadian ETF’s and mutual funds aren’t PFIC’s by default.

There. I said it.

I know, this sounds like blasphemy in the Canadian tax and personal finance world. But rocking the Form 8621 boat needs to happen. It’s almost 2025, and the time for going along with the status quo just because “that’s how it’s always been done” is over.

So let's let our tax freak flags fly, and look into what the heck is going on here.

PART 1

Where’s the IRS Guidance?

I’m a Canadian CPA, not a tax lawyer. I don’t write the rules or hand out legal opinions. What I do is follow IRS instructions and legal guidance provided to me by people who are much smarter than me. So, naturally, I turned to the Form 8621 Instructions and the internet for answers. And what did I find?

Nothing.

No clear guidance. No formal rulings. No legal precedent that definitively says Canadian mutual fund trusts (CMFT's) and Canadian exchange traded funds (ETF’s) are PFIC's. Start digging deeper, and you’ll find there’s nothing in the Internal Revenue Code, and no formal substantive IRS guidance anywhere, that taxpayers can use for reference either.

And that’s the rub. For something that’s presently treated as gospel in the Canadian tax world, the complete absence of any actual referenced case law or formal IRS guidance around these entities is ... concerning.

How Did We Get Here?

So where did this default belief that ETF's and CMFT's should be treated as PFIC's even come from? Best I can tell, it traces back to 2009, when the Black Eyed Peas were boom-boom-powing, and TikTok wasn’t a thing. That September, the IRS issued Chief Counsel Advice (CCA) 201003013. Prior to this, it looks like the issue wasn’t really on anyone’s radar. Not in rulings, not in published commentaries. Nowhere.

This is strange, given that the U.S. PFIC regime has been around since 1986. That’s more than 20 years of... nothing. No rulings, no major disputes, no aggressive gaming of the system. Then, out of nowhere, the 2009 CCA memo is released, and suddenly everything is a PFIC.

It’s hard not to feel a little suspicious. The “Canadian mutual funds are PFICs” narrative seems less like a long-standing interpretation based on 20 years of pre-2009 tax best practices, and more like a relatively recent development born from one CCA letter.

The Spectre of CCA 201003013

CCA 201003013 was written to address whether any portion of a decedent's RRSP was to be included in their gross estate for federal estate tax purposes. In plain English: someone wanted to know how much of a dead guy’s RRSP the IRS was going to tax.

What the IRS *wasn’t* trying to do was issue specific guidance on the U.S. foreign entity classification of a Canadian mutual fund trust. The "Facts" section in the memo doesn’t provide any details about the mutual funds in question, and the analysis itself only addresses the particular (and unnamed) CMFT's held by this taxpayer, inside this specific RRSP account. It’s likely the taxpayer made some representations about the classification of the funds, but the rest of us aren’t privy to those details.

The CCA’s sole reference to Canadian mutual funds? A casual, unsupported line buried at the very end:

"You indicated that the RRSP held shares in several mutual funds organized as trusts. However, a mutual fund may have been formed as a 'trust' under Canadian law, but be properly classified as a corporation under US law. Based on the information provided, it appears that all the Canadian mutual funds held by Decedent's RRSP would be classified as corporations for US tax purposes."

That’s it. Not exactly a rock-solid directive…

What ISN’T said

Let’s do a practical read of the exact wording from CCA 201003013 for some context:

“IF the … mutual funds held by Decedent's RRSP ARE classified as corporations for U.S. tax purposes, the shares of the mutual funds would not constitute U.S. situs property.

Emphasis is mine of course. But let's focus on the keywords "If", and "Are", because those are a dead giveaway that this is maybe not an all-encompassing thing after all. Next:

… Based on the information provided, … the … mutual funds held by Decedent's RRSP would be classified as corporations for US tax purposes."

I don't know about you, but when I look at the full paragraph, it becomes clear that this memo would appear to be pretty narrowly focused. It is only providing commentary on this specific taxpayer’s mutual fund holdings, in this taxpayer's specific RRSP account, and written in the context of assessing U.S. estate tax liability for a foreign taxpayer.

