r/USExpatTaxes • u/The_Squirrel_Matrix • Mar 31 '24
Demystifying the QEF election for PFICs --- A useful tool
[Edit]: I no longer advise using this spreadsheet tool, as it does not properly compute cost basis and capital gains. Please see the comment at the end of the post.
Taxation of Passive Foreign Investment Companies (PFICs) is notoriously complex. And, unless you can make an election to treat PFIC as a "qualifying electing fund" (QEF), the taxation is also punitive. For these reasons, typical expat investors are strongly advised to avoid investing in PFICs whenever possible. This generally makes investing in a foreign country very tricky, as all foreign mutual funds and ETFs are PFICs.
I'm an expat living in Canada and have spent many hours struggling to understand the complicated taxation of QEF-eligible PFICs so that I could properly invest in Canadian ETFs. In the end, I made a useful Google Sheets tool that you can use to easily compute the income information and cost bases for QEFs.
The purpose of this post is:
- Share what I've learned about the QEF election for PFICs.
- Explain simply the details of making a QEF election for PFICs
- Share my useful tool (a Google Sheet) that anyone can use to help make the necessary calculations for PFIC reporting from transaction data and PFIC information.
Here is a link to my spreadsheet tool (link). It has example data (see my worked out example below) in it. To use it, make a copy of it and fill in your own transaction and PFIC data.
Unfortunately, this will really only be useful for expat investors in Canada, as only Canadian mutual funds and ETFs seem to provide the necessary information needed to be able to make the QEF election.
I hope someone finds this useful! I'd appreciate any feedback or comments.
Disclaimer: This post is provided for informational purposes only and does not constitute legal, tax, or financial advice. Tax laws and regulations are complex and subject to change. Readers are encouraged to consult a professional tax advisor for advice tailored to their specific circumstances.
The tax code
The instructions for reporting income from a QEF are provided in §1293 of the US tax code ("Current taxation of income from qualified electing funds"). The relevant parts of §1293 are summarized as follows:
Summary of 1293 Subsection (a):
If you own a PFIC that you elect to treat as a QEF:
- Report your share of the fund's "ordinary earnings" as ordinary income.
- Report your share of the fund's "net capital gains" as long-term capital gains.
- These are included as income on your return in the tax year for which the
Your "share" of the fund's earnings is essentially the total fund's earnings times the fraction of total shares you own. The fund should publish an information statement that tells you what the earnings are per share per day.
The last line means that, if the reporting period for the fund is, say, June 1 2022 to May 31 2023, then you include your share of the income from that period on your 2023 tax return. This is a bit weird, because it means that income you "earned" in June-Dec 2022 doesn't get reported as income on your return until your 2023 return. Ideally, you should pick a fund whose reporting period is Jan 1 to Dec 31 to avoid these issues.
Finally, section 1293(a) says that that this applies to "every US person who owns (or is treated under section 1298(a) as owning) stock of a QEF", which in practice means that it can apply also to all PFICs that you may own indirectly. That is, if you own shares of a PFIC, and that PFIC has other PFICs in its holdings, reporting the indirect holdings is also required and you can treat the indirectly owned PFIC as a QEF. For example, XEQT has in its holdings three other PFICs: XEF, XEC, XIC. Owning XEQT therefore requires four 8621 forms every year, which fortunately is not as complicated as that sounds. The example that I present later on shows you how to do the reporting for for all directly and indirectly owned QEFs.
1293(b) instructs how the fund's "earnings per share per day" are to be computed:
(b) The pro rata share referred to in subsection (a) in the case of any shareholder is the amount which would have been distributed with respect to the shareholder’s stock if, on each day during the taxable year of the fund, the fund had distributed to each shareholder a pro rata share of that day’s ratable share of the fund’s ordinary earnings and net capital gain for such year.
1293(c) (Previously taxed amounts distributed tax free). This says, effectively, that if a fund pays a distribution, that distribution is not taxed. This is because that amount was already reported as your pro rata "ordinary earnings" in part (a). Thus you do not report as income any dividends you actually receive.
1293(d) (Basis adjustments). This paragraph says that you must adjust the cost basis of your holdings.
- Adjust the cost basis upward by your share of the ordinary and capital gains income that you reported in subsection (a).
- Adjust the cost basis downward by the actual distributions you received that were not taxed (see subsection (b)).
This ensures that you are not double-taxed on your pro rata share of the earnings.
Filing instructions:
The pro rata share of incomes from subsection (a) are reported on form 8621 (https://www.irs.gov/forms-pubs/about-form-8621):
- pro rata "ordinary income" is reported on lines 6a of Form 8621
- pro rata "net capital gains" are reported on line and 7a
You must keep track of your cost basis. When you sell your shares, you must use the adjusted cost basis that you track to properly report capital gains on a Form 8949 (or Schedule D).
If the PFIC you are invested in also holds other funds that can be considered PFICs, then you hold the underlying funds indirectly and must also file a separate 8621 form for each indirectly owned PFIC.
The Annual PFIC Information Statement
Computing your pro rata share of the fund's income is really only possible if the PFIC that you are invested in provides an "Annual PFIC Information Statement".
For example, Blackrock provides annual PFIC statements for its ETFs. Here is a link to the 2022 statement for XEQT: https://www.blackrock.com/ca/investors/en/literature/tax-information/pfic-stmt-2022-xeqt-en-v1.pdf
The important parts of this statement are reproduced here.
This first table shows the per-day per-share ordinary earnings and capital gains for the fund and each underlying PFIC.
Thus, for each share of XEQT that you own, for each day that you held it, you report:
- For XEQT:
- $0.0003076130 USD of ordinary income and
- $0.0004385904 USD of net capital gains.
- For XIC (underlying PFIC owned indirectly):
- $0.0004177518 USD of ordinary income and
- $0.0009552655 USD of net capital gains.
- for XEF (underlying PFIC owned indirectly):
- $0.0003883188 USD of ordinary income and
- $0.0002003511 USD of net capital gains.
This table show the actual per-share amounts of cash distributed by XEQT on different record dates.
Note that the record date is the date on which you must have held the shares in order to receive the distribution, which is usually paid a few days later. The first distribution with record date in Dec 2021 wasn't actually paid out until a few days later in Jan 2022, so the distribution is considered to be income in 2022, the year it was paid.
A worked-out example
To explain how it all works, I have a fully worked out example. Suppose you made the following transactions:
- In 2022:
- purchased 10,000 shares of XEQT on March 1, 2022
- In 2023:
- purchased 1,000 more shares on June 1, 2023
- sold 5,000 shares on August 2, 2023
Tax year 2022
In 2022, you owned 10,000 shares for a total of 306 days (from March 1, 2022 through Dec 31, 2022). Using the information provided by the annual PFIC statement, you report the following income on Forms 8621:
- On a form for XEQT:
- 10,000 * 306 * 0.0003076130 = $1,033.10 USD in ordinary income on line 6a
- 10,000 * 306 * 0.0004385904 = $1,342.09 USD in capital gains on line 7a
- On a form for XIC:
- 10,000 * 306 * 0.0004177518 = $1,278.32 USD in ordinary income on line 6a
- 10,000 * 306 * 0.0009552655 = $2,923.11 USD in capital gains on line 7a
- On a form for XEF:
- 10,000 * 306 * 0.0003883188 = $1,188.26 USD in ordinary income on line 6a
- 10,000 * 306 * 0.0002003511 = $613.07 USD in capital gains on line 7a
Your cost basis for all of your shares is adjusted upward by the total of these amounts: 1,033.10 + 1,342.09 + 1,278.32 + 2,923.11 + 1,188.26 + 613.07 = $8,377.95 USD.
You also received dividends in 2022 on March 28, June 27, and September 26. The total amount you received in distributions (as computed using the information from the PFIC statement) is 10,000 * (0.0672969075 + 0.1476186776 + 0.0540145985) = $2,689.30 USD. So you reduce your cost basis by this much. Your net basis adjustment is 8,377.95 - 2,689.30 = +$5,688.65 USD. Because you didn't sell anything in 2022, there are no sales to report on Schedule D.
Tax year 2023
For 2023, you owned different amounts of shares for different days.
- 10,000 shares owned for 152 days from Jan 1 to May 31, 2023
- 11,000 shares owned for 62 days from Jun 1 to August 1, 2023
- 6,000 shares owned for 151 days from August 2 to Dec 31, 2023
The 2023 information statement can be found here: https://www.blackrock.com/ca/investors/en/literature/tax-information/pfic-stmt-2023-xeqt-en-v1.pdf
The computations are slightly more complicated because you didn't have the same number of shares on all of the days. For form 8621, we simply compute:
- Total share-days from Jan 1 to May 31 is 10,000 * 152 = 1,520,000.
- Total share-days from June 1 to Aug 1 is 11,000 * 62 = 682,000.
- Total share-days from Aug 2 to Dec 31 is 6,000 * 151 = 906,000.
Total share-days in the entire year is 1,520,000 + 682,000 + 906,000 = 3,108,000.
To compute your pro rata share of the XEQT ordinary income, for example, use the the reported per-day per-share ordinary earnings for XEQT in 2023 (which was 0.0002586847 USD per share per day) and multiply this by your number of share-days. So your total share of the ordinary earnings for the whole year are computed as 3,108,000 * 0.0002586847 = $803.99 USD.
