2018-0768561E5 Application Administrative Position on US LLPs & LLLP

Principal Issues: Further to the CRA's administrative position that a LLP or LLLP formed before April 26, 2017 that would otherwise be viewed as a corporation by the CRA may in certain circumstances continue to be viewed as a partnership, what are the Canadian tax implications of the LLLP described in this letter subsequently taking the position that it is a corporation for Canadian tax purposes?

Position: A grandfathered LLLP that subsequently takes the position that it is a corporation for Canadian tax purposes should be considered to have taken inconsistent filing positions between partnership and corporate treatment. As a result, the CRA may issue assessments or reassessments to the particular entity and/or any member of the entity in respect of one or more taxation years, on the basis that the entity was a corporation. We relayed this request to audit for response because it is of an administrative nature.

Reasons: Consistent with prior public announcements (IFA 2017 and 2018).

Author: Moreno, Yves
Section: 248(1) "corporation"

XXXXXXXXXX                                                                   2018-076856
                                                                                            Y. Moreno
August 1, 2019

Dear XXXXXXXXXX:

Re: Administrative Position on US LLPs & LLLPs

This is in reply to your letter of June 29, 2018.  Notwithstanding our prior determination that Delaware and Florida LLPs or LLLPs are generally considered to be corporations for Canadian tax purposes, at the 2017 Annual Conference of the International Fiscal Association (“IFA 2017”), the CRA announced that it would be adopting the administrative practice of allowing any such entity formed before April 26, 2017 to file as a partnership for all prior and future taxation years, provided the following three conditions are met:

*     No member of the entity and/or the entity itself takes inconsistent positions from one taxation year to another, or for the same taxation year, between partnership and corporate treatment;

*     There is no significant change in the membership and/or the activities of the entity; and

*     The entity is not being used to facilitate abusive tax avoidance.

You have described a scenario involving two grandfathered LLLPs that have filed as partnerships for Canadian tax purposes since the time of their formation. The LLLPs are held by Canadian resident corporations and are looking to be treated as corporations for Canadian tax purposes on a prospective basis.

You have asked that we clarify the application of the administrative position in regards to this hypothetical fact pattern.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act.  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R9, Advance Income Tax Rulings and Technical Interpretations.

In our view, the change by the LLLPs from partnership to corporate treatment constitutes taking an inconsistent position from one taxation year to the next and accordingly, the first condition noted above would not be met.

As stated at IFA 2017, where any of these conditions is not met in respect of any such entities formed before April 26, 2017, the CRA may issue assessments or reassessments to the members and/or the entity, for one or more taxation years, on the basis that the entity was always a corporation.

The LLLPs will not be viewed as corporations for Canadian tax purposes on a solely prospective basis.

Upon the termination of existence of a grandfathered LLP or LLLP, such entity will cease to be subject to the administrative grandfathering.

A working group (the “Working Group”) lead by the International, Large Business and Investigations Branch is in charge of transitional and compliance issues related to the administrative practice described in this letter.  We have forwarded your request to the Working Group for its consideration and response.  If you have any questions regarding your request, you may contact Mr. Marc Gautreau of the Canada Revenue Agency (Assumption Place Building, Moncton, New Brunswick, E1C 8P2).

Yours truly,

Yves Moreno
for Division Director
International Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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