What it doesn’t appear to give is a black-and-white ruling that this corporation classification applies to all Canadian mutual funds/ETF's, or to all RRSP accounts holding mutual funds. The scope instead focuses on this specific taxpayer's facts and circumstances, and doesn't appear to imply anything else. Any broader application is likely speculative.

The Estate Tax Issue

Call me cynical, but the IRS’s decision to treat this taxpayer’s mutual fund holdings as corporations for U.S. tax filing purposes feels like a strategic dodge. Instead of grappling with a much larger and consequential question (Whether owning U.S. assets through a foreign partnership or another pass-through entity exposes a non-U.S. investor to U.S. estate tax), the IRS sidestepped the issue entirely. Why? Because opening that can of worms would likely wreak havoc on cross-border tax policy and estate planning.

For this specific taxpayer, it was a win. Their mutual funds weren’t subject to U.S. estate tax. But, I don’t believe for a second that the IRS did this out of the kindness of their hearts. It was an easy way to avoid having to answer tough questions down the road about pass-through entities and estate tax liability.

None Of This Matters Anyway

Here’s a fun fact about CCA 201003013: like all Chief Counsel Advice memos, it comes with the disclaimer "This Chief Counsel Advice responds to your request for assistance. This advice may not be used or cited as precedent.” Translation? It’s the equivalent of saying “Here’s what we think, but don’t you dare try holding us to it later.”

Take from that what you will, but personally, I prefer court rulings whenever it comes to making real decisions about how to file tax returns. Why? Because courts deal in firm rulings, not hypothetical musings. Case in point (bad pun): In Western Waste Industries v. Commissioner, 104 T.C. 472 (1995), the Tax Court made it clear that private letter rulings, technical advice memoranda, and CCAs cannot be used as precedent.

Take Away - One CCA to Rule Them All? Yeah, No

Let’s be real. CCAs might be interesting to read, but they’re not what you hang your hat on when filing a tax return. One lone CCA from 2009, with a single off-hand comment buried at the end, isn’t exactly the definitive guidance you’d want for something as nuanced as PFIC entity classification. And the fact that this interpretation hasn’t been repeated or published anywhere else, in any IRS literature, in the 15 years since that CCA was published? ... That should tell you something.

Sure, CCA's can spark interesting conversations, but they don’t give you a clear roadmap for filing correctly. And the present reality is that when it comes to PFIC treatment of Canadian ETF's and mutual fund trusts, no official, binding guidance from the IRS actually exists.

So, if CCA's can’t provide the answer, where do we go? Back to the IRC. Let’s see what US tax law actually says about PFIC's and foreign entities, and try to figure out if there's a reasonable, defensible filing position here.

PART 2

Begin At The Beginning

What the heck is a PFIC? We can look at § 1297(a) for help, where it says:

“For purposes of this part, except as otherwise provided in this subpart, the term “passive foreign investment company” means any foreign corporation if:

(1) 75 percent or more of the gross income of such corporation for the taxable year is passive income, or

(2) the average percentage of assets (as determined in accordance with subsection (e)) held by such corporation during the taxable year which produce passive income or which are held for the production of passive income is at least 50 percent.”

So in summary, a PFIC is a foreign corporation that meets specific income or asset tests under U.S. tax law.

Words Mean Things

Canadian ETF's and mutual funds are almost always organized as Canadian trust entities. Why? Well, the story involves a couple of names that might ring a bell: Stephen Harper and Jim Flaherty, and a tax policy change dubbed the Halloween Massacre. Back in the mid-2000s, when these two were running the show, the Canadian government cracked down on income trusts to stop them from being used as tax shelters. But mutual fund trusts were spared, so the structure stuck. Fast-forward to today, and these entities are still operating as trusts under Canadian tax law.

But what about U.S. purposes? The IRS doesn’t care how Canada labels something. The Internal Revenue Code has its own rules for determining what qualifies as a “Corporation.” And those rules can get pretty specific. With that in mind, let me introduce you to IRC Section 301.7701-2 and its underlying clauses.

An Automatic Corporation?

