2022-0926431C6 IFA 2022 Q8 - Foreign Entity Classification

Principal Issues: Will the CRA publish and maintain an online list of foreign entities that the CRA has classified for reference purposes?

Position: No.

Reasons: The CRA would consider the classification of a foreign entity in the context of an advance income tax ruling.

Author: Yan, Cindy Xiao Xian
Section: -

2022 International Fiscal Association Conference

CRA Roundtable

Question 8 - Foreign Entity Classification

In Income Tax Technical News No. 38 (Sept. 22, 2008), the CRA updated its two-step approach to foreign entity classification and also confirmed how the CRA would classify a number of specific foreign entities. Given the CRA's recent announcements on the classification of certain US LLLPs and the introduction of anti-hybrid mismatch rules in countries like Luxembourg, which may apply depending on how Canada treats a particular Luxembourg entity for tax purposes (e.g., a Luxembourg special limited partnership), will the CRA publish and maintain an online list of foreign entities that the CRA has classified for reference purposes?

CRA Response

The CRA’s approach to the classification of a foreign entity or arrangement in respect of a property, venture or other object (collectively referred to in this response as the “foreign entity or arrangement”) remains the same as indicated in prior years. That is, to determine the status of an entity or arrangement for Canadian tax purposes, the CRA generally follows the two-step approach described below:

1) Determine the characteristics of the foreign entity or arrangement under applicable foreign law, relevant constating documents, indentures, partnership agreement, contracts and other relevant terms or documentation (the “applicable law and documentation”).

2) Compare these characteristics with those of recognized categories of entity or arrangement under relevant Canadian law in order to classify the foreign entity or arrangement under one of the categories around which the provisions of the Income Tax Act and the Income Tax Regulations are drafted.

As part of this two-step approach, the CRA examines the nature of the relationship between the various parties that are involved and their rights and obligations in respect of the foreign entity or arrangement under the applicable law and documentation.

The classification of a particular foreign entity or arrangement is to be determined on a case-by-case basis and does not generally lend itself well to the type of standard or universal classification requested by this question. On that basis, the CRA would not be in a position to publish and maintain an online list of foreign entity or arrangement classifications. However, the CRA would not see paragraph 19 k) of the most recent version of Information Circular IC 70-6 (Advance Income Tax Rulings and Technical Interpretations) as preventing it from entertaining an income tax ruling request. The CRA does not consider that the classification of a foreign entity or arrangement is strictly speaking an issue “that would require interpretation of a law not administered by the CRA, including foreign law”. On that basis, the CRA would consider confirming the classification of a foreign entity or arrangement, in one of the categories around which the provisions of the Income Tax Act and the Income Tax Regulations are drafted, in the form of an advance income tax ruling.

Consistent with the general spirit of paragraph 19.1 (although the classification is not strictly speaking only a question of fact either) and of Appendices A and A.1 of the most recent version of IC 70-6, taxpayers are expected to include with their request a complete description of the characteristics described above, their analysis as to the proper classification of the entity or arrangement for purposes of the Income Tax Act and the Income Tax Regulations along with a discussion on the way their relevant provisions would appropriately apply to proposed transactions involving or affecting the rights and obligations of the entity or arrangement and its stakeholders, a copy of the foreign legislation applicable to the entity or arrangement and any other relevant documents described above.

Cindy Yan
2022-092643
May 17, 2022

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