Tax Interpretations Judicial and CRA interpretations of Canadian tax law and transactional implications

Income Tax Act - 241-260 - Section 248 - 248(1) - “Corporation”

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Anson v. HMRC, [2015] UKSC 44 [profits of LLC earned directly by members]

Lord Reed found that that the profits of a Delaware LLC belonged to the members as they arose, so that a UK member was taxed on the “same” income in both countries. See summary under Art. 24.

HMRC v. Anson, [2013] EWCA Civ 63, rev'd supra [LLC not fiscally transparent]

The taxpayer, who was resident in the UK, paid US income taxes on his share of the profits of an LLC of which he was a member, and also paid UK income taxes on income remitted to the UK including such share of the LLC's profits.  He would have been entitled to relief under Art. 23 of the UK-US Double Tax Convention from UK tax on such profits if the UK tax was "computed by reference to the same profits or income by reference to which the United States tax [was] computed."

In finding that this requirement was not satisfied, given that the distribution of the profits to the taxpayer (so as to attract UK tax) was distinct from the earning of the profits by the LLC in the first place (resulting in the US tax), i.e., the LLC was fiscally transparent for US but not UK purposes, Lady Justice Arden stated (at para. 57):

If profit is earned by an entity, and the source of the profit to the taxpayer as a member of that entity is a contract as between him and other members, then in the usual case it follows that the source of his income must be a different source of income from that of the entity itself. The fact that there is a contract generally suggests that there is a disposition of a right to the profits from one person to another. That result can be avoided if the member had a proprietary right to the profits as they arose. This would as I see it generally be the case where income accrues to a trust under which an income beneficiary has an interest in possession, or to a unit trust or collective investment scheme, if the investors have a beneficial interest in the assets that are subject to the unit trust or scheme.

In the case of the LLC, there was was "nothing to suggest that it did not have unqualified ownership of its assets or that its members had any interest in those assets" (para. 77).  She furher stated (at para. 64):

It would be unusual but not impossible for an entity with a separate legal personality, such as a company, to be tax transparent for English law purposes. One example would be the Scottish partnership where the partnership is a separate legal entity and holds the assets of the business, but the partners have an (indirect) interest in the assets and carry on business in common: this has been held by this court to be tax transparent....

Hague v. Cancer Relief & Research Institute, [1939] 4 DLR 191 (Man. K.B.) [corporation has separate legal personality]

In finding that an institute which section 2 of the Cancer Relief Act, 1930 (Manitoba) purported to make a "body corporate" was not, in fact, a corporation because there were no natural persons to compose or to constitute the corporation, Dysart J. stated (pp. 193-194):

"What is a corporation? According to our system of law, a corporation is a group or series of persons which by a legal fiction is regarded and treated as a person itself. It is a legal entity composed of persons. In law 'a person' is any being that is capable of having rights and duties, and is confined to that. Persons are of two classes only - natural persons and legal persons. A natural person is a human being that has the capacity for rights or duties. A legal person is anything to which the law gives a legal or fictitious existence and personality, with the capacity for rights and duties. The only legal person known to our law is the corporation - the body corporate."

Administrative Policy

[U.K] Revenue and Customs Brief 15 (2015): HMRC response to the Supreme Court decision in George Anson v HMRC (2015) UKSC 44 25 September 2015 [Anson specific to its facts]

…[T]he [Anson] decision is specific to the facts found in the case. This means that where US LLCs have been treated as companies within a group structure HMRC will continue to treat the US LLCs as companies, and where a US LLC has itself been treated as carrying on a trade or business, HMRC will continue to treat the US LLC as carrying on a trade or business.

[It is understood from a U.K. correspondent that the "treating" is by HMRC, who have long regarded US LLCs as "opaque" (see INTM180030 below) and are effectively saying they will continue to do so.]

