Canada to treat US LLPs and LLLPs as corporations
TAX ALERT |
On July 20, 2016, the Canadian Revenue Authority (CRA) released the transcript from a recent meeting of the International Fiscal Association where they disclosed their formal position that certain U.S. limited liability partnerships (LLPs) and limited liability limited partnerships (LLLPs) are corporations for Canadian income tax purposes. Their position does not have the force of law but taxpayers may rely on it in assessing their Canadian tax obligations. This position is very significant because it may result in the following consequences:
- U.S. LLPs and LLLPs engaged in a Canadian trade or business will now have to file a Canadian income tax return either to pay Canadian income tax or to claim an exemption under the permanent establishment (PE) article of a relevant treaty. Any such filing obligation will no longer fall upon the partners of an LLP or LLLP.
- LLPs and LLLPs engaged in Canadian trade or business in prior years through a PE must file at the entity level (even if partners filed and paid tax for such year) subject to the exception below.
- LLPs and LLLPs engaged in Canadian trade or business in prior years with no PE are required to file a Canadian tax return for such year since the year stays open until a return is filed (subject to the exception below) and a return must be filed by a corporate entity to claim treaty benefits (although a return generally is not necessary for a pass-through entity with individual partners under Canadian rules). Therefore, LLPs and LLLPs that did not file in prior years may need to file a return though it may be a nil return unless further guidance provides otherwise.
- On a go-forward basis, partners in an LLP or LLLP are NOT required to file at all—filings are now entity-level obligations, therefore, partners in U.S. LLPs and LLLPs no longer face individual liability for any tax or filing requirements in Canada arising from the LLP’s or LLLP’s activities.
- Canadian investors in a U.S. LLP or LLLP with a U.S. trade or business may be used to paying U.S. corporate tax and branch profits tax at a reduced treaty rate. However, it is not clear whether the owners of such an entity, as a hybrid entity, will be able to claim treaty benefits because of the operation of the anti-hybrid rules of the treaty.
Exception: CRA will treat an LLP or LLLP as a corporation retroactively unless (a) the entity is formed and begins to carry on business in Canada before July 2016 with an intent to make a profit, (b) it was intended that the entity be treated as a partnership for Canadian purposes, (c) the entity and its members have always filed returns as a partnership, and (d) the entity converts, before 2018, to an entity that is recognized as a partnership for Canadian purposes (such as a general or limited partnership).
This new guidance will likely have a significant impact on taxpayers utilizing U.S. LLPs or LLLPs organized in Delaware and Florida, and it is reasonable to assume that the guidance will also apply to LLPs and LLLPs organized in any U.S. state. As a result, taxpayers should immediately review their U.S.-Canada structures to assess the impact of this new guidance.