13 February 2017 Internal T.I. 2015-0568011I7 - Classification of Florida LLLP

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: Whether two particular LLLPs governed by the laws of Florida would be considered to be corporations or partnerships for the purposes of the Act?

Position: Corporations.

Reasons: The provisions of the foreign legislation and other relevant documents in respect of the Florida LLLPs support the conclusion that these entities should be considered to be corporations for the purposes of the Act. However, based on administrative concessions under development, consideration should be given to maintaining the partnership treatment of the entities for the relevant taxation years, as per the filings made by the taxpayers.

								February 13, 2017

Mr. James Smith,						HEADQUARTERS
Senior Technical Applications Officer
Technical Section 2 					Income Tax Rulings
Small and Medium Enterprise Directorate		  Directorate
								Yannick Roulier

								2015-056801

Entity Classification – Florida Limited Liability Limited Partnership

This is in reply to your correspondence of January 26, 2015, wherein you requested our views with respect to the tax status of two particular Limited Liability Limited Partnerships governed by the laws of the state of Florida (“Florida-LLLPs”), for the purposes of the Income Tax Act (“Act”). We apologize for the delay in responding.

Background

We understand the facts of the situation submitted to be as follows:

1. On XXXXXXXXXX, a limited partnership governed by the laws of the province of XXXXXXXXXX (“LP”) was formed. It has Canadian-resident taxpayers among its members.

2. In the course of the year XXXXXXXXXX, LP invested as a limited partner in two LLLPs governed by the laws of the state of Florida: XXXXXXXXXX (“Florida-LLLP-1”), which was formed on XXXXXXXXXX, and XXXXXXXXXX (“Florida-LLLP-2”), which was formed on XXXXXXXXXX.

3. In general, and without limiting the relevance of the law applicable in the state of Florida to the provisions referred to below, the current version of the Florida Revised Uniform Limited Partnership Act of 2005 (Chapter 620, Part I, Florida Statutes; “FRULPA”) provides, among other things, for the following (capitalized words refer to terms defined in the FRULPA):

a. A Limited Partnership is an entity, having one or more General Partners and one or more Limited Partners, which is generally formed under this act by two or more Persons by delivering a Certificate of Limited Partnership to the Department of State for filing (sections 620.1102 and 620.1201).

b. A Limited Liability Limited Partnership (“LLLP”) is generally a Limited Partnership whose Certificate of Limited Partnership states that it is an LLLP (section 620.1102(10)).

c. An LLLP is an entity distinct from its Partners that has a perpetual duration; specific rules apply in respect of the dissociation of General Partners and Limited Partners (section 620.1104 and 620.1601 to 620.1605). An LLLP may be organized for any lawful purpose and has the power to do all things necessary or convenient to carry on its activities, including the power to sue and be sued and to assume liabilities of its own (sections 620.1104, 620.1105, 620.1112, 620.2001 to 620.2005).

d. Limited Partners of an LLLP have limitation of liability in respect of the obligations of the LLLP (sections 620.1106, 620.1303, 620.1502 and 620.1509).

e. General Partners of an LLLP have limitation of liability in respect of the obligations of the LLLP (sections 620.1106, 620.1404(3), 620.1405(3), 620.1502 and 620.1509).

f. In general, each General Partner is an agent of the LLLP for the purposes of the LLLP’s activities, and a Limited Partner does not have the right or the power to act for or bind the LLLP (sections 620.1302, 620.1303, 620.1402 and 620.1804).

g. In general, a General Partner has specific fiduciary duties of loyalty and care to the LLLP and the other Partners, and Limited Partners do not have any fiduciary duty to these parties (sections 620.1305 and 620.1408).

h. Profits and Losses of an LLLP shall generally be allocated among the Partners on the basis of the value of their Contributions (section 620.1503(1)).

i. Partners have generally no right to receive a Distribution before the LLLP decides to make such Distribution; once the decision is made, Partners become entitled to receive their share of the Distribution and have the status of creditors of the LLLP with respect to it; such share is generally determined on the basis of the value of Partners’ Contributions; LLLP has to satisfy a solvency test in order to make Distributions (section 620.1503(2) to 620.1509).

j. The possibility for an LLLP to convert into another type of domestic or foreign organization (“Organization”), to merge with other Organizations, or that an LLLP be created from these types of transactions involving various type of Organizations, is contemplated by the law (sections 620.2101 to 620.2125).

k. An Organization that has been converted pursuant to the FRULPA is for all purposes the same entity that existed before the conversion; title to all real property and other property at the time of conversion remains vested in the converted entity, and all debts, liabilities and obligations of the former entity continue as obligations of the converted entity (section 620.2105).

l. Unless otherwise provided in the Partnership Agreement, only a Transferable Interest, which is a personal right to receive distributions, can be subject to a Transfer (sections 620.1701 and 620.1702).