INTM180030 - "Foreign entity classification for UK tax purposes: List of Classifications of Foreign Entities for UK tax purposes": Country-by-country listing of entities as transparent or opaque for U.K. income tax purposes.

28 May 2015 IFA Roundtable, Q. 3, 2015-0581511C6 [Florida LLLPs potentially corporations]: CRA indicated that Florida limited liability limited partnerships and limited liability partnerships potentially may be corporations for purposes of the Act given that “they seem to have both legal personality and full, or at least very extensive, limited liability for all members,” i.e., liability protection which “seems to go beyond the type of limitation of liability applicable to partnerships governed by the laws of the Canadian provinces,” and invited submissions on this issue.

CRA also noted (before release of Anson) that it accepts that LLC are corporations. See summary under s. 96.

20 October 2012 Ontario CTF Round Table, 2012-0463021C6 [entity classification rulings: resumed]:

[The] Directorate has reconsidered its 2010 decision [to cease giving entity classification rulings]....Taxpayers wishing to request an advance income tax ruling on...classification...should include with their request a complete description of the characteristics of the entity, their analysis as to its proper classification, and a translated copy of both the legislation under which the entity was created and its organizational documents.

15 July 2011 Memorandum 2010-0388621I7 [anstalt a corp]: a Liechtenstein anstalt possessed most of the hallmarks of a corporation aside from issuing shares, and was to be treated as a corporation.  Furthermore, although it did not issue shares within the meaning of s. 248(1), as there was only one beneficiary, a division of the capital of the anstalt into shares was unnecessary so that it was reasonable to consider that the Canadian resident beneficiary's interest was the equivalent of a share.  "For Canadian tax purposes, it should suffice that the interest is what accords him the same rights as are normally conveyed by a share."

28 September 2009 Memorandum 2008-030051 [anstalt a corp]: In light of its characteristics, a Liechtenstein anstalt could be treated for Canadian purposes as either a trust or a corporation depending on the specific facts of the particular situation. However, CRA would not change its published position that an anstalt is a corporation without a public announcement to that effect which would only have prospective effect.

Income Tax Technical News, No. 38, 22 September 2008 under "Foreign Entity Classification": discussion of CRA's two-step approach to entity classification (determine its characteristics under the foreign law; and compare those characteristics with those of a recognized category of business association under Canadian law).

14 August 2008 T.I. 2004-010469 [Del. LP a partnership]:  application of CRA's two-step approach to entity classification to find that a Delaware LLC governed by the Delaware Limited Liability Company Act  that is converted into a limited partnership pursuant to s. 17-217 of the Limited Partnership Act will be considered to have become a partnership for Canadian income tax purposes, so that there is a disposition of the property of the LLC and of the shares in the LLC.

5 October 2004 TI 2004-006186 [Madagascar LLC]: A limited liability company organized in Madagascar would be considered to be a corporation for purposes of the Act given that it has several characteristics of a corporation, including separate legal personality.

9 September 2002 Memorandum 2002-014395 [anstalt a corp]: A Leichtenstein establishment (i.e., a Leichtenstein anstalt) is a corporation for purposes of the Act.

29 January 2002 T.I. 2001-008584: List of states for which CCRA has provided an opinion that a limited liability company formed under the laws of that state is a corporation for Canadian tax purposes.

10 February 1999 T.I. 982987: A Hungarian korlatolt feleossegu tarsasag is a corporation for purposes of the Act because it has legal personality and existence apart from its members. "This would be our view whether or not the Articles of Association of the particular Kft provided that members may be liable for losses of the Kft in excess of their initial capital contributions."

24 September 1997 T.I. 964219: A Tennessee limited liability company is a corporation for purposes of the Act.

28 January 1997 T.I. 962501: A Russian joint stock company would be a corporation for purposes of the Act (including the foreign affiliate definition), as it is a distinct legal entity, separate from its shareholders, directors and officers.

