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: 1. How will a Limited Liability Company established in the state of XXXXXXXXXX of the United States ("USLLC") be taxed in Canada if it is treated as a partnership in the United States ("US")? 2. How will a USLLC be taxed in Canada if it is treated as a C corporation in the US?
3. Is a USLLC considered to be resident for treaty purposes to receive treaty benefits?
Position: 1. & 2. USLLC will be taxed in Canada as a corporation regardless of its designation in the US. 3. Question of fact.
Reasons: 1. & 2. This is CRA's position and there is some supporting jurisprudence. 3. See treatment under Canada-US Tax Convention.
October 17, 2012
Re: US LLC owned by Canadian residents
This letter is in response to your email in which you asked the following questions regarding a Limited Liability Company established in the state of XXXXXXXXXX ("USLLC"):
1. How will the USLLC be taxed in Canada if it is treated as a partnership in the United States ("US")?
2. How will the USLLC be taxed in Canada if it is treated as a C corporation in the US?
3. Is the USLLC considered to be resident for purposes of the Canada-United States Tax Convention ("Treaty") to receive treaty benefits?
- USLLC is 100% owned by two related Canadian residents ("Canadian owners").
- USLLC owns residential property in XXXXXXXXXX which generates rental income.
- It is assumed that the directors of USLLC exercise mind, management and control of USLLC in the US; therefore, USLLC is considered resident in the US. Where the situs of mind, management and control is considered to be located elsewhere, USLLC may be considered resident in a different country.
The particular situation outlined in your email appears to relate to a factual one, involving a specific taxpayer. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. We are, however, prepared to offer the following general comments, which may be of assistance.
All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").
While the USLLC may be treated as a partnership or may elect to be treated as a corporation for US tax purposes, the USLLC is considered a corporation under Canadian tax law despite the treatment available under US tax law.
Question 1 USLLC treated as a partnership in the US
It is the Canada Revenue Agency's (CRA) view that a fiscally transparent entity (such as USLLC) is not a resident of the United States for purposes of applying the Treaty as the USLLC is not itself liable to tax in the US. Based on the facts provided, USLLC would not be taxed in Canada.
Since the USLLC is considered a corporation for Canadian tax purposes, distributions from USLLC to the Canadian owners will generally be taxed as dividends in Canada. Where there has been a distribution made and the amount has been included in computing the Canadian owners income for the year as a dividend from a foreign corporation there may be deducted under subsection 20(11) of the Act, an amount equal to the income taxes paid in excess of 15% of such income. The Canadian owners may also be eligible to claim a foreign tax credit (FTC) under subsection 126(1) of the Act in respect of the US income taxes paid. Any of the US taxes paid that cannot be utilized by the foreign tax credit may be deducted from income pursuant to subsection 20(12) of the Act. Any amounts deductible pursuant to subsection 20(11) will reduce the amounts eligible for the FTC under subsection 126(1) and the deduction under subsection 20(12).
Question 2 USLLC treated as a C corporation in the US
Where USLLC is treated as a C corporation, USLLC would be considered a resident of the US for purposes of the Treaty and as a result, USLLC, unless carrying on a business through a permanent establishment in Canada, would only be taxable on Canadian sourced income in Canada.
Similar to the discussion under question 1 above, the Canadian owners will be taxed in Canada on any distributions from USLLC and may be eligible to claim a FTC or make a deduction from income pursuant to subsections 20(11) or 20(12). Where a distribution is considered a dividend and the recipient is considered a qualifying person pursuant to Article XXIX-A of the Treaty, Article X, if applicable, should limit the US tax withheld on the distribution to 15%.
Question 3 Treaty benefits
It is CRA's view that a fiscally transparent entity (such as USLLC) is not a resident of the United States for purposes of applying the Treaty as the USLLC is not itself liable to tax in the US. Therefore, Treaty benefits will not be applicable.
Where USLLC is taxed as a corporation in the US and is itself liable to tax in the US, Canada would consider USLLC as a resident of the US for purposes of the Treaty. The benefits of the Treaty will be available to USLLC providing the provisions of Article XXIX-A (Limitation of Benefits), as applicable, are met.
We trust these comments will be of some assistance.
Lita Krantz, CA
International Division/ Division des opérations internationales
International Section III
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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