Here’s how the IRS approaches whether a business entity is automatically classified as a corporation under Treas. Reg. section 301.7701-2(b):

Treas. Reg. section 301.7701-2(b)(1): A business entity organized under a federal or state statute, or under a statute of a federally recognized Indian tribe, if the statute describes or refers to the entity as incorporated or as a corporation, body corporate, or body politic.
Treas. Reg. section 301.7701-2(b)(3): A business entity organized under a state statute, if the statute describes or refers to the entity as a joint-stock company or joint-stock association.
Treas. Reg. section 301.7701-2(b)(4): An insurance company.
Treas. Reg. section 301.7701-2(b)(5): A state-chartered business entity conducting banking activities, if any of its deposits are insured under the Federal Deposit Insurance Act, as amended, or a similar federal statute.
Treas. Reg. section 301.7701-2(b)(6): A business entity wholly owned by a state or any political subdivision thereof, or a business entity wholly owned by a foreign government or any other entity described in § 1.892-2T.
Treas. Reg. section 301.7701-2(b)(7): A business entity that is taxable as a corporation under a provision of the Internal Revenue Code other than section 7701(a)(3).
Treas. Reg. section 301.7701-2(b)(8): Certain foreign entities listed in the regulation, such as those formed in jurisdictions like American Samoa, Argentina, Australia, etc., are automatically classified as corporations.

I’m sure you read all of the above in detail, instead of just glancing at it and rolling your eyes. But for those in the back: Canadian mutual fund trusts and ETF's don’t seem to fit into any of these boxes.

Now, if you’re looking for something definitive here, go talk to a lawyer (I can make introductions to some good ones.) But based on the above rules, CMFT's and Canadian ETF’s don’t seem to make the cut for automatic treatment as a corporation.

Maybe Not A Corporation

So if a CMFT or ETF isn’t by default a corporation for US purposes, what is it then? AM 2021-002 does a good job articulating things:

“In the absence of an election, a foreign eligible entity is... ...classified as (i) a partnership if the entity has two or more members and at least one member does not have limited liability; (ii) an association if all of the entity's members have limited liability; and (iii) a disregarded entity if the entity has a single owner that does not have limited liability.”

Based on this, it seems likely that a CMFT or ETF, given its structure as a trust entity, would appear to fall under the category of a Foreign Eligible Entity under U.S. tax rules. What that classification ultimately defaults to (Partnership, association, or disregarded entity) would depend on the specifics of the fund’s structure and liability arrangements.

Foreign Eligible Entity

At this stage it’s helpful to remember the tax accountant’s refrain-to-self of “How do I file the ^#%!@$% tax return!?” Before you can even think about filling in numbers, you need to figure out what you’re dealing with. Is this foreign entity a corporation? A partnership? A disregarded entity? A sentient pile of tax confusion?

PLR 200930003 offers a useful reminder:

“Section 301.7701-3(b)(2) provides guidance on the classification of a foreign eligible entity for federal tax purposes. Generally, a foreign eligible entity is treated as an association taxable as a corporation if all members have limited liability, unless the entity makes an election to be treated otherwise. If a foreign eligible entity has one owner, it may elect to be treated as a disregarded entity pursuant to the rules in § 301.7701-3(c). If a foreign eligible entity has more than one owner, it may elect to be treated as a partnership pursuant to the rules in § 301.7701-3(c). Section 301.7701-3(c) provides that an entity classification election must be filed on Form 8832 and can be effective up to 75 days prior to the date the form is filed or up to 12 months after the date on which the form is filed.”

To summarize: A foreign eligible entity is like Schrödinger's cat for tax purposes. Depending on its structure and elections, it could be taxable as a corporation, partnership, or disregarded entity. And until you figure out what this foreign entity is, you literally can’t file the tax return. Form 8832 is the magic key to put the entity in the correct “box” for U.S. tax purposes. Want it to be a corporation? Great. Partnership? Sure. Disregarded entity? Why not.

Recap

Let’s recap here, because things are about to down a serious tax nerd rabbit hole:

IRC Section 1297(a) says PFIC’s are foreign corporations.
Canadian ETF’s and Mutual Fund Trusts are organized as legal trusts.
CMFT’s don’t fit neatly into the IRC Section 301.7701-2(b) tests that automatically designate an entity a corporation for US purposes.
IRC Section 301.7701-3(b)(2) explains that, unless a foreign eligible entity elects otherwise, it is either a partnership, an association, or a disregarded entity (depending on the specifics of the entity.)