30 July 1996 T.I. 962459 (C.T.O. "Kazackhstan Limited Liability Partnerships"): Kazackhstan Limited Liability Partnerships normally will be considered to be corporations given that they have the status of a legal entity under Kazackh Law, their property belongs to them and the participants are not held liable for the partnership's obligations - although it is possible for a particular partnership to possess certain important attributes which are not indicative of a corporate entity, for example, being formed for only a very brief period of time.

30 August 1995 T.I. 950304 (C.T.O. "Corporate Status-Dutch BV with Unlimited Liability"): The fact that a private company with limited liability incorporated under, and governed by the Netherlands Civil Code may not have an unlimited life or that the shareholders have agreed to assume liability for its liabilities, does not generally affect the determination that it qualifies as a corporation.

13 July 1995 T.I. 951809 (C.T.O. "6363-1 Foreign Affiliates - Def'n of Corporation"): RC stated on the basis of its review of the New York Limited Liability Company Law that it was of the opinion "that a company formed under the NYLLCL would be a corporation for the purposes of the Act notwithstanding that all of its members are liable in their capacity as members for all its debts, obligations or liabilities as a result of a statement to such effect in the articles of organization thereof."

25 October 1994 T.I. 941925 (C.T.O. "Partnership or Corporation"): A German offene Handelsgesellschaft ("OHG"), as described by the writer, would be considered a partnership for Canadian tax purposes.

25 October 1994 T.I. 941750: A limited liability company organized under the applicable legislation of Florida, Wyoming, Delaware or Indiana will be considered to be a corporation rather than a partnership for Canadian tax purposes.

27 June 1994 T.I. 940600 (C.T.O. "Corporate Status of a Delaware LLC (4093-U5-100-4)"): A limited liability company formed under Chapter 18, Subtitle II of Title 6 of the laws of Delaware will be treated as a corporation for purposes of the Act.

27 June 1994 T.I. 940819 (C.T.O. "Corporate Status of a Nova Scotia Co. (H.A.A. 6363-1)"): An unlimited liability company incorporated under the Nova Scotia Companies Act is a corporation within the meaning of s. 248 of the Act.

17 February 1994 T.I. 932790 (C.T.O. "Barbadian Limited Liability Company (Barbados Treaty)"): Assuming that the proposed Barbadian Societies Restricted Liability Act is enacted in its proposed form, a foreign entity created under that legislation should qualify as a corporation for purposes of the Act.

93 C.M.TC - Q. 12: The limited liability companies for the two states that RC has reviewed (Wyoming and Florida) are considered to be corporations rather than partnerships.

4 October 1990 T.I. (Tax Window, Prelim. No. 1, p. 20, ¶1022): A foreign unlimited liability company is a "corporation" and therefore may qualify as a foreign affiliate.

IT-343R "Meaning of the Term Corporation"


Nathan Boidman, "Anson and U.S. LLCs: A Canadian Perspective,"Tax Notes International, August 3, 2015, p. 439.

Effect of Anson on fiscally opaque status of LLCs (p. 439)

[T]he consistent treatment of LLCs in Canada as corporations (i.e., opaque) [raises] the obvious question as to whether Anson will disturb that status quo.

The short answer appears to be — no….

Misinterpretation of effect of LLC Agreement (p. 439)

First, with respect, the decision — that section 4.2 of the LLC agreement (together with certain provisions of the Delaware LLC Act) that required that profits be allocated to LLC owner capital accounts immediately vested those profits in the owners — seems to be wrong. This is because the judgment did not deny that the assets garnered by the LLC from those profits remained those of the LLC, to the entire exclusion of the owners, until actually distributed (and that the LLC was in no way acting as an agent or trustee with respect to those assets) and because of the interrelated fact that nowhere did the judgment consider or discuss that because no owner of an LLC is liable for its debts, creditor claims could interrupt the owner’s ultimate access to those assets, underlying the profits.