4. Based on our general understanding of the applicable law of the foreign jurisdiction, the FRULPA was enacted in 2005 and wasn’t substantively changed since then. Accordingly, we are relying on the current version of that law for the purposes of the present document, notwithstanding that certain aspects of the applicable version of the law to taxation years since XXXXXXXXXX may vary in their details.

5. The agreement concerning Florida-LLLP-1 (“Agreement-1”) was entered into on XXXXXXXXXX, and provides the following (capitalized words refer to terms defined in the agreement):

a. that the General Partner has organized the entity as a Florida limited partnership formed on XXXXXXXXXX, and simultaneously with filing its certificate with the Department of State, the entity filed a Statement of Qualification pursuant to which it elected to become a Florida LLLP pursuant to the FRULPA (XXXXXXXXXX);

b. that the LLLP is a separate and distinct legal entity, all business of which should be conducted in its name (XXXXXXXXXX);

c. that all property owned by the LLLP shall be owned by it as an entity and Partners shall generally have no ownership interest in any of the LLLP’s property, their interest in the LLLP being a personal property for all purposes (XXXXXXXXXX);

d. the details of the Partners’ Capital Contributions (XXXXXXXXXX);

e. that the General Partner and the Limited Partner will generally be liable only to make their Capital Contributions, and that the General Partner will have no personal liability for the repayment of any Capital Contributions of any Partners (XXXXXXXXXX);

f. the rules to maintain each Partner’s Capital Account (XXXXXXXXXX);

g. the rules for the yearly allocation of Profits or Losses to Partners and for the distribution of Net Cash From Operations, Net Cash From Refinancings and Net Cash From Sales, which generally involve an unfettered discretion of the General Partner to maintain reasonable holdbacks and reserves (XXXXXXXXXX);

h. that the General Partner has the sole and exclusive right to manage the business of the LLLP and has extended rights and powers to do so (XXXXXXXXXX);

i. that, except where the Limited Partner may vote on the matters that expressly require its approval under Agreement-1, the Limited Partner will have no right or power to take part in the management or control of the LLLP or its business and affairs or to act for or bind the LLLP in any way (XXXXXXXXXX);

j. that, subject to certain conditions, a Limited Partner may at any time Transfer its Interest in the LLLP (XXXXXXXXXX);

k. for the termination of status, removal or replacement of the General Partner (XXXXXXXXXX); and

l. the Liquidating Events, which included XXXXXXXXXX (XXXXXXXXXX).

6. The agreement concerning Florida-LLLP-2 (“Agreement-2”) was entered into on XXXXXXXXXX, and provides for the following (capitalized words refers to defined terms in the agreement):

a. that the General Partner has organized the entity as a Florida LLLP formed on XXXXXXXXXX pursuant to the provisions of the FRULPA (XXXXXXXXXX);

b. that the LLLP is a separate and distinct legal entity, all business of which should be conducted in its name (XXXXXXXXXX);

c. that all property owned by the LLLP shall be owned by it in its name and not in the name of any Partner (XXXXXXXXXX);

d. the details of the Partners’ Capital Contributions (XXXXXXXXXX);

e. that the General Partner and the Limited Partner will generally be liable only to make their Capital Contributions, and that the General Partner will have no personal liability for the repayment of any Capital Contributions of any Partners (XXXXXXXXXX);

f. the rules to maintain each Partner’s Capital Account (XXXXXXXXXX);

g. the rules for the yearly allocation of Profits or Losses to Partners and for the distribution of Net Cash From Operations, Net Cash From Refinancings and Net Cash From Sales, which generally involve an unfettered discretion of the General Partner to maintain reasonable holdbacks and reserves (XXXXXXXXXX);

h. that the General Partner has the sole and exclusive right to manage the business of the LLLP and has extended rights and powers to do so (XXXXXXXXXX);

i. that, except where the Limited Partner may vote on the matters that expressly require its approval under Agreement-2, the Limited Partner will have no right or power to take part in the management or control of the LLLP or its business and affairs or to act for or bind the LLLP in any way (XXXXXXXXXX);

j. that, subject to certain conditions, a Limited Partner may at any time Transfer its Interest in the LLLP (XXXXXXXXXX);

k. for the termination of status, removal or replacement of the General Partner (XXXXXXXXXX); and

l. the Liquidating Events, which included XXXXXXXXXX (XXXXXXXXXX).