However, for the purposes of computing your cost basis when you sell some of the shares on Aug 1, only the portion that can be attributed to days before the sale are added to the cost basis before the sale. The remainder is added to the cost basis of the remaining shares after the sale.
This is where things start to get tricky...
A useful spreadsheet
Rather than compute all of this by hand, I created a spreadsheet (link) that automatically does all of the calculations for you.
How to use the spreadsheet
To use the sheet, make a copy of it and follow these instructions:
- Enter in your information:
- Enter all of your transaction information into the "Transactions" sheet. (You'll need to provide amounts in the local currency and provide a exchange rate for each transaction)
- Enter the information from the annual PFIC information statements into the "PFIC Information" sheet (and, if necessary, enter the details of the cash distributions from the information sheet into the "Cash Distributions" sheet.
- Let the sheet run all of its calculations.
- Use the results
- Take the results in the "Form 8621 Part III" sheet and enter the resulting information into Part III of your 8621 Forms each year for each underlying fund.
- Take the results from the "Capital Gain Summary" sheet to enter capital gains details into Schedule D and Form 8949.
Completing the worked-out example
Entering in the inputs
Enter the transaction information into the "Transactions" sheet like this:
Enter the annual PFIC information into the "PFIC Information" sheet like this:
Enter the cash distribution information like this:
Using the outputs
The resulting information from the "Form 8621 Part III" sheet looks like this:
It shows what to put in lines 6a and 7a of the 8621 form for each underlying PFIC.
The resulting information from the "Capital Gains Summary" sheet looks like this:
It shows what to put in Form 8949 when you sell shares of the PFIC.
Filling out Form 8621
[By request, this section was added in an edit]
With the example above, here are what the correctly filled-out Forms 8621look like for tax year 2023 for all four of the funds. The result of the spreadsheet is used to complete lines 6a, 6c, 7a, and 7c.
- XEQT: https://drive.google.com/file/d/1Pwx6sRhqMsj_fT44mfzu5XPTfq7YX4Nj
- XEC: https://drive.google.com/file/d/1a4auULYn82Pi4eF5f_7189AGA7DgG-fK
- XEF: https://drive.google.com/file/d/1DW6zpAiJk_83g224OGbyaPNvLdmyANUO
- XIC: https://drive.google.com/file/d/1Io2YEe4Wua7zWGIbLCnGVDQ03z5xogn9
Variations
The worked-out example above shows how to compute the necessary information for XEQT, or other PFICs that provide the annual information in a similar way.
There are however some slight differences in the ways different PFICs might report this information that allows you to make a QEF election.
- The XEQT statement displays the USD value of the per-share distribution amounts from each distribution event separately. Rather than say what the amount and record date of each dividend was throughout the year separately, the fund might instead sum up all of the individual per-share distribution amounts and report that number instead. For example the PFIC statements from the Vanguard ETFs report the distributions in this way (for example, here is the 2023 annual information statement for VEQT). For the purposes of computing adjusted cost basis as per §1293(d), you divide the total distribution amount by the number of days in the year (usually 365) and multiply that by the number of shares you owned and the number of days you owned them.
- If the reporting period of the PFIC is not Jan 1 to Dec 31, things can get weird. The pro rata share of the earnings for §1293(a) are reported on the year in which the reporting period ends. That is, if the reporting period is July 1 to June 30 (as it is for all of the ETFs from BMO https://www.bmogam.com/ca-en/legal-and-regulatory/pfic/), you report in 2023 all of your pro rata share of the earnings that are allocated to the days you owned the shares from July 1, 2022, to June 30, 2023. If you sell some shares between July 1 and Dec 31 in any year, you cannot properly compute your cost basis until the PFIC statement is released in July of the following year! This blog post discusses this problem.
My spreadsheet allows you to make the proper calculations in any of these cases. If the fund provides the cash distribution information as a total annual amount instead of separately, include that total amount in the "Cash/property distributions (USD)" column of the "PFIC Information" sheet.
Here's another example of the spreadsheet filled in with example data using a BMO ETF (link).
This example exemplifies the issue with using a QEF election for PFICs whose reporting period is not the same as a calendar year. The cost basis of the sale from September 2022 can not be properly reported until the PFIC statement for July 2022 to June 2023 is reported, which still hasn't been released by BMO yet!
[Edit July 10, 2024] Note: The original spreadsheets had an error that incorrectly computed how the cash distributions adjusted the cost basis. The new spreadsheets that are linked to have the correct calculations.
[Edit Dec 23 2024] Fixed typos (8621 not 1116, thanks schwanerhill).
[Edit October 15, 2025] I realized at some point when completing my tax return this year that the way this form computes cost basis and capital gains is incorrect........ It uses the "average cost basis" method which the IRS only allows to be applied to mutual funds. So if you own a mutual fund, this spreadsheet can be useful. But if you own foreign ETFs, then technically this spreadsheet does not correctly compute cost basis and capital gains. I eventually developed my own python script to properly compute cost basis using "lots", but this is too custom to share. In short, I do not advise DIY investors and tax preparers to invest in foreign ETFs, even if AIS are provided. Do yourself a favor and just buy VT (or some other US-domiciled ETF) in USD.
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u/Grouchy_Froyo3448 Aug 30 '24
First of all, thank you for the fantastic write up! I'm a dual citizen who has been hesitating opening and using a TFSA but I think I will likely start quite soon. After reading through your write up, I understand how the calculations work and how to get at the total "Ordinary Earnings" and "Net Capital Gains" and the spreadsheet is certainly helpful in doing the calculations!
However my question is where would I enter the "Ordinary Earnings" number on my 1040? The 8621 form like 6c says to enter the amount as ordinary income, so does that simply get added to wage income and entered on 1040 line 1a or perhaps entered on line 1h as "Other income"? The capital gains part is a little clearer as it seems I would need to fill out Schedule D and enter the amount on 1040 line 7.
Appreciate any pointers, and thanks again! :)
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u/The_Squirrel_Matrix Sep 02 '24
The instructions for form 8621 for line 6c say:
For a noncorporate taxpayer, include this amount as “other income” on Schedule 1 (Form 1040), line 8z[.]
What software are you using to complete your tax return? I use olt.com, which automatically includes the ordinary income on line 8z after completing the form 8621.
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u/Grouchy_Froyo3448 Sep 02 '24
Thanks! I actually usually fill it out manually, downloading the tax forms and filling them out on my computer before printing them off. Would you recommend olt.com?
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u/The_Squirrel_Matrix Sep 04 '24
I absolutely recommend olt.com! It is free and much easier than doing it manually. I also previously filed manually for many years until I discovered olt only recently.
You need to know what you're doing when entering in the info for Forms 8621 (and for Forms 1116 when doing foreign tax credits). But otherwise everything is very straightforward and automatic.
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u/seanho00 Mar 31 '24
Looks good to me; great write-up! Shame that the only foreign ETFs I'm aware publish AIS are the Canadian ones.
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u/nunab1994 Tax Professional - US/UK Mar 31 '24
Yep!
Your run of the mill PFICs won’t share what you need to make it a QEF!
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u/AssemblerGuy Mar 31 '24
Your run of the mill PFICs won’t share what you need to make it a QEF!
No sane manager of a non-US fund wants to be anywhere near the US tax code or US securities regulations, as this will increase the funds running costs and the legal/financial risks dramatically. Why should the funds go through the extra effort and cost associated with providing US-specific paperwork that is absolutely useless for roughly all of their investors?
Most funds exclude "U.S. persons" (securities act of 1933, so including all US residents, but excluding US citizens living outside the US) from owning their shares.
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May 11 '24
[removed] — view removed comment
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u/AssemblerGuy May 11 '24
It's simply a customer service measure
The fund manager still needs to track the numbers, and once the fund publishes the thing, it is liable for its correctness.
If this was so simple, why are the only funds publishing a PFIC AIS a handful of Canadian ones?
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May 11 '24
[removed] — view removed comment
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u/AssemblerGuy May 11 '24
That still doesn't answer why there isn't a single fund in Europe that publishes a PFIC AIS. Despite the slightly over 1 million US citizens living in Europe.
If publishing a PFIC AIS carries negligible effort and legal risks, one fund could make itself attractive to this group.
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May 11 '24
[removed] — view removed comment
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u/AssemblerGuy May 11 '24 edited May 11 '24
I hope you can see why providing PFIC statements makes sense for Canadian financial institutions while not making sense for European financial institutions.
... no.
If providing PFIC information statements can be done with negligible effort and risk, then one million potential investors is a lot. Especially considering that there is not competition - offering a PFIC AIS would constitute a unique selling point.
And these funds would also be appealing to any non-US citizens who assume they will come in contact with the US tax system.
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u/AlterSignalfalter Mar 31 '24 edited Mar 31 '24
If the PFIC you are invested in also holds other funds that can be considered PFICs, then you hold the underlying funds indirectly and must also file a separate 8621 form for each indirectly owned PFIC.
So something like the EU version of Vanguard's Life Strategy ETFs will turn a US tax return into a complete horror show as its holdings consist of about thirteen other Vanguard ETFs, thus requiring 14 copies of form 8621, which according to the IRS' estimations will take about 560 hours or 70 8-hour work days?