Why does this matter? Because only corporations can be PFIC's. If a CMFT isn’t a corporation under U.S. rules, it can’t meet the definition of a PFIC. Simple as that.

PART 3

Let’s Talk About Liability

Now that we’ve established some rules for classification, let’s focus on one key factor: liability. It’s the linchpin in deciding whether Canadian ETF's and mutual funds are corporations, partnerships, or something else entirely

When the IRS classifies a foreign eligible entity as a corporation, partnership, or disregarded entity, it generally applies the default classification rules found in Treasury Regulation § 301.7701-3(b)(2). These rules revolve around liability. More specifically, around whether the members of the entity are personally shielded from its debts, or not.

Default Classification Rules for Foreign Eligible Entities

The default rules offer a starting point for figuring out how a foreign eligible entity should be classified:

Partnership: A foreign eligible entity with two or more members, where at least one member lacks limited liability, appears to default to partnership status.
Corporation (Association): If all members have limited liability, the entity defaults to being classified as a corporation.
Disregarded Entity: For single-member entities where the owner lacks limited liability, the entity is disregarded for tax purposes and treated as part of the owner.

The takeaway here is that liability isn’t just a minor detail. It's arguably a deciding factor in how a foreign entity is classified for U.S. tax filing purposes. Whether Canadian ETF's and mutual fund trusts provide limited liability to their members suddenly becomes something on our radar.

What Does Limited Liability Mean?

Under U.S. tax rules, limited liability means a member isn’t personally responsible for the entity’s debts or obligations solely because they are a member. To over-simplify (but not really):

Limited liability = Corporation for US filing purposes.
Not limited liability = Partnership for US filing purposes.

Do Canadian ETF’s And Mutual Fund Trusts Have Limited Liability?

I don’t know. (Please don’t yell at me yet.)

What I do know is when you dig into the prospectus documents of the various mutual funds and Canadian ETF’s out there, you consistently find language like this:

“Each ETF is a unit trust and as such its Unitholders do not receive the protection of statutorily mandated limited liability in some provinces as in the case of shareholders of most Canadian corporations. There is no guarantee, therefore, that Unitholders of an ETF could not be made party to a legal action in connection with the ETF”

(From the Canadian ETF 'Global X US Dollar Currency ETF' DLR.TO prospectus, Page 56, HERE.)

For a tax accountant, this kind of language always raises questions. If it is stated that fund unit holders aren't guaranteed limited liability, does that mean these funds can’t be treated as corporations under U.S. rules? Because remember, if an ETF or mutual fund isn’t a corporation, they also can’t be PFIC's. That’s a big deal.

And this is part of the story where a very sharp tax lawyer steps in with a brilliant analogy: the Estate of Fung v. Commissioner case.

What Does Estate Tax Have to Do with ETFs?

This isn’t the first time liability (or lack thereof) has played a starring role in a tax classification issue. The Estate of Fung case gives us a way to consider why theoretical liability likely matters in tax court.

This case involved a nonresident who owned U.S. real estate, along with a mortgage. He died (Rookie mistake – Don’t be rich and die holding US real estate. You will have a bad time.) The tax issue boiled down to this: should estate tax be calculated on the full fair market value of the property, or should the mortgage reduce that value?

The answer hinged on whether the loan was “recourse” (the lender could go after the borrower personally for the debt) or “nonrecourse” (the lender could only seize the property). The court ruled that the loan was recourse because the lender theoretically had the legal right to sue the borrower, even if lenders in California almost never pursue personal liability in practice.

The judge dismissed arguments about “what usually happens” and instead focused on the legal rights and risks under the governing law. The takeaway? Theoretical legal rights matter, even if they’re unlikely to be exercised.

Applying This Logic to Canadian ETF's

Now, let’s bring this back to Canadian ETF's. The fact that unit holders theoretically could be held liable for ETF debts, however unlikely, could mean these entities don’t meet the criteria for “limited liability” under U.S. tax rules.

Why does this matter? Because for an entity to be treated as a corporation under the IRS’s default classification rules, all of its members must have limited liability. If unit holders don’t have that protection, the ETF can’t be classified as a corporation. And if it’s not a corporation, it’s not a PFIC.