No double taxation of distributed LLC profits (p. 439)

In Anson, it certainly wouldn't have been fair for the U.K. resident to suffer double tax…[H]ad Anson been a Canadian resident, the same issue would not have arisen assuming distributions in the year of LLC earnings because Canada’s foreign tax credit rules do not require that the foreign tax be on the foreign income taxed in Canada, only that the same country be involved for both.

Courts and Finance implicitly have endorsed opaque status (pp. 439-440)

Third, as seen in TD Securities LLC, not only has the Canada Revenue Agency and the tax community consistently treated LLCs as corporations, the income of which is their own, but the courts have not sought to disturb that understanding.

Fourth and finally, the Department of Finance, which drafts Canada’s tax laws for Parliament’s consideration, has clearly endorsed the notion that U.S. LLCs are to be treated as corporations, the income of which is their own….[T]he department issues [Explanatory Notes] with new legislation, and the courts have increasingly been looking to those notes in deciding tax cases.

Matias Milet, "Hybrid Foreign Entities, Uncertain Domestic Categories: Treaty Interpretation Beyond Familiar Boundaries"2011 Canadian Tax Journal, Vol 59, p. 25

When categorizing foreign entities so as to apply the relevant entity-based Canadian rules, it likely is preferable to utilize the Wittgenstein approach of identifying "family resemblances" rather than attempting to determine the "essential" or "fundamental" characteristics that all such entities (e.g., corporations or partnerships) share in common.  Includes discussion of cases categorizing German silent partnership (Memec) or LLCs.

Gwendolyn Watson and Steven Baum, "U.S. LLCs as Corporations - a New Canada Revenue Agency Position?" International Tax Planning, 2011, p. 1136

Contrary to a CRA suggestion "there does not appear to be any Canadian authority requiring that a foreign entity 'issue capital stock' in order to be considered a 'corporation'...."

Jessica Fabbro, "What is an LLC?" CCH Tax Topics, No. 2067, 20 October 2011, p.1

Discussion of  HMRC v. Anson, [2011] UKUT B21 (TCC) (reversing the finding in Swift v. HMRCI, [2010] UKFTT 88 (TC) that a US LLC was closer to a Scottish partnership than a UK company).

Jessica Fabbro, "Oh Say Can You (LL)C?  A Case Comment on Boliden Westmin Ltd. v. British Columbia", CCH Tax Topics, No. 1836, 17 May 2007, p. 1: discussion of finding in that case that a Nevada LLC most closely resembled a corporation.

Marc Damo, "Characterization of Foreign Business Associations", 2005 Canadian Tax Journal, No. 2

Proposed a two-stage approach to entity classification which now is accepted by CRA (see, for example, 2010-0388621I7.)

John R. Owen, "Foreign Entity Classification and the Character of Foreign Distributions", 2005 Conference Report, c. 20

Discussion of the essential characteristics of a corporation.

Andersen and Wilkie, "U.S. and Third-Country Limited Liability Companies Provide Opportunities for Canadian Multinationals", Tax Management International Journal, Vol. 25, No. 5, 10 May 1996, p. 291.

Hirsch, "Real Estate Issues: Traps and Opportunities", 1995 Corporate Management Tax Conference Report, c. 9

Discussion of use of Nova Scotia unlimited liability companies for real estate investments in Canada, and of U.S. limited liability companies for real estate investments in the United States.

Owen, "Using a Limited Liability Company to License Intellectual Property into the United States", Taxation Law Section Newsletter, Canadian Bar Association - Ontario, Vol. 5, No. 3, May 1995, p.1.

Bernstein, "U.S. Limited Liability Corporations" and "Nova Scotia Unlimited Liability Companies", Tax Profile, February 1995, Vol. 4, No. 20., pp. 201, 205.

Lanthier, "Emerging Income Tax Issues: Public Service 2,000, International Finance Companies, and U.S. Limited Liability Companies", 1993 Conference Report, pp. 3:19 - 29

Discussion of U.S. limited liability companies.