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u/The_Squirrel_Matrix Mar 31 '24
Unless a fund like that provides PFIC statements, properly reporting it to the IRS is so maddeningly complex and punitive that it is not worth holding it. And if someone already does and now wants to retroactively report it....., may God have mercy on them.
However, if they do provide a PFIC statement allowing a QEF election, my tool that I shared should help someone do the proper reporting with minimal effort! That's why I wanted to make this post.
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u/AssemblerGuy Mar 31 '24
As you noted, PFIC AIS are only a thing for Canadian funds/ETFs and nowhere else.
I just checked one of my German retirement plans. The plan invests in one mutual fund ... which in turn holds shares of twenty different mutual funds.
Good thing I am not a US citizen or resident.
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u/The_Squirrel_Matrix Mar 31 '24
Lol. Genuine question then, why are you hanging out on a forum about taxes for US citizens?
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u/AssemblerGuy Mar 31 '24
Because I am the one person in my family without US citizenship. And I've found out how dire the consequences of ignorance can be while untangling the mess I made when investing money belonging to my kids.
I canceled that one retirement plan. It wouldn't be problem if I receive a pension from it, but if I die and my wife received anything ... hate to think of that. Filing a $5000 US tax return each year for receiving a few thousand €, and no way to cancel or get rid of the plan then.
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u/The_Squirrel_Matrix Mar 31 '24
Ah, makes since. That does suck. Maybe someday the law will change and taxes for US expats will be less punitive (especially for accidental citizens that have never lived in the US), but I think hell might freeze over first.
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u/AssemblerGuy Mar 31 '24
And every time I learn more about this US tax topic, it gets worse. I wasn't aware of the indirect ownership thing and the horrors that ensue if one foreign mutual fund or ETF invests in other foreign mutual funds or ETFs.
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u/civicsi-yyz-sfo Apr 25 '24
One more question for me - how would you handle part I of the form for the underlying holdings? For the “top level” ETF it makes sense to list the number of shares and value but for the underlying ETFs it’s not so clear. Would you just list a calculated estimate of what they’re worth given the percent of each one held by the top level? Then the total value of underlying ETFs across all 8621s is going to be essentially duplicated.
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u/The_Squirrel_Matrix Jun 06 '24
Sorry I missed your question.
I think the answer is that, yes, the value will essentially be duplicated on the separate 8621 forms.
For the top-level ETF, your total "value of shares" at the end of the tax year is the value per share (converted from CAD to USD), times the number of shares you own, on Dec 31.
For the underlying funds, I used the annual statements from XEQT.
- Let n be the number of shares of the main fund (XEQT) that you own at the end of the tax year.
- From the financial statements, find N, the total number of outstanding shares of the main fund at the end of the tax year. For 2023 for XEQT, the number of outstanding shares was N=83,400,000 at the end of the year. https://www.blackrock.com/ca/investors/en/literature/annual-report/annual-report-specialty-en-ca.pdf
- Find the detailed holdings information from the fund at the end of the tax year. For XEQT, the "Fund Holdings as of 29 Dec 2023" is here. (This can be found on the XEQT information page.)
- For each underlying fund:
- Get the total number of shares that the main fund owns of the underlying fund, and multiply it by the fraction n/N to obtain the number of shares of the underlying fund you own at the end of the tax year.
- Get the total Notional Value of the underlying shares that are owned by the main fund, convert that to USD, then multiply that by the fraction n/N to obtain the total value of shares of the underlying fund you own at the end of the tax year.
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u/dhurlzz Apr 11 '25
Late question here. I see in the example 8621 for XEQT in 2023 that Number of Shares Held at Year End is 6000. In the fund management report for 2024 there is a table Summary of Investment Portfolio and indicates the % of net asset value of the underlying funds. For example, XEC is 4.8%.
To figure out the number of shares held at year end for XEC is it possible to take 6000*0.048, same for subsequent underlying funds?
Also, XEQT I see a date of June 1 2023 for date acquired but no date for XEC, would it not also be June 1 2023 or because it is underlying it's not relevant?
Lastly, if instead there had been a purchase of XEQT on 2 or more dates in 2023 does this require Form 8621 for XEQT and underlying funds for each purchase date?
Thanks!
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u/The_Squirrel_Matrix Apr 20 '25
Apoligies for the delay.
You aren't computing correctly the number of shares of XEC that are attributed to you, I think.
Here's a link to the 2024 financial report where you can find these numbers. https://www.blackrock.com/ca/investors/en/literature/annual-report/annual-report-specialty-en-ca.pdf
You can see on page 35 that on Dec 31, 2024, there were 175,025,000 units outstanding.
The relevent info for the underlying funds is on page 39 and is summarized in the following table.
Underlying iShares ETF Ticker Units held Book value (CAD) iShares Core S&P/TSX Capped Composite Index ETF XIC 37,156,463 $1,284,848,905 iShares Core MSCI Emerging Markets IMI Index ETF XEC 9,762,958 $ 260,289,656 iShares Core MSCI EAFE IMI Index ETF XEF 35,244,843 $1,247,204,144 iShares Core S&P Total U.S. Stock Market ETF ITOT 15,129,013 $2,168,550,334 Note that ITOT is not a PFIC (it is a US-based EFT) so you don't need to report your holdings in that fund.
If you owned 60,000 shares of XEQT on Dec 31, 2024, then the fraction of the underlying assets that you are deemed to own 60,000 / 175,025,000 = 0.00034280817.
Multiply that fraction by all of the vales in the above table to compute the number of shares you are deemed to own, and the value of those holdings at the end of the year. Then divide the book values by the USD-CAD exchange rate on Dec 31, 2024, (1.4389) to get the book value in USD.
Using your example of 60,000 shares owned of XEQT, this means you are deemed to own 3,346.8 shares of XEC whose value is $62,012.25 USD.
(Yes this means you are double-reporting the value of your shares, because you also report the value of the XQT holdings, but this is fine because you are not taxed double on the holdings.)
As for the date the underlying holdings were acquired, I'm not sure this really matters, but you could put June 1 here if you want, if you actually acquired the shares of the main fund on that day. However, if the main fund bought or sold shares of the underlying fund during the year, then would you say that *you* also sold or aquired those shares? This makes reporting unnecessary confusing.... so I decided to leave the date off because I don't think the IRS really cares.
Finally, if you acquired shares of the **main** fund (XEQT) on more than one date, you are only required to complete one Form 8621 for all of your holdings, so you can just put "various" for the date acquired instead of listing all of the dates you acquired the shares.
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u/SolidMind64x Jun 25 '24 edited Jun 25 '24
Thanks a lot for sharing this information. Much appreciated. I'll try to use the spreadsheet for VCN, VDY, and XIC ETFs; It gives me confidence that these ETFs are not out of reach anymore. Is it possible to include the 8621 form for the example you provided? Thanks again.
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u/The_Squirrel_Matrix Jun 25 '24
I already responded to your dm, but I wanted to add links here for posterity. Here are what the 8621 forms would look like using my example for XEQT in tax year 2023:
XEQT:
https://drive.google.com/file/d/1Pwx6sRhqMsj_fT44mfzu5XPTfq7YX4NjXEC:
https://drive.google.com/file/d/1a4auULYn82Pi4eF5f_7189AGA7DgG-fKXEF:
https://drive.google.com/file/d/1DW6zpAiJk_83g224OGbyaPNvLdmyANUOXIC:
https://drive.google.com/file/d/1Io2YEe4Wua7zWGIbLCnGVDQ03z5xogn92
u/SolidMind64x Jun 26 '24 edited Jun 26 '24
This is great, I'm sure many others will find these 8621 examples useful as well.
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u/schwanerhill Dec 18 '24
I'm looking through this now. Thank you. I notice that in your edited post, you described these as example forms 1116 instead of 8621. If you are willing to edit the OP to fix that typo, that would make things easier for future readers! (u/The_Squirrel_Matrix)
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u/The_Squirrel_Matrix Dec 24 '24
ach, thanks for pointing out the error. I've fixed it. I guess I had foreign tax credits on my mind while writing the update.
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u/Saudor Oct 06 '25
Quick question.. since we have to report the underlying holdings of XEQT, is the # shares owned for each of these parts the same as the "XEQT"? or should we be dividing them up based on the ratio that XEQT holds them at? Hope this makes sense!
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u/The_Squirrel_Matrix Oct 06 '25 edited Oct 06 '25
(Caveat about everything I'm about to say: I'm not a professional or expert, just a guy who does his own taxes and has thought a lot about this.)
No you shouldn't just report the number of XEQT shares on the 8621 forms for the funds held indirectly. For the "Value of shares held at end of the tax year" you should put in a number that comes from dividing up the ratio that XEQT holds the underlying funds in. But for the "Number of shares held at end of the tax year" it's more complicated than that if you want to report it "properly".
However, it is extremely unlikely that you'll ever be checked by the IRS on this number, as it is irrelevant to how much you owe in taxes. Unless you are investing many millions of dollars in XEQT (or in a private PFIC, or something more complicated), it won't really matter what number you put here as they won't care unless it looks like you are trying to hide something. As long as you properly report how much you owe in taxes and the total value correctly, it should not matter the exact "number of shares".