This leads to an interesting conclusion: the current status quo of treating of Canadian ETF and mutual fund trusts as PFIC’s might rest on an even shakier foundation than just blindly following CCA 20100313. By focusing on the real legal rights and risks spelled out in governing law and fund prospectuses, rather than what “usually happens”, there would appear to be a more than reasonable filing position that Canadian ETF's may not default to corporation status for U.S. tax purposes.

Full disclosure: I can’t take the credit for this thought process. A very smart and very kind tax lawyer, my friend Phil Hodgen, pointed me to this case. Out of either generosity, or pity, he walked me through the tax court’s approach to theoreticals. Either way, the credit is his.

The Black Swan Risk

The core of this issue is limited liability. Just because lawsuits against unit holders “never happen” doesn’t mean they can’t. The logic in Estate of Fung reminds us that legal risks, even if rare, still count heavily in U.S. tax court. Ignoring them would be like pretending Black Swan events don’t exist just because they’re uncommon. And, as Nassim Taleb famously points out, it’s those rare events that eventually come back to bite you.

So the lack of limited liability for Canadian ETF's and mutual fund trusts, whether that is a remote risk or not, matters. It's a big deal when it comes to how to treat these entities for U.S. tax purposes, and affects your potential filing obligations under U.S. tax rules. Because if an ETF or mutual fund doesn’t meet the criteria for a corporation, that entity can’t be a PFIC either.

Ackchyually!

So, what’s standing in the way of the Canadian tax world adopting this conclusion with great enthusiasm and collective happiness all around? A whole lot of hand-waving and what the internet underground affectionately refers to as “Ackchyually” arguments (Google it).

These are the kinds of arguments that go, “Well, technically, ETF holders won’t actually be liable because it’s never happened before.” But here’s the thing: that’s not the point. Tax law doesn’t care whether something has never happened. It cares whether the risk exists (Fung says so.) And when you read through all of the actual prospectus documents and legal paperwork for these Canadian mutual fund and ETF trust entities, the paperwork clearly states that unit holders could face liability, remote risk or not.

Ignoring what’s right in front of you because “it hasn’t happened yet” is a terrible way to determine a filing position. And as a tax accountant, you try really hard to never deal in hypotheticals or wishful thinking. You deal with the facts and instructions in front of you, using governing law and case precedent to tell you what paperwork to fill out and where to put the numbers into your software. And if a tax court says a remote risk matters, then it matters. That’s the standard.

Big Picture

At this point, you might be thinking, “Well, that’s just, like, your opinion, man.”

And fair enough. The limited liability issue is just one piece of the puzzle, and I'm just an accountant talking out loud. Fortunately, there are plenty of other factors worth considering, such as, like:

Funds formed before provincial limited liability laws (e.g., Ontario 2004) potentially may not give Canadian investors in those funds full limited liability.
If even one investor doesn’t have limited liability, U.S. rules default to partnership classification.
Canadian mutual funds don’t generally fit U.S. definitions of “ordinary” or “investment” trusts—they act more like partnerships.
The management teams at Canadian ETF's/CMFT’s can use (And some have already) Form 8832 to elect formal partnership status for U.S. tax filing purposes. And in instances where this election was made, the treatment hasn't been challenged by the IRS.
Generally speaking, the intention of the PFIC rules was to target income deferral. Canadian funds distribute income annually. No tax shelter here. (More on this later.)

Each of these points is packed with nuance and could easily be the focus of their own articles. (Standby - I’ll be tackling them in more detail soon.) But the point being made is that when lumped together, these factors build a strong case that the default treatment of Canadian ETF's and mutual fund trusts as PFIC's is anything but straightforward.

PART 4

So, What Does This Mean for Filing?

Enough with the theory. Let’s get practical and focus on what really matters when it is time to file the return.

The idea that “Canadian ETF's are automatically PFIC's” is not as clear-cut as it might seem. The issue around limited liability, along with the other factors discussed above, support a reasonable filing position to treat Canadian mutual fund trusts and ETF's as U.S. partnerships, rather than corporations.

