2018-0744121C6 STEP 2018 - Q16 - Impact of check the box election

Principal Issues: Whether the CRA agrees that generally there are no Canadian tax implications when a US LLC, which was previously regarded as a fiscally transparent entity for US tax purposes, elects to be treated as a corporation under the US check-the-box rules.

Position: Depends on facts and circumstances. The US check-the-box election generally would not impact upon the characterization of the entity as a corporation for Canadian tax purposes, and would not result in a disposition of the LLC units by the member. Other Canadian tax implications of an LLC making an election under the US check-the-box rules may result depending on the specific facts and circumstances.

Reasons: The check-the-box election does not alter the US legal characteristics of an LLC. When a US LLC is treated as a corporation for US tax purposes and pays US tax on its income, the LLC may qualify as a "resident" of the US under the Canada-US Tax Convention. Further, the application of the various provisions in the Income Tax Act relating to foreign tax credits and deductions may yield different Canadian tax results where it is the LLC, rather than its members, that is the person paying the US tax on the LLC's income.

Author: Ho, Judy
Section: 91(1), 95(1), 126, 20(12), Article IV of the Canada-US Tax Convention

2018 STEP CRA Roundtable – May 29, 2018

QUESTION 16. Implications of a US LLC making a check-the-box election

Given recent changes to the tax system in the US, Canadian resident persons who carried on business in the US through US LLCs may now prefer to alter this choice of entity for US tax purposes.  An election is permitted in this case, the check-the-box election, whereby the US LLC may be designated to be a corporation for US tax purposes.  In such a circumstance, where a check-the-box election is made, does CRA agree, generally speaking, that the making of the check-the-box election has no implications for Canadian tax purposes?  It is noted that the Canadian tax treatment of the US LLC would be that it is a foreign corporation, and the check-the-box election would not alter this treatment for Canadian tax purposes.

CRA Response

It has become widely accepted that US limited liability companies (“US LLCs”) are properly viewed as corporations for purposes of the Income Tax Act. The filing of a check-the-box election by a US LLC, after it had previously been treated as a fiscally transparent entity for US tax purposes, would not alter the US LLC’s classification as a corporation for Canadian tax purposes.

The check-the-box election is made, and has implications, for US tax purposes, but does not impact upon the US legal attributes or laws regarding the governance and operation of an LLC.  From a US legal perspective, a US LLC remains the same legal entity after checking-the-box as it was before the election was made.  Consequently, a check-the-box election would not result in a disposition either of the units of a US LLC by its members or of the LLC’s assets for Canadian tax purposes.

However, we would note that the application of the Canada-US Tax Convention to a US LLC as well as certain other Canadian tax consequences, such as foreign tax credits and deductions, may be different depending upon whether the US LLC is treated as a fiscally transparent entity or a corporation under US tax law.  In general, when a US LLC is treated as a corporation for US tax purposes, it is the entity paying US tax on the US LLC’s income rather than its members. Examples of various Canadian tax results to a Canadian member of a fiscally transparent US LLC have been discussed at previous STEP conference roundtables. The tax results outlined in the responses to those previous conference questions may be different after a US LLC makes a check-the-box election to be treated as a corporation for US tax purposes.

Judy Ho
2018-074412

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