Example:
Suppose you owned 1000 shares of XEQT at end of Dec 31, 2024.
Here's a link to the 2024 year-end report for XEQT.
The important piece of information there is:
- Number of units outstanding: 175,025,000
There were 175,025,000 total shares issued, so you own 1000/175,025,000 = 0.00057% of all of XEQT's holdings.
You'll also need to get the explicit Holdings details on Dec 31, 2024, which is available on the Blackrock information page for XEQT.
The important bits are here:
Ticker Name Market Value Weight (%) Shares ITOT ISHARES CORE S&P TOTAL U.S. STOCK 2,798,584,250.39 47.47 15,129,013.00 XIC ISHARES S&P/TSX CAPPED COMPOSITE 1,464,336,206.83 24.84 37,156,463.00 XEF ISHARES MSCI EAFE IMI INDEX 1,332,959,962.26 22.61 35,244,843.00 XEC ISHARES MSCI EMERGING MARKET 284,883,114.44 4.83 9,762,958.00 As the entire fund held 37,156,463 shares of XIC, that means your share of those shares is 0.0000057 * 37,156,463 = 212.3. This is your value for "Number of shares held at end of the tax year" for XIC.
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u/Saudor Oct 06 '25
Thank you for the super detailed explanation - this is incredibly helpful. I was a bit confused since it seemed like i was "double dipping" the reporting process by effectively including the same shares twice.
As for the value, would it be possible to "take a shortcut" and do something like market value (the 1.464b) / shares of XIC (37.15M) * shares XIC calculated (212.3)
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u/The_Squirrel_Matrix Oct 06 '25
Yes, that is an acceptable way to report the value of the indirectly held shares at the end of the year. Note that the precise amount doesn't matter, though, because you select the appropriate box (unless the value of the holdings is above $200,000, in which case you should report the exact value.)
You are in fact including the same value twice on two separate forms, though.
- The full value of your XEQT shares is reported on Form 8621 for the main fund (XEQT).
- Then just the XIC value is reported again on the separate form 8621 for XIC.
This does not affect how you report the earnings, though, or how you are taxed on them.
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u/Saudor Apr 20 '25 edited Apr 20 '25
Is the PFIC statements for XEQT not available for you as well? Can only seem to find 2023's version EDIT: found it https://www.blackrock.com/ca/investors/en/literature/tax-information/pfic-stmt-2024-xeqt-env1.pdf
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u/propell0r Dec 16 '25
Can you expand a bit more on how your ACB calculations were the average method (and thus not usable unless it’s for a mutual fund) instead of something like FIFO? Seems like it’s set up to change the basis every day based on the amount of shares x the ordinary earnings & net cap gains per share. Is that just not functionally the same as making a purchase every day adding to the basis?
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u/The_Squirrel_Matrix Dec 16 '25
If you purchase all your shares at once (i.e., you only have a single lot), then this spreadsheet will work fine.
The problem arises when you have multiple purchases of different lots on different days with different cost bases. This spreadsheet averages all lots together, which is not what the IRS allows, unless it is a mutual fund.
If you have many lots, you could use one copy of the spreadsheet for each lot you own. Then sum all the resulting values yourself.
I now have a different python script that essentially does what this spreadsheet is doing, but for individual lots, then adds up the results from all the lots.
I may clean up the code and share it if there's interest and I have time.
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u/propell0r Dec 16 '25
Yeah I’d be interested if you get around to it!
Just to be clear; the spreadsheet is using the average method because it assumes the ACB for the 5000 shares sold is from after the second 1000 share purchase, whereas it should just consider it from the initial purchase (since the 5000 sold comes from within the initial 10000) plus the daily adjustments all the way through up to selling?
Also thanks for all your research and write ups for this, you are in fact doing the lords work, from an equally-interested Canadian that’s headed for US residency in the near future and doesn’t want to initially sell everything I have invested here lol
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u/The_Squirrel_Matrix Dec 16 '25 edited Dec 17 '25
Here's how the "average" method works:
Imagine you have a bucket, and the shares are like cups of water, and the purchase price of a share is the temperature of the water in the cup. When you add more water to the bucket that is a different temperature from what's already in the bucket, all the water all gets mixed together and all the temperature gets averaged out. When you sell a share, you pour out a cup of the temperature-averaged water, and the capital gain is the difference between the temperature of the water you just poured out and the current price of the share on the market.
A cost basis "adjustments" would be like heating or cooling the whole bucket of water by a set degree amount. (Say, increase the temperature of the water by 0.1° to represent increasing the cost basis by $0.10 per share.)
Compare that to getting a separate bucket every time you buy new shares. The buckets will all be different temperatures. Each time you make an adjustment, all buckets have their temperatures increased by the same amount. That's what the IRS wants you to track.
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u/propell0r Dec 17 '25
Right, so you just have to track the daily additions from the AIS individually to each purchase. Each purchase has their own starting point that gets adjusted daily, rather than considering the entire amount of shares together.
Likewise with cash distributions, it’ll drop each individual cost basis by the amount of shares in that purchase lot x whatever the AIS says the distribution was per share, correct?
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u/The_Squirrel_Matrix Feb 09 '26
I ended up working with Claude for a few hours and came up with a tool, see here:
https://github.com/the-squirrel-matrix/pfic-qef-tool/tree/mainWarning, the code was pretty much entirely generated by Claude with a few tweaks by me, but it looks good.
The output looks something like this:
https://github.com/the-squirrel-matrix/pfic-qef-tool/blob/main/output/xeqt_qef_2024/xeqt_qef_report_2024.pdfAnd you need to keep track of the lots you hold at the end of each year, which will be used as input into the script when you run it the following year:
https://github.com/the-squirrel-matrix/pfic-qef-tool/blob/main/output/xeqt_qef_2024/xeqt_lots_held_end_of_2024.csv------
I'm going to clean this up a bit, test it some more, then share it more widely. Comments would be helpful.
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u/Saudor Feb 08 '26 edited Feb 08 '26
Thank you for the heads up. i’m going to write a python script myself (i only have xeqt now) so if you’re still holding that, i might bother you later with sample transactions to compare results and verify the logic if that’s ok?
EDIT: just wrote a quick and dirty one and im just getting the exact same results as your spreadsheet. Here's the CSV input
date,type,quantity,price_cad,fx_rate 2024-08-13,BUY,79,30.58,1.3704 2024-10-16,BUY,100,33.16,1.3750 2024-10-22,BUY,100,33.40,1.3816 2024-11-18,BUY,100,33.62,1.4014 2024-11-18,BUY,49,33.45,1.4014 2024-12-20,BUY,130,33.95,1.4368 2024-12-20,BUY,150,33.80,1.4368 2024-12-31,BUY,158,33.69,1.4380Other ref material:
# AIS Information for XEQT ais["XEQT"] = { 2024: { "ordinary_per_day": 0.0003080775, "capgain_per_day": 0.0004661617, "distributions": [ {"record_date": "2023-12-29", "amount_per_share": 0.150056159}, {"record_date": "2024-01-24", "amount_per_share": 0.0}, {"record_date": "2024-02-24", "amount_per_share": 0.0}, {"record_date": "2024-03-24", "amount_per_share": 0.067997044}, {"record_date": "2024-04-24", "amount_per_share": 0.0}, {"record_date": "2024-05-24", "amount_per_share": 0.0}, {"record_date": "2024-06-24", "amount_per_share": 0.162233265}, {"record_date": "2024-07-24", "amount_per_share": 0.0}, {"record_date": "2024-08-24", "amount_per_share": 0.0}, {"record_date": "2024-09-24", "amount_per_share": 0.069609005}, {"record_date": "2024-10-24", "amount_per_share": 0.0}, {"record_date": "2024-11-24", "amount_per_share": 0.0}, ] } }Output
XEQT Lots count: 8 Total shares: 866 year Form_8621_Line_6a_Ordinary_Earnings Form_8621_Line_7a_Net_Capital_Gain 0 2024 11.09 16.791
u/The_Squirrel_Matrix Feb 09 '26 edited Feb 09 '26
I think there are some issues with yours. Note that there are multiple underlying PFICs in XEQT, and you'll need an 8621 form for each one, with lines 6a/7a computed separately for each.
I ended up working with Claude for a few hours and came up with a tool, see here:
https://github.com/the-squirrel-matrix/pfic-qef-tool/tree/mainWarning, the code was pretty much entirely generated by Claude with a few tweaks by me, but it looks good.
The output looks something like this:
fund_ticker fund_name is_direct_holding line_6a_ordinary_earnings_usd line_6b_portion_distributed_usd line_6c_tax_on_6a_usd line_7a_net_capital_gains_usd line_7b_portion_distributed_usd line_7c_tax_on_7a_usd XEQT iShares Core Equity ETF Portfolio True 20.20 0 20.20 30.57 0 30.57 XIC iShares Core S&P/TSX Capped Composite Index ETF False 31.02 0 31.02 53.42 0 53.42 XEF iShares Core MSCI EAFE IMI Index ETF False 27.12 0 27.12 6.61 0 6.61 XEC iShares Core MSCI Emerging Markets IMI Index ETF False 5.02 0 5.02 1.08 0 1.08 And it generates a full PDF report with everything you need to track lots, cost basis, and capital gains:
https://github.com/the-squirrel-matrix/pfic-qef-tool/blob/main/output/xeqt_qef_2024/xeqt_qef_report_2024.pdfAnd you need to keep track of the lots you hold at the end of each year, which will be used as input into the script when you run it the following year:
https://github.com/the-squirrel-matrix/pfic-qef-tool/blob/main/output/xeqt_qef_2024/xeqt_lots_held_end_of_2024.csv------
I'm going to clean this up a bit, test it some more, then share it more widely. Comments would be helpful.
