PFICs owning PFICs

[NickH]

The instructions for Form 8621 read, in part:

"Chain of ownership. If the shareholder owns one PFIC and through that PFIC owns one or more other PFICs, the shareholder must either:
1. File a Form 8621 for each PFIC in the chain or
2. Complete Form 8621 for the first PFIC and, in an attachment, provide the information required on Form 8621 for each of the other PFICs in the chain."

Consider a Canadian mutual fund whose purpose is to hold shares in other mutual funds (which may in turn hold shares in still other funds) to fulfil some investment strategy. If a person holds shares in the first fund, are they truly required to complete Form 8621 for every single fund?

Doesn't that make compliance highly difficult for that type of mutual fund structure? How would reporting income even work if the income from child funds is included in the parent funds? What happens when a child fund distributes income but a parent fund uses a loss to offset that income?

[NickH]

Treasury Regulation 1.1295-1(d)(3)(i) reads:

"In general. An election under section 1295 shall apply only to the foreign corporation for which an election is made. Therefore, if a shareholder makes an election under section 1295 to treat a PFIC as a QEF, that election applies only to stock in that foreign corporation and not to the stock in any other corporation which the shareholder is treated as owning by virtue of its ownership of stock in the QEF."

http://ecfr.gpoaccess.gov/cgi/t/text/te ... 44&idno=26

I think that settles it, if a Canadian mutual fund is a PFIC then you would need to make QEF elections for the fund and all other PFICs it owns.