17 January 1997 External T.I. 9613405 - FOREIGN ACCRUAL TAX - LIMITED LIABILITY COMPANY

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

									Tim Kuss
XXXXXXXXXX							961340

Attention: XXXXXXXXXX

January 17, 1997

Dear Sirs:

Re: Limited Liability Company - Foreign Accrual Tax

This is in reply to your letter dated April 16, 1996 concerning the tax treatment of U.S. tax paid by a Canadian resident member/shareholder of a U.S. limited liability company ("LLC"). Specifically, you have asked if the tax would be considered "foreign accrual tax" as defined in subsection 95(1). In considering our response you have asked for us to assume the following:

• LLC is a corporation for Canadian tax purposes.
• LLC is taxed as partnership for U.S. tax purposes. As a result, the members/shareholders of LLC are liable for U.S. tax on their share of the income of LLC.
• LLC is a controlled foreign affiliate of its Canadian resident member/shareholder.
• LLC's income would be considered foreign accrual property income.

Analysis and Discussion

In the above circumstances, the U.S. tax paid is a tax of the members/shareholders and not of LLC and would therefore not qualify as foreign accrual tax. In order for an income or profits tax to qualify as foreign accrual tax, the tax must be paid by the particular affiliate (or any other affiliate of the taxpayer in respect of a dividend received from the particular affiliate). It is implicit that any tax paid by the affiliate is, in fact, the affiliate's tax and not simply a payment on behalf of another person's tax obligation. Therefore, arranging the affairs so that LLC actually makes the tax payment would not cause the tax to become foreign accrual tax.

Where the member/shareholder of LLC is an individual resident in Canada, a portion of any U.S. tax paid in respect of the individual's share of the income of LLC may be deductible for purposes of subsection 20(11). Any excess will be a creditable tax for purposes of subsection 126(1) and a deductible tax for purposes of subsection 20(12). Any amount included in income under subsection 91(1), would be considered income from sources in the U.S. for purposes of subsections 20(11) and 126(1).

Where, however, the member/shareholder of LLC is a corporation resident in Canada, any U.S. tax paid in respect of the corporation's share of the income of LLC would not be a creditable tax for purposes of subsection 126(1) or a deductible tax for purposes of subsection 20(12), as the tax would be, in our opinion, paid by a corporation in respect of income from a share of the capital stock of a foreign affiliate of the corporation.

We hope our comments are of assistance.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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