2016-0642051C6 IFA 2016 Q.1: Classification of U.S. LLPs & LLLPs

Principal Issues: Whether LLPs and LLLPs governed by the laws of Florida or Delaware would generally be treated as corporations for the purposes of the Act?

Position: Generally yes; certain administrative relief provided for entities formed before July 2016 that, among other conditions, convert before 2018 to forms of entities that are generally recognized as partnerships for Canadian income tax purposes.

Reasons: The provisions of the foreign legislation and the articles creating these entities support the general conclusion that these types of entities should generally be treated as corporations for the purposes of the Act.

Author: Roulier, Yannick
Section: 248(1) "corporation"

2016 International Fiscal Association Conference
CRA Roundtable

Question 1 – Entity Classification: U.S. LLPs and LLLPs

At this conference last year the CRA confirmed that it still follows a so-called “two-step approach” to entity classification. It also stated that it was in the process of considering the proper classification of limited liability partnerships (“LLPs”) and limited liability limited partnerships (“LLLPs”) governed by the laws of Florida but that it had not yet concluded its analysis. At the Canadian Tax Foundation’s annual conference in November 2015 the CRA said that it had still not concluded its analysis in this regard but that it was heavily leaning toward treating them as corporations. It also stated that its analysis had been broadened to include LLPs and LLLPs governed by the laws of Delaware.

Does the CRA have anything new to add on this subject?

CRA Response

We are now ready to take a final position on these entities.

The main factors we considered in our analysis of these entities are the existence of a separate legal personality that is recognized under the law of the relevant foreign jurisdiction – meaning the full legal capacity to acquire and own property, to sue and be sued, to carry on their own activities and to incur liabilities of their own – and the extensive limitation of liability afforded to all of their members. It is the combination of these two general factors, in this particular context, that sets these entities apart from general partnerships (“GPs”) and limited partnerships (“LPs”) that exist under Canadian provincial law. While we have come to accept that legal personality alone is not sufficient to distinguish certain U.S. partnerships from their Canadian counterparts, we have great difficulty with the limited liability factor. We find it difficult to accept that an entity that is solely and entirely responsible for its own obligations can be considered not to be the relevant unit for the purposes of assessing tax under the Act.

Furthermore, we believe it has become widely accepted that U.S. limited liability companies (“LLCs”) are properly viewed as corporations for the purposes of the Act, notwithstanding the recent excitement created by the Anson (footnote 1) case in the United Kingdom. We see little substantive difference between LLPs, LLLPs and LLCs governed by the laws of the states of Florida and Delaware. As such, we have reached the general conclusion that Florida and Delaware LLPs and LLLPs should be treated as corporations for the purposes of Canadian income tax law.

We acknowledge the difficulties that may be created by these positions. Thus, in order to promote fairness and predictability, we are prepared to make certain administrative concessions in this regard. Specifically, in the absence of abusive tax avoidance, we are prepared to accept that any such LLP or LLLP be treated as a partnership for the purposes of the Act, from its time of formation, where

*     the entity is formed and begins to carry on business before July 2016;

*     it is clear from the surrounding facts and circumstances that the members

o     are carrying on business in common with a view to profit; and

o     intended to establish an entity that would be treated for Canadian income tax purposes as a partnership and not a corporation;

*     neither the entity itself nor any member of the entity has ever taken the position that the entity is anything other than a partnership for Canadian income tax purposes; and

*     the entity converts, before 2018, to a form of entity that is generally recognized as a partnership for Canadian income tax purposes.

Any such entities in respect of which some but not all of these conditions are met will be dealt with on a “facts and circumstances” basis. However, we will not generally accept partnership treatment for a Florida or Delaware entity that starts out as an LLC and then converts, under corporate continuance-like statutory provisions, to an LLP or LLLP where there is no significant substantive change to their legal context.

We suspect that much of this reasoning may be applicable in respect of entities of other states of the U.S. and perhaps other foreign jurisdictions as well, but we would need to analyze each specific statute and other relevant documents in order to make a determination as to their status.

We would also point out that these are general views only. The classification of a particular entity is a question of fact. Taxpayers may wish to request an advance income tax ruling where they are contemplating transactions involving foreign entities whose Canadian income tax status may be unclear.

Yannick Roulier
Dave Beaulne
2016-064205
May 26, 2016

FOOTNOTES

Note to reader:  Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 Anson v. HMRC [2015] UKSC 44, United Kingdom Supreme Court.

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