2020-0866671C6 CTF Q9 entity classification of UK LLP

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

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

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2021

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2021


Video Tax News is a proud commercial publisher of Canada Revenue Agency's Technical Interpretations. To support you, our valued clients and your network of entrepreneurial, small businesses, we choose to offer this valuable resource to Canadian tax professionals free of charge.

For additional commentary on Technical Interpretations, court cases, government releases, and conference materials in a single practical document specifically geared toward owner-managed businesses see the Video Tax News Monthly Tax Update newsletter. This effective summary and flagging tool is the most efficient way to ensure that you, your firm, and your clients are fully supported and armed for whatever challenges are thrown your way. Packages start at $400/year.