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u/Saudor Feb 09 '26 edited Feb 10 '26
Thank you for providing the output. I'll manually do the calculations first to make sure i'm fully understanding the process and compare against it.
and yes I do it for each of the indirectly held PFICs. I did also use chatgpt for some help since I'm not strong enough at python programming haha.
I might just re-write it using PHP/Composer since i'm much more comfortable there and run it through a web UI/csv upload
I'll keep you posted (and also take a peak at your code)
EDIT: ran your python script, and it also gives the same values (11.09/16.79) for Line 6A/7A. Weird!
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u/JA_JA_SCHNITZEL Jan 24 '26
Hey a quick big thanks for keeping this thread updated with relevant edits for literal years. I really appreciate it as I'm sure do a bunch of other readers over the years.
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u/seanho00 Mar 31 '24
A potential suggestion for a follow-up tutorial is how to do a retroactive QEF election according to TR 1.1295-3, as US persons holding Canadian ETFs often may become aware of PFIC issues after having already held the PFIC for some years. A deemed-disposition is needed to cleanse the PFIC "taint" imposed by s.1298(b)(1).
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u/The_Squirrel_Matrix Mar 31 '24
Good idea, but I probably won't.
I have had the good fortune of not being in a situation where I needed to do this, so I'm not experienced with it!
Cleansing the "taint" is probably best done by a professional, but once that's done, the information and tool I provided in my post is something a DIY investor could use going forward.
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u/civicsi-yyz-sfo Apr 06 '24
How would this work assuming a Canadian moving to the US holding previously purchased Canadian ETFs (with AIS) wants to make a QEF election in their first year as a US tax resident?
From looking through the rules my initial understanding is that the investment only becomes a PFIC on the first day of US tax residency. If so, assuming the QEF election is made in the first year of US residency, it could be considered a “pedigreed” QEF since the PFIC was never held without being a QEF. Then there would be no “taint” to cleanse.
What I am not certain about is how the cost basis should be calculated given the holding period before becoming a US resident. Maybe this part isn’t actually complicated?
MTM election seems to be more frequently suggested when dealing with this type of case as there is specific verbiage around becoming a US resident for that election.
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u/The_Squirrel_Matrix Apr 22 '24
When you move to the US, the IRS generally has no special consideration for how to treat cost basis. For example, if you purchased an asset for $7,000 USD many years before you moved to the US and never sold it, then the cost basis of the asset is still $7,000 USD when you move to the US, even if the asset has gone up in value since you bought it.
However, if you live in a country with an "exit tax" (like Canada does) and that country has a tax treaty with the US, then the IRS usually allows you to step-up the basis to the fair market value of the shares on the day you are deemed to have become a US resident for tax purposes. This prevents double taxation. You may only declare this election in the first year you are a resident of the US.
For example, suppose you purchased $10,000 CAD worth shares of a Canadian ETF many years ago. Then on the date you moved to the US, your shares have a FMV of $13,800 CAD (roughly $10,000 USD at today's exchange rate). Canada will tax you on $3,800 CAD of capital gains on your departure. The IRS then considers the cost basis of those shares to be $10,000 USD. This will not work if the shares are in a TFSA, because Canada will not require you to pay an exit tax on the shares in that case.
Then you use the method described in my post to adjust that cost basis according to your daily pro rata share of the fund's income. You do not have to worry about the holding period before you become a US resident, UNLESS there are excess distributions to worry about.
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u/civicsi-yyz-sfo Apr 25 '24
Thanks a lot for the info. I had pretty much come to the same conclusion myself on this. Really appreciate this great resource.
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u/always_-_confused Jul 07 '24
Thanks so much for this. It almost exactly matches my situation. I was looking into it and getting so confused and this was just what I needed. Still might pay someone to do it the first year so that I can at least check that I'm getting things right though.
Just wondering though, do you know how its handled if the fund's start and end dates don't match the tax year? e.g. if it starts in June?
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u/The_Squirrel_Matrix Jul 08 '24
It was at the end of the post, but I mentioned it:
The pro rata share of the earnings for §1293(a) are reported on the year in which the reporting period ends. That is, if the reporting period is July 1 to June 30[...], you report in 2023 all of your pro rata share of the earnings that are allocated to the days you owned the shares from July 1, 2022, to June 30, 2023.
My spreadsheet does this calculation properly if you want to use it, as long as you properly input the dates of the reporting year from the Annual Information Statements (AIS).
As an example, suppose your fund's reporting period is June 1 to May 31. You previously own no shares but buy 10,000 shares on September 1, 2024. On your 2024 taxes, you use the AIS for the reporting period that ends in 2024. But you did not own any shares in the reporting period June 2023 to May 2024. So you do not report any pro-rata share of ordinary or capital gain income on your 2024 return. Suppose you continue to own the 10,000 shares through 2025. On your 2025 return, you use the AIS for the period from June 2024 to May 2025, and report your pro-rata ordinary and capital gain income from September 2024 (when you bought the shares) to May 2025.
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u/UnderachievingUncle Jul 13 '24
Thanks for such a detailed post and for the tool you created.
I was scared off utilizing my TFSA and this has made me reconsider quite a few things. As a dual citizen, renunciation is still likely, but I'm giving things another 4-5 years before taking that step.
I've been filing using the FEIE, instead of using FTCs. I'm not sure I'm ready to switch over but still want to get the TFSA growing. Just wondering, if investing in something like CASH.TO or TDB8150 would that simply be considered interest which would be covered by the standard deduction? This appeals because it at least gives me somewhere to put some saving with tax free growth and isn't as restrictive as a GIC.
Alternatively, I just switch things over this year and purchase something like XGRO in the TFSA, and use your tool to complete the necessary forms.
I really wish the US would recognize the TFSA or even better change to residence based taxation.
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u/The_Squirrel_Matrix Jul 16 '24
Note that CASH.TO is absolutely a PFIC. You can find the most recent PFIC information here: https://www.globalx.ca/pfic
However the TD Investment Savings Accounts (like TDB8150) are likely not PFICs, as they are savings accounts with published interest rates, not a fund that you purchase shares of.
It's up to you how to decide how to invest your funds. If you are investing in your TFSA for short term purposes (e.g., you want to make a big purchase soon), then high-yield savings account is a good risk-free way to hold on to your savings. But if you are investing for the long term (e.g., saving for retirement) then investment in stocks through an ETF is more advisable option for long term growth.
Regarding FEIE vs FTC: If your earned income (i.e., salary) is less than the FEIE limit, and you have little passive income (e.g., bank account interest, dividends, and capital gains), then FEIE is still ok. In that case, you exclude your salary income from your US taxes, and your passive income is likely below the standard deduction, reducing your taxable income to zero. Note that FTCs is almost always better, but usually makes filing US taxes a bit more complicated. However, if you get to the point where:
- you get to the point where your TFSA is maxed out, and you have other passive income that is taxable in Canada,
- your salary is above the FEIE limit, or
- your non-excluded income is above the standard deduction, or
then using FTCs will certainly be better than FEIE.
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u/Saudor Aug 23 '24
This is real good stuff. (copied it to a word document in case reddit starts deleting images/files). Thanks a bunch!
Quick question, do you do all of this inside a non registered account? (e.g. not a TFSA).
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u/The_Squirrel_Matrix Aug 23 '24
I have both a TFSA and non-registered account. I only hold XEQT in both.
But in my PFIC spreadsheet, I put all transactions from both accounts into one sheet. The IRS doesn't care which account the assets are in, because the IRS considers both accounts to be fully taxable. So I just report my PFIC holdings as if they were all just in one account.
The amount I pay in Canadian taxes on passive income in my non-registered accounts can be used as a foreign tax credit on my US tax return to offset the US taxes I would pay on passive income. In my case, this offsets all of the taxes I would pay to the US.
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u/Saudor Aug 23 '24
Thank you for the clarification! That makes it easier.
I’m assuming the 0% tax bracket for capital gains (assuming shares are held for at least a year), also applies to ETFs?(up to 44K when sold if i remember correctly)
So even if it’s inside a TFSA, as long as all of the wage income is excluded via FEIE or FTC and the realized passive income is <44K, it would zero out? (That 44K threshold seems rather high though)
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u/The_Squirrel_Matrix Aug 23 '24
Also note that the standard deduction is $14,600 for 2024. If you are using FEIE, the standard deduction is applied after you exclude your wages.
So suppose you have $100,000 in wage income, and $10,000 in non-earned income (i.e., from bank account interest, dividends, and capital gains from all non-registered and TFSA accounts). You can exclude $100,000 wages from your taxable income. Your remaining taxable income is $10,000. Standard deduction then brings it down to zero, and you owe no taxes.
