2020-0866671C6 CTF Q9 entity classification of UK LLP

Principal Issues: Does the CRA view a UK LLP as a corporation or a partnership for Canadian tax purposes?

Position: Corporation.

Reasons: The general characteristics of a UK LLP more closely resemble a corporation than other forms of business association under Canadian commercial law.

Author: Graham, Kanwal
Section: 248(1) "corporation"

2020 Canadian Tax Foundation
CRA Roundtable

Question 9 – Entity classification of UK LLP

Under the United Kingdom’s Limited Liability Partnerships Act 2000 (as amended), a limited liability partnership governed by that statute (“UK LLP”) is treated in the United Kingdom as a separate legal entity but the profits of its business are taxed as if the business were carried on by partners in partnership, rather than by a body corporate. Does the CRA view a UK LLP as a corporation or as a partnership for Canadian tax purposes?

CRA Response

When determining the form of association under Canadian commercial law of a foreign business association for Canadian tax purposes, the CRA generally applies the following two-step approach:

*    determine the characteristics of the foreign business association under foreign commercial law; and

*    compare these characteristics with the characteristics of recognized categories of business associations under Canadian commercial law in order to classify the foreign form of business association under one of those categories.

The following characteristics are common to corporations incorporated under Canadian federal or provincial legislation:

*    legal personality and existence, separate and distinct from its members;
*    ability to carry on its activities in its own name;
*    ability to acquire and own rights and property (including the property used in carrying on its business) and to incur liabilities in its own name (which must not be the rights or liabilities of the members);
*    capacity of taking legal proceedings in its own name and exposure to being sued; and
*    the issuance of some form of “share capital” or equity interest.

Generally, to qualify as a partnership under Canadian provincial law, there are three essential elements:

*    a business;
*    carried on in common by two or more people;
*    with a view to profit. 

The CRA is of the view that the general characteristics of a UK LLP more closely resemble the general characteristics of a corporation than the general characteristics of other forms of business association under Canadian commercial law for the following reasons:

*    A UK LLP has a legal existence separate from its members.

*    A UK LLP, and not its members, carry on the business. 

*    A UK LLP, and not its members, acquires and owns property in its own name for use in its business, and is responsible for any debts or obligations incurred as a result of carrying on its business.

*    The capital of a UK LLP serves the same function as the share capital of a corporation.

It should be noted that the classification of a particular UK LLP remains to be determined on a case-by-case basis. Taxpayers may wish to request an advance income tax ruling if they are contemplating transactions involving a foreign entity whose legal form for Canadian income tax purposes is uncertain.

Kanwal Graham
2020-086667
October 27, 2020

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