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Cross-Border Question of the Week: Is There PFIC Exposure When Holding PFIC Investments Indirectly?

03.19.25 // Markets & Investing // Blog Article //

Written by Carson Hamill CIM®, CRPC™, FCSI®, Associate Financial Advisor & Assistant Branch Manager & Dean Moro BComm, CIM®, CRPC™, Financial Advisor & Associate Portfolio Manager

Question:

My father, my last living parent, recently passed away in Canada. He had the following accounts: Registered Retirement Income Fund (RIF), Life Income Fund (LIF) and Tax-Free Savings Account (TFSA).

The estate was listed as the beneficiary on these accounts. Within them are Canadian mutual funds and Canadian ETFs. I am the beneficiary and will inherit these assets, but I live in the U.S. Am I at risk of PFIC exposure?

Answer:

Inheriting Canadian assets may seem simple, but the IRS could complicate things. As a U.S. taxpayer inheriting from a Canadian estate, you might unintentionally become an indirect shareholder of a PFIC (Passive Foreign Investment Company) if the estate holds Canadian mutual funds or ETFs. The IRS imposes additional reporting (Form 8621) and potentially higher taxes on PFICs.

→ Here’s what you need to know:

How Canada Taxes These Accounts at Death

When a Canadian taxpayer passes away, their investment accounts are subject to Canadian tax rules:

  • RRIF & LIF: Taxed at market value on the deceased’s final Canadian tax return.
  • TFSA: Tax-free at death, but any post-death growth is taxable to the estate.

Any gains between the date of death and distribution must be reported on a Canadian T3 trust tax return. However, as a U.S. beneficiary, your tax obligations don’t stop at Canada’s border.

Understanding the PFIC Problem

What is a PFIC?

A Passive Foreign Investment Company (PFIC) is any non-U.S. mutual fund or ETF. The IRS imposes strict rules on PFICs because they assume U.S. investors may be using them to defer taxes.

Why Does This Matter for U.S. Heirs?

If the Canadian estate holds PFICs, the IRS considers you an indirect PFIC owner, leading to:

  • Extra IRS paperwork (Form 8621—one per PFIC, per year)
  • Higher tax rates on gains
  • Complex tax calculations

Even if the estate sells the PFICs and distributes only cash, you may still have reporting obligations.

Clarification on Indirect Ownership:

The IRS treats U.S. beneficiaries of estates holding PFICs as indirect shareholders. This means you could have PFIC exposure even if you never directly held these investments. For more details, refer to the IRS Form 8621 instructions.

How to Avoid PFIC Issues

If You Are the Account Owner (Before Death):

If your estate or a U.S. individual is listed as the beneficiary, consider selling Canadian mutual funds and ETFs before death. Transition to non-PFIC investments to prevent PFIC tax issues for U.S. heirs.

If You Are the Estate Administrator (After Death):

Sell the PFICs before distributing assets to U.S. beneficiaries. This limits PFIC reporting to one year instead of indefinitely.

If You’re a U.S. Beneficiary:

Consult a cross-border tax expert before claiming any assets. PFIC rules are complex, and proper guidance can help minimize your tax burden.

What Tax Filings Are Required?

Canadian Estate Administrator Must:

  • File a terminal T1 tax return for the deceased.
  • Possibly file a T3 trust return for income earned before distribution.

U.S. Beneficiary Must:

  • File Form 8621 if the estate held PFICs—even if you only inherited cash.

Important Note

U.S. heirs generally do not need to file a Canadian T1 return for inherited investment assets unless they inherit Canadian real estate or sell Canadian property after inheritance.

Final Thoughts: Plan Ahead

If you are a Canadian with U.S. beneficiaries or a U.S. person inheriting from Canada, careful tax planning can prevent unnecessary complications.

  • Canadians: Avoid holding PFICs in accounts that will pass to U.S. heirs.
  • U.S. heirs: Get tax advice before inheriting assets with PFIC exposure.

By planning ahead, you can reduce tax liabilities and avoid excessive IRS paperwork. Inheritance should be a financial advantage, not a tax headache.

Next Steps

If you are planning on moving to Canada and need assistance with your investments, estate planning, and portfolio management, please call or email our team at Snowbirds Wealth Management, as we specialize in cross-border financial planning and wealth management. We work closely with experienced cross-border lawyers and accountants to ensure you have an integrated team in your corner.

About Snowbirds Wealth Management

Gerry Scott is a portfolio manager and founder of Snowbirds Wealth Management, an advisory firm focussed on the cross-border market. Together with Dean Moro and Carson Hamill, associate financial advisors with Snowbirds Wealth Management, they provide investment solutions for Americans living in Canada, and Canadians residing in the United States. Licensed in both Canada and the US, they provide tailored investment solutions to minimize the tax burden when moving assets across borders.

To schedule an introductory call, please click here.

Statistics and factual data and other information are from sources RJLU believes to be reliable but their accuracy cannot be guaranteed. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities nor is it meant to replace legal, accounting, taxation or other professional advice. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters. The information is furnished on the basis and understanding that RJLU is to be under no liability whatsoever in respect thereof.

Raymond James (USA) Ltd. advisors may only conduct business with residents of the states and/or jurisdictions in which they are properly registered. Investors outside the United States are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this site. Raymond James (USA) Ltd. is a member of FINRA/SIPC.

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