Canada identifies US partnerships that it will treat as corporations
INSIGHT ARTICLE |
In a recent ruling, the Canadian Revenue Agency (CRA) provided further insight into the factors it considered in reaching its conclusion in prior guidance that a Delaware LLLP should be classified as a corporation for Canadian income tax purposes. (For additional coverage of this issue see our prior article here)
In CRA Views 2015-0587691I7, consistent with its IFA-2016 Position, the CRA ruled that a Delaware LLLP, which had been dissolved, had been a corporation for Canadian income tax purposes. In reaching its conclusion, the CRA analysis broke down several relevant factors of both the Delaware Revised Uniform Limited Partnership Act (DRULPA) and the entity’s partnership agreement in reaching this conclusion.
Specifically, the CRA employed a so called “two-step” approach, considering the facts of the entity in conjunction with a combined interpretation of the entity’s partnership agreement and the DRULPA to support its conclusion. The CRA noted two main factors in its analysis, the first being the existence of a separate legal entity recognized under the DRULPA. That is to say, the Delaware LLLP had full legal capacity to carry on its own activities and incur its own liabilities, acquire and own property, and sue and be sued. Secondly, the CRA noted that the Delaware LLLP afforded limited liability to all of its members. Using this approach, the CRA reaffirmed their IFA-2016 Position, concluding that the Delaware LLLP should be classified as a corporation for Canadian income tax purposes.
In light of its recent administrative grandfathering approach for existing Florida and Delaware LLLP’s, and given that the LLLP in question had already been dissolved, the CRA ultimately suggested that this particular LLLP should be treated as a partnership for the purposes of the Canadian Income Tax Act.
While this ruling does not alter the CRA’s position regarding Florida and Delaware LLP’s and LLLP’s, it does provide additional detail about CRA’s approach and the facts it looked to in order to reach this conclusion. Taxpayers with entities organized as LLP’s and LLLP’s operating in Canada should consider this information, as it could be useful for assessing the how the CRA’s position with respect to Florida and Delaware LLP’s and LLLP’s may apply to similar entities organized in other jurisdictions. Treating these entities as corporations may limit the availability of benefits under the U.S.-Canada income tax treaty resulting in significant tax costs. In addition, an entity treated as a corporation may be required to file income tax returns in Canada even though it is a passthrough for U.S. tax purposes. Thus, taxpayers with Canadian operation should carefully assess the impact of this latest guidance from the CRA.