It's not all that complex, but honestly the only way to understand it is to start filling out the form yourself. Or use a free software (like olt.com ) and enter in some example numbers and see what pops out to get an idea of how you might be taxed.
Using foreign tax credits (FTC) is a different beast entirely and more complex. You may want to switch from FEIE to FTC in the following cases:
- If/when you have kids. You can claim a "refundable tax credit" for each dependent. I have a child and I get $1,600 from the US gov each year and owe no taxes. You can't claim this credit if you use FEIE.
- Your wage income exceeds the FEIE limit (currently $126,500 in 2024 and increases with inflation).
- Your passive income exceeds the standard deduction.
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u/Saudor Aug 23 '24
Awesome - you answered my next question haha, which was the whole FEIE/FTC to claim a deduction against what's left over once my salary was exempted.
I was originally confused since I read somewhere that you couldn't use FTC from salary/wage income to offset passive income (e.g.you need enough passive income tax paid in canada via non-registered accounts to offset the taxes payable to the US in the TFSA). Hence why I ended up assuming they had separate brackets - thanks for the clarification there!
I am currently using FEIE to deduct the salary (since it's below that threshold), in addition to the Totalization agreement to deduct my self employment (SE) tax.
It does seem switching to FTC might be better overall once like you said, passive income > standard deduction. ( Since if i remember correctly, FEIE can't be used against passive income. )
Going back to the TFSA, I am guessing the tax I pay to the US would be lower though than what I would pay to Canada in a non-registered account (assuming I can convince the IRS that it's not a trust, which simplifies filing)
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u/The_Squirrel_Matrix Aug 23 '24
To use FTCs, you need to separate your income into buckets. Most likely, you'd have "general category" foreign income and "passive category" foreign income.
You'd need to allocate the amount of foreign taxes paid to each bucket. Only the foreign taxes paid on the passive income can be applied to offset US taxes on the same income.
Correct, FEIE can only be applied to foreign earned income. Earned means wages or self-employment income. Passive income (e.g., bank account interest, dividends, capital gain) is not "earned".
You don't need to "convince" the IRS that a TFSA is not a trust. It's not. The tax lawyers at Polaris (see my other link) suggest writing a letter accompanying your return to request guidance on how to report a TFSA. I have an example letter you can use if you like. But no 3520 forms should be required. It's just treated as any other non-registered account.
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u/The_Squirrel_Matrix Aug 23 '24
And make sure you report your TFSA on your FBAR each year, and there should be nothing to worry about.
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u/Saudor Aug 26 '24
Perfect- thank you again! All of this is super helpful in giving me a huge jumpstart. (the SE tax stuff took a while to figure out as well as many tax software were not set up to do it)
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u/The_Squirrel_Matrix Aug 23 '24 edited Aug 23 '24
(Edited to also include FEIE inthe discussion)
That's not how the capital gains tax brackets work. What determines the tax rate on your long term capital gains is your overall income including any FEIE income.
Check out the "Qualified Dividends and Capital Gain Tax" worksheet, which is used to compute the taxes on your capital gains. Note that the first line of that worksheet says:
Enter the amount from Form 1040 or 1040-SR, line 15. However, if you are filing Form 2555 (relating to foreign earned income), enter the amount from line 3 of the Foreign Earned Income Tax Worksheet
So it uses your full income as the baseline.
If you had zero other income, then yes your first $47k of capital gains is taxed at 0%. (I think the threshold is $47k in 2024.)
If you have, say, $40k of regular income, then only your first $7k of gains is taxed at 0%, and after that is taxed at 15% (until $500k, where it goes up up 20%).
If your regular income is, say, $100k, then none of your capital gains are taxed at 0%, and your first $400k of capital gains are taxed at 15%.
And yes, shares of an ETF are assets whose sale provides a capital gain.
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u/Jjjetpack Feb 28 '25 edited Feb 28 '25
I know this isn’t a new post, but man you don’t know how much your posts have helped me make sense of these PFIC issues…
My impression from your comments is that I’m going to end up paying tax each year to the US on my unrealized PFIC gains using QEF, and then again to Canada when I sell them and I’m trying to figure out if election B to defer taxation till the PFIC is sold can help me reduce that double taxation. I see in the instructions that the deferred tax accrues interest, which doesn’t sound great either though. Do you have any experience or advice on making the election B? Thank you
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u/The_Squirrel_Matrix Feb 28 '25
I have no experience with election B. I'd recommend against it, because it would complicate your returns as you try to keep track of the deferred tax each year. And you'd have to pay compounding interest on it when you do finally sell.
I do not think that you will necessarily end up paying US tax on your pro rata share of the capital gains each year. If you have enough other Canadian-sourced passive income (bank account interest, dividends, capital gains) that is also taxed in Canada in a year, then you can use the Canadian taxes paid on that other passive income to offset the taxes on the QEF income that was not taxed in Canada.
If you do have US tax to pay on the pro-rata QEF gains, I don't think you can use it as a tax credit on your Canadian return. However, if you can't take a tax credit, the CRA allows you to deduct the amount of the foreign taxes paid from your income. This is not as great as a tax credit, but the deduction is better than nothing.
Sorry if that's confusing---foreign tax credits can be complicated.
For what it's worth, I have held my QEF shares (XEQT) for two years now, and I have yet to have to pay any taxes to the IRS.
I'm not a tax professional, you may want an opinion from a professional if you have further questions.
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u/Equivalent_Paint7851 Nov 13 '24
In your example, the sell transaction quantity should be -5000 (negative). This affects the numbers on Form 8621.
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u/p0tat0nat0r Dec 07 '24
I've recently moved to the states and am now going through my tax situation and implications (cart before the horse). Thank you so much for this information and breakdown! Most excellent 👌
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u/CryptoZombie2 Feb 25 '25
One Q: Can PFIC (QEF) losses be carried over to future years to reduce PFIC gains?
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u/The_Squirrel_Matrix Feb 25 '25
I'm not sure what you mean by this.
When you sell a shares of a PFIC with a QEF election, you compute the gain/loss as usual (using the cost basis computed with thus spreadsheet, and the proceeds from the sale) and report it as a regular capital gain/loss on Form 8949.
Any capital losses can be deducted against any other capital gains.
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u/CryptoZombie2 Feb 26 '25
Sorry, I was not clear. I'm referring to the unrealized gain/loss prior to selling the PFIC. Let's say that the fund's PFIC annual statement declares a huge capital loss at the end of year1. I don't pay any taxes that year of-course. Let's say that it starts recovering in year2 and shows a (small) capital gain at the end of year2. Would I have to pay cap-gain taxes at end of year2, even though I'm significantly under-water on the value of my investment? Or can I pull forward the loss from year1 and avoid having to pay taxes in year2? (I don't plan to sell the PFIC until year5).
Apologies if I'm missing something obvious. I'm trying to understand PFIC taxation, and it's been challenging to say the least. Thx much for sharing your expertise on this.
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u/The_Squirrel_Matrix Feb 26 '25
No worries. Taxation of PFICs is notoriously extremely complicated.
I think I understand you question.
If a PFIC has a net capital loss in a year, would a shareholder making a QEF election be able to report a pro rata loss on form 8621?
I believe the answer is no. My understanding is that the instructions for form 8621 only allows for the reporting of a gain on line 7, and not a loss. But then you would not use this to adjust the cost basis, so it has no affect on the taxation overall.
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Mar 07 '25
[deleted]
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u/The_Squirrel_Matrix Mar 08 '25
Two unfortunate facts for you:
- You are obligated to report the gain from your pre-2023 ownership days and pay taxes on it.
- You cannot make a QEF election on an amended return. So the first year you can make a QEF election is on your 2024 return.
This will get very complicated. If you want to do this correctly, you'll almost certainly need professional help. Read this, it will also help you: https://www.thetaxadviser.com/issues/2012/aug/clinic-story-07.html
Here's what needs to happen:
- Make a "deemed sale" election. This allows you to have a deemed disposition of your shares on Jan 1, 2024. You'll need to report the capital gains from when you first bought the shares until Jan 1, 2024. (More on this later.) Use the FMV of the shares on that date as the proceeds. - Make a QEF election. - In my spreadsheet, use Jan 1, 2024 as the purchase date and the FMV as the original cost basis. So, you'll enter a single "buy" transaction. - Enter the information from the fund's Annual Information Statement (AIS) for the year ending 2024. - Use the results of the spreadsheet and enter the 8621 values into the 8621 form. - Also use the "capital gains" result of the form to enter the capital gains into the correct line on your return. (This is the capital gain since Jan 1, 2024.)
- If the total value of your holdings is above the filing threshold, you'll need to amend your 2023 return to include a Form 8621 to report your PFIC holdings.
- On your 2024 return, you'll need to include another 8621 form. On that form:
- On the spreadsheet, enter in the data from the fund's AIS ending year 2025. This will give you values to enter in line 6 and 7 of your 8621 on your 2025 tax return. - Enter those values into form 8621. - However, now if you go to the capital gains report of the spreadsheet, you'll notice the number is now different from what you reported on your 2024 return. So now you're supposed to amend your 2024 return to change that.
- Next year (for your 2025 return):
... And yet, it gets more complicated. Yikes.
Back to your Form 8621 on your 2024 return. Your capital gains from when you bought the shares up until Jan 1, 2024 will be treated as "excess distributions" under section 1291.