But theory only goes so far. Filing a tax return is about making sure it is accurate, defensible, and practical. Let’s break down what this means in practice and what potential risks might come into play.

Defensibility of the Filing Position Under IRC 6662

The position that a Canadian ETF is not a PFIC would appear to be reasonable and defensible under IRC 6662, which is designed to address penalties for issues like negligence, substantial understatements, or other accuracy-related errors.

Since I like lists, here’s how this filing position appears to hold up in practice:

Taxpayers taking this position still report all income through Canadian tax slips like T5's and T3's. There’s no intent to under-report income or evade taxes. Everything is disclosed and accounted for.
Since all income is reported annually, consistent with the distributions made by Canadian mutual funds, this position doesn’t create a situation where income is understated relative to U.S. tax rules.
The classification of Canadian ETF's as partnerships rather than corporations is supported by reasonable interpretations of tax law, particularly around limited liability and the default classification rules for foreign eligible entities. This provides a solid foundation for taxpayers to argue their position, reducing the risk of negligence penalties.
Substantial authority appears to exist for this position, based on applicable provisions of the tax code, Treasury regulations, and supporting interpretations of limited liability and partnership classification. While not definitive, these sources provide a well-reasoned basis for the filing position.
Treating Canadian ETF's as partnerships avoids the need to file the complex Form 8621 for PFIC's, which aligns with the practical realities of reporting income through Form 1040. This approach doesn’t attempt to sidestep tax obligations but simplifies compliance.
Informally, the IRS has shown little interest in aggressively pursuing cases involving Canadian mutual fund trusts classified as partnerships. The lack of significant enforcement in this area suggests it’s not a priority for the agency. (Don’t take my word for it. Reach out to Max Reed: He’s the OG pioneer who pushed back on this PFIC stuff, all the way back in 2012, I believe.)
By accurately reporting income and relying on reasonable interpretations of the law, taxpayers reduce the likelihood of penalties. Adequate disclosure of the relevant facts on tax returns further supports this filing position under IRC 6662.

Why This Filing Position Is Practical and Defensible

The purpose of IRC 6662 is to promote accurate reporting and deter negligence or substantial understatements. Taking the position that Canadian ETF's and mutual fund trusts aren’t PFIC's should generally align with these goals. The approach ensures that all income is disclosed and taxes are paid, with no attempt to exploit loopholes or hide income.

While no filing position is immune to scrutiny, taking the position that mutual funds or ETF's aren't corporations is backed by reasonable interpretations of the law (from actual tax lawyers, not me) and substantial authority. It’s a practical and defensible approach to filing tax returns that balances compliance, transparency, and fairness.

What this approach is NOT about is taking aggressive stances that materially understate a taxpayer’s income. Chasing that dragon will not only fail to serve your intended purpose, but also risks inviting hefty penalties for both the taxpayer and the preparer.

I Value My Time – Please Wrap This Up

Between the unresolved questions around limited liability, the fund prospectuses openly admitting some entities lack statutorily mandated protection (their words, not mine—see DLR.TO above), and the complete lack of formal IRS guidance apart from a 15-year-old throwaway comment, there is a strong case for a reasonable, defensible filing position that treats these funds as partnerships, not corporations.

This isn’t about taking an aggressive stance or finding clever ways to lower taxable income. It’s about filing tax returns the right way: accurately, transparently, and grounded in compliance with practical realities. Tax isn’t black and white, and this is another example of where the “way we’ve always done it” deserves a closer look. (For a similar discussion, see my article about TFSA's and 3520's.)

So if you’ve been filing Form 8621 to report a $100 ETF in your Canadian couch potato portfolio without stopping to ask why, it’s time to rethink the narrative. Filing overly complicated forms just because “that’s what everyone does” deserves scrutiny. Based on the current Canadian tax landscape and discussions with those who’ve navigated this issue before, the IRS doesn’t appear to be overly concerned, as long as income is being reported.

Save your time and energy for the things that actually matter.

Usual Disclaimer: What is written here is not formal tax advice. I’m not your CPA. It’s possible, or dare I say even probable, that the comments and opinions expressed here contain material errors, are out of date, or that important stuff has been left out. Don’t use this info to make tax decisions. Hire a pro to help you.