7. The Florida-LLLPs were registered under the laws of the state of Florida for the sole purpose of owning and operating real estate property as a going concern for profit.

8. For all relevant taxation years, the Florida-LLLPs were treated as partnerships for U.S. tax purposes.

9. The profits or losses from the real estate properties located in Florida of each of the Florida-LLLPs were allocated to their respective partners on a yearly basis, and further reported and allocated by LP to its own partners based, among other provisions, on the application of section 96 of the Act.

10. Florida-LLLP-1 surrendered its investment properties in XXXXXXXXXX due to XXXXXXXXXX. All of its assets were then liquidated, and a final tax return was filed to the U.S. tax authorities in respect of that year. For the purposes of the present, it is assumed that Florida-LLLP-1 was properly liquidated and dissolved under the applicable laws in XXXXXXXXXX, although no documents were submitted to support these facts.

11. Florida-LLLP-2 also surrendered its investment properties in XXXXXXXXXX due to XXXXXXXXXX. All of its assets were then liquidated, and a final tax return was filed to the U.S. tax authorities in respect of that year. For the purposes of the present, it is assumed that Florida-LLLP-2 was properly liquidated and dissolved under the applicable laws in XXXXXXXXXX, although no documents were submitted to support these facts.

12. The surrender of property mentioned in paragraphs 10 and 11 was reported by LP in accordance with the rules set out in section 79 of the Act. For both years, LP reported capital losses on land, and terminal losses on Class 1 and Class 8 assets of Schedule II of the Income Tax Regulations.

13. On XXXXXXXXXX, LP disposed of all of its assets and ceased to exist on XXXXXXXXXX.

14. In XXXXXXXXXX, the XXXXXXXXXX Tax Services Office issued assessments to the majority of the Canadian-resident members of the Florida-LLLPs for their taxation years ending in XXXXXXXXXX and XXXXXXXXXX (the “Assessments”). The Assessments disallowed terminal losses and capital losses and reversed the income of the Florida-LLLPs based on the position that these entities have to be considered corporations for the purposes of the Act.

15. We are unaware as to whether any of the Assessments have been objected to.

These facts are based on your request for an opinion, including the Memorandum from XXXXXXXXXX dated XXXXXXXXXX, the documents attached to the request (including Agreement-1 and Agreement-2), and conversations held with you in dealing with your request. Note that all the facts pertaining to this particular situation are not fully repeated herein and one should refer to these documents for additional details, where necessary. No written representations or correspondence from the taxpayers or their representatives were provided with this request.

Issue

In this context, you are asking for our views with regard to the classification of the Florida-LLLPs as corporations or partnerships for the purposes of applying the Act to the relevant taxation years.

Comments

We are of the view that the dominant characteristics of the Florida-LLLPs support the conclusion that they should be classified as corporations for the purposes of the Act. We reach this conclusion based on a so-called “two-step” approach, considering our understanding of the facts described above and a combined interpretation of Agreement-1 or Agreement-2, as the case may be, and the FRULPA.

The main factors we considered in our analysis of these entities are the existence of a separate legal personality that is recognized under the FRULPA – meaning the full legal capacity to acquire and own property, to sue and be sued, to carry on their own activities and to incur liabilities of their own – and the limitation of liability afforded to all of their members. This conclusion is consistent with our general position adopted in document 2016-0642051C6 (the “IFA-2016 Position”).

In the IFA-2016 Position, we stated, among other things, that LLLPs governed by the laws of the state of Florida should generally be treated as corporations for the purposes of Canadian income tax law. XXXXXXXXXX

XXXXXXXXXX

In addition, in the fall of 2016, an internal committee was put in place in order to deal with certain compliance issues that might result from the implementation of the IFA-2016 Position. This committee is being led by the International Tax Division of the International, Large Business and Investigations Branch, and involves the active participation of our Directorate. XXXXXXXXXX.

In the facts submitted, LP disposed of all of its