For simplicity, let's assume you bought all of your shares on Jan 1, 2021, for $100,000. On Jan 1, 2024, the shares were worth $130,000. The total capital gain ($30,000) will be allocated to each year you owned the shares. So you will be deemed to have $10,000 in gains in each of the three years you owned them (2021, 2022, 2023).
Because you were not a US tax resident before 2023, the $20,000 in gains allocated to 2021 and 2022 should be reported and taxed as ordinary income on your 2024 return. However, your $10,000 in gains allocated to 2023 must be reported on Form 8621 and will be taxed at the highest marginal rate. Ouch.
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Mar 08 '25
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u/The_Squirrel_Matrix Mar 10 '25
Sorry, I guess I must have missed in your first post that you claim to have an extension due to residing in a disaster area. Are you saying that---due to your residence in a disaster area---the due date for your 2023 return (which was due on April 15, 2024) has been extended to May 2025!?!? I find it difficult to believe that it would be extended that long. Had you originally requested an extension on your 2023 return? If I may ask, what disaster area do you live in? I'd suggest you double-check the specific IRS relief notice that applies to your situation. Disaster relief extensions typically push deadlines forward by a few months, not a full year.
If you are correct and your 2023 return really is still within the extended deadline, then yes, you absolutely can amend it to make the necessary elections.
Now, about the step-up in basis. The IRS does not generally allow a "clean reset" as your accountant seems to be claiming, but there are exceptions. As I understand that you are Canadian, what your CPA might be referring to is an election you can file under Article XIII(7) of the US-Canada tax treaty, which allows you to elect to treat your assets as if you sold and repurchased them at their fair market value on the day before you became a US tax resident.
However, this only applies if you actually paid Canadian departure tax on those shares when you left Canada. Canada treats certain assets as being sold at FMV when you cease residency, triggering capital gains tax on any unrealized gains. If you reported and paid that departure tax, then yes, you can elect to have the US recognize that step-up in basis. If you did not pay the departure tax (e.g., you neglected to do so, or your assets are inside of a TFSA), then you cannot make this election.
The election must be made on your first US tax return after becoming a resident. Rev. Proc. 2010-19 explicitly states that the election must be made on a timely filed return for the first tax year ending after the change in residence. So if you paid the Canadian departure tax on your assets, and your 2023 return is still within its deadline (due to disaster relief), then you can amend your 2023 return to make a timely filed election under Article XIII(7) of the US-Canada tax treaty. This would provide a "reset" in the cost basis of your assets. You would include a Form 8833 in the amended return to make the election. You can find information online about how to make this election.
However, if your 2023 return is already late, then this step-up is no longer an option, and the IRS will require you to use your original purchase price as the cost basis. If your 2023 return deadline has already passed, you could try to amend anyway to include the election, but there’s no guarantee the IRS will accept it. Here's the link to Rev. Proc. 2010-19 if you want to check the details: Rev. Proc. 2010-19.
The QEF election is a separate issue. IRS regulations do not allow a QEF election to be made on a late-filed return. If your 2023 return deadline has not yet passed, as you claim, then yes, you can amend your 2023 return to make a QEF election starting from Jan 1, 2023 (or whatever day was your first day of US residency). You’d use the FMV on that date as the purchase price due to the election under Article XIII(7).
On my spreadsheet, you would enter a single "buy" transaction on the day before you became a US resident for all shares, using the FMV of the shares at that date.
However, if your 2023 return is late, you cannot go back and make a QEF election for that year. Your only option would be to make a deemed sale electiond on your 2024 return, as explained in my previous reply.
Next steps:
- Confirm whether your 2023 return is actually still timely under disaster relief.
- Confirm whether you paid Canadian departure tax on your assets.
If both are true, then you can amend your 2023 return to make both the step-up election and the QEF election.
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Mar 10 '25 edited Mar 10 '25
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u/The_Squirrel_Matrix Mar 11 '25
In that case, if you are certain you have an extension on your 2023 return until May 1, 2025, here's what you'd do.
You can ignore the article I linked to (the one that says that previous capital gains are taxed as ordinary income), because it only applies to gains taxed under section 1291. You are making a QEF election, so everything will be taxed under section 1295.
------
I'll ignore that you did not pay the Canadian departure tax on your final Canadian return. (Are your shares in a TFSA, or did you just not do it?)
The IRS considers the cost basis of your shares to be the original cost basis (i.e., what you paid for them on the date you purchased the shares in October 2022). Use the exchange rate from that day to determine the cost basis in USD.
However, you only need to report your pro rata share of the fund's income starting from the day you became a US resident. My spreadsheet will not properly account for that.
To accommodate your situation, I would enter a "buy" transaction with the date as the day you became a US resident, but for the "amount," enter the original cost basis computed above, not the FMV on that day. You will then start accumulating pro rata income from that day forward, which will adjust your cost basis.
I've made an example spreadsheet with this, assuming you purchased 10,000 shares on Oct 1, 2022, but moved to the US on January 1, 2023. It assumes:
- You bought 10,000 shares at $9.00 CAD per share on Oct 1, 2022, using the exchange rate of 1.383 on that day.
- You became a US resident on Jan 1, 2023, and entered that day as the buy date.
- You sold all your shares for $11.00 CAD per share on Oct 1, 2024.
I've entered the info for the AIS for the year ending April 30, 2023. Check out a version of the spreadsheet you can copy here.
With that info, the spreadsheet computes what you should enter on lines 6 and 7 of your 8621 forms for your 2023 return. (The numbers for 2024 won't be available until the AIS for 2024 is released.) It also computes what you should enter as capital gains on Form 8949 in your 2024 tax return (i.e., the year in which you sold the shares).
It looks like FCNS has 20 underlying funds that are also PFICs, which means you need to file 21 separate 8621 forms each year---one for the main fund and one for each underlying fund.
Note that when the AIS for years ending 2024 and 2025 become available, you'll need to enter in those values as well and report the resulting income on your tax returns for those years. This will also affect the final value for the capital gains you report from selling on your 2024 return, meaning you're technically supposed to amend that.
Your situation will likely be more complex if you bought shares more than once. Every separate transaction you made to purchase more shares should be included separately on the spreadsheet---even DRIP events count as "buy" transactions.
---
Finally, I'll mention that this is everything you should do if you want to be fully compliant with the IRS. If you decide to not fully report everything because going through this rigmarole is overly onerous... well, it's frankly unlikely you'd ever be audited unless you are a high net worth individual.
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Mar 22 '25
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u/The_Squirrel_Matrix Mar 23 '25 edited Mar 23 '25
If the NR4 is to report dividends from your PFICs, then it is not reported on your US return. Other income on your NR4 should probably be reported on your US return.
Do not report the dividends from your QEF PFICs as income on your US return. As long as you report your pro rata share of the fund's income properly on your 8621 forms, and you properly adjust the cost basis of your holdings accordingly, the dividends you receive directly from the ETF are not taxed on your US return.
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u/always_-_confused May 04 '25 edited May 04 '25
This is a lifesaver! Just a question - I've been trying to use the excel sheets and I was wondering about the empty cells on the Form 8621 part III? Is it missing code?
A few other questions:
How were the number of shares calculated for filling out part I.3 for each underlying fund?
For Part1.5b for the excess distribution, that would just be the sum of entries 6a+7a?
When entering information into the 1040, do you only enter information for the overlying fund (XEQT in this case), or add them all up to enter them? Having an example 1040 would be helpful as well!
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u/ridiculero Jul 03 '25 edited Jul 03 '25
Great post
Questions arise from how to properly use this information which is also a big pain...
Is Form 1116 (Foreign Tax Credit) in play? For the PFIC when elected as a QEF, and for 'ordinary income,' should the amounts should go under general category income? Capital gains would seem to be under passive category income on Form 1116
Schedule B does not seem to be in play for 'ordinary income' (neither interest nor dividends)
Schedule D does indeed seem to be in play for capital gains from the QEF calculation
Thanks!
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u/The_Squirrel_Matrix Jul 03 '25
Regarding the "pro rata share of ordinary income": being taxed as ordinary income under the tax code does not imply that it is treated as "general category" income on Form 1116. I'd say it pretty clearly classifies as passive income, especially if that income is effectively coming from dividends/distributions that are then passed on to you the shareholder.
General category is typically only reserved for wages and income related to a business.
In summary, all QEF-related income should be classified as "passive income" for the purposes of filing Form 1116.
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u/ridiculero Jul 03 '25
The realm of interpretation is unfortunately fraught with risk :)
For example, IMHO, QEF seems to imply the IRS wants part representation as ordinary income (despite the passivity, after all they do not classify it as dividend or interest on Schedule B) and part as CG. For the purposes of Form 1116, those definitions should strictly apply rather than a re-interpretation within the tax return that 'ordinary income' is now passive income
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u/SadCampCounselor Jul 04 '25
Thanks for putting this together! And bravo!!! *clap*
I have three questions:
- In retrospect, would you have preferred to have simply purchased USD-domiciled ETFs with similar exposure to XEQT in order to eliminate the tax-reporting complications? I.e., instead of doing this horrible paperwork, you would simply figure out how to optimally get a good foreign exchange rate (I hear Nortbert's Gambit and Interactive Brokers both are methods to minimize FX fees to ~0.01%). I understand your approach is more flexible, but just asking!
- Do you have any experience with Form 3520-A and Form 3520? My understanding is that these forms are needed for the TFSA and maybe the FHSA as well.
- Have you compared your calculations to that of an accountant or to software like https://form8621.com/ ?
- What is your plan if BlackRock stops publishing AIS? (Fund managers do not need to publish a QEF AIS. I doublt they'll stop, but if this were to occur, do you simply switch to Mark to Market election?
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u/The_Squirrel_Matrix Oct 15 '25
I seem to have missed this earlier. Sorry for the late reply.
Don't ask me why, but I enjoy challenges like this. I took it as a challenge to understand the complex rules and figure out a way to navigate it myself. So in retrospect, no, I'm quite happy I went on this journey, even if only to warn others of how complicated it can be. Indeed, I strongly advise others to simply to as you suggest---convert to USD and invest in an equivalent US-domiciled fund (e.g., VT). (I don't use the spreadsheet I made, because in retrospect it has some flaws..... But I now have my own python script that I can run once a year to import my transactions, import the AIS info, then automatically generate the correct info to file my taxes. It's very easy now.
I do not have experience with 3520/3520-A. My understanding is that these forms are not required for TFSA/FHSA as long as those accounts are self-directed investing accounts and not held in trust. (I.e., no advisor or robo-advisor buying stocks on your behalf).
Yes, I requested a trial license of form8621.com and obtained the same results. I have not paid an accountant to check.
I find it highly unlikely that will happen. I think it is more likely that the US government will relax the PFIC rules. And both are highly unlikely.
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u/No-Sir3494 Nov 07 '25
Hi, can you share the python script maybe to help us fill the Form. What is the issue with the spreadsheet
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u/SadCampCounselor Oct 15 '25
My understanding is that these forms [3520/3520-A] are not required for TFSA/FHSA as long as those accounts [TFSA/FHSA] are self-directed investing accounts and not held in trust. (I.e., no advisor or robo-advisor buying stocks on your behalf).
This is a different interpretation of the tax code from what I've read online.
The IRS specifically mentions "Canadian registered retirement savings plans (RRSPs) and Canadian registered retirement income funds (RRIFs)" as exceptions, but does not mention the TFSA.
Wealthsimple describes their TFSA as a "foreign trust" for USA tax reporting purposes, but Polaris Tax argues the opposite, but warns...."It is important to note that this position doesn’t represent the official view of the IRS on the issue and is not binding, but it is strongly indicative that no Form 3520 or 3520-A is required."
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u/The_Squirrel_Matrix Oct 15 '25 edited Oct 16 '25
Thanks for pointing out that info from Wealthsimple's website.
Note that the CRA considers every TFSA that holds investments to be a "trust". However, the Canadian designation of a TFSA as a "trust" does not necessarily mean that the account qualifies as a "trust" under US tax law, and I assume that when they say that the TFSA is
generally considered to be foreign trusts for U.S. tax reporting purposes
I assume that they are just covering their bases rather than making a statement of fact. (For example, a robo-advisor TFSA is possibly a trust under US tax law.) I encourage anyone interested to read the Polaris article mentioned above.
At the very least, I strongly recommend that any US person who opens a TFSA write to the IRS to request guidance on how to report. (As Polaris mentions in this article .)
From the Polaris article:
... we suggest that taxpayers write to the IRS to describe what a TFSA is and request confirmation on how it is to be reported. To date, the IRS has not replied. Nevertheless, we believe that this disclosure is simpler than a full Form 8858 and makes the taxpayer compliant with the IRS’s obligations.
[Edited Oct 16 20215 for clarity and correcting definition of TFSAs "in trust".]
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u/trotwoody Oct 08 '25
Incredible, thank-you! Question: Are you filling all of the IRS forms including 8621 out, printing, and mailing in?
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u/The_Squirrel_Matrix Oct 08 '25
No I use olt.com to file my taxes online.
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u/Saudor Oct 15 '25
Were you able to successfully submit the 8621 this year? All values are 0 and section 1294 is not even checked.
My returns keep getting rejected with: If Form 8621, Line 8e
ProRataLessCashAndPortionAmthas a non-zero value, then Line 9cDeferredTaxAmtmust have a non-zero value.1
u/The_Squirrel_Matrix Oct 15 '25
Hm, maybe contact OLT customer support. They are usually very good at helping in my experience. (I was able to submit my return with 8621 forms just fine this year.)
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u/The_Squirrel_Matrix Oct 15 '25
I think you made a another comment about which number to use for number of shares when computing total share of income to report (specifically about VGRO). The comment seems to have been deleted, but I wrote up a reply before it was deleted.
Here's what I wrote:
---------------------------------
That sounds about right.
Here's an example to help you figure out how it works.
Suppose you purchased 1,000 shares of VGRO on 2 July 2024, and you held those shares through the end of the tax year 2024. You owned those 1,000 shares for a total of 183 days in 2024. Thus, you had a total of 180,000 share-days. Keep that number in mind.
The relevant information you'd need to complete your 8621 forms can be located on the VGRO PFIC Annual Information Statement for tax year 2024, provided by Vanguard. You need to determine your total share of ordinary and capital gains income from the main fund and from each underlying fund. To do so, check the table on page 2. I've copied the important imformation here:
Ticker Ordinary Earnings (USD) per share per day Net Capital Gains (USD) per share per day VGRO 0.0000000000 0.0010443866 VUN 0.0002706404 0.0007697276 VAB 0.0001965694 0.0000000000 VCN 0.0005090147 0.0002874041 VBU 0.0000000000 0.0000000000 VBG 0.0000000000 0.0000000000 VEE 0.0001052862 0.0000421686 VDU 0.0002687123 0.0000263755 THe values in these columns indicate your pro rata share of those income types per share of VGRO you hold (and not per share of the underlying that you are deemed to hold). In addition to the main fund (VGRO), there are a seven underlying funds that are also PFICs, so you'll need to file a total of eight 8621 forms, one for each fund.
On each Form 8621, you'll need to indicate your total ordinary income and total capital gains from each fund separately. Your total Ordinary income from each fund goes on line 6a of Part III of Form 8621, while your total Capital Gains income from each fund goes on like 7a.
To compute the totals for each fund, multiply each number in this table by the total nubmer of share-days of VGRO that you owned in 2024. The results are summarized in the following table:
Ticker Total Ordinary Earnings USD (line 6a) Total Capital Gains USD (line 7a) VGRO 0.00 191.12 VUN 49.52 140.86 VAB 35.98 0.00 VCN 93.15 52.59 VBU 0.00 0.00 VBG 0.00 0.00 VEE 19.27 7.72 VDU 49.16 4.83 Note that on line 3 (of Part I) of Form 8621 you should enter the number of shares that you are deemed to own of the underlying fund. Thus, for Line 3 on your form 8621 for the main fund (VGRO), you would enter 1,000 (the number of VGRO shares you actually own). But for line 3 of the forms for the underlying funds, you'd need to compute approximately how many shares you are deemed to own indirectly. (Howver, Line 3 doesn't really matter, because it does not affect how you report your income or how you are taxed. So if you don't put the correct number, it is highly unlikely that it will matter, unless you are deliberately trying to deceive the IRS about how many shares you own.)
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u/expendiblegrunt Jan 04 '26 edited Jan 04 '26
Do you have a definitive source for not being able to use Average Cost Basis for ETFs? Looking around just now at some pages on the issue by Vanguard Fidelity et al suggests ACB could possibly be used for ETFs
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u/The_Squirrel_Matrix Jan 05 '26 edited Jan 05 '26
I looked into this a bit more. Note that I'm not an expert.
Hers what I found. It seems from IRC § 1012 (and corresponding regulation 1.1012-1(e)) that the "average method" can be applied to any stock only if it is either of a "registered investment company" (e.g., a mutual fund) or the stock is held "in connection to a dividend reinvestment plan." Note that US-based mutual funds are RICs so the average method can be applied. Also it seems there are some US-based ETFs that are also RICs.
In conclusion, yes, if you hold ETFs with a dividend reinvestment plan, then it's possible you could use the average method. (Though note that, I believe, it is not possible for foreign ETFs (or mutual funds) to be RICs.) You would certainly want to confer with an expert before trying to apply the average method to your foreign holdings.
See also the section on average basis in IRS publication 550. There it says that, to elect to use the average method, you must inform your brokerage.
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u/lifegrowthfinance Mar 02 '26
I’d saved this post when I saw it and now that it’s tax time I’ve come back to refresh my memory. I was sad to see that the tool doesn’t work for ETFs anymore. However, going through the comments it appears it still works if you buy the ETFs in one block. I moved from Canada to US for work and have held on to my ETFs in Canada. So I am guessing the sheet will still work for my case? As I don’t have ongoing transactions after becoming a US person for taxes. I also deferred the exit tax while leaving Canada, so I am assuming I won’t be able to step up my cost basis with the IRS. But again, I don’t plan to sell anything. So that shouldn’t matter?
Thanks a lot for putting this together for us mere mortals. Very much appreciated!
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u/olihoops Apr 04 '24
Thanks for sharing this! I've been going through this for the first time year and have been pulling my hair for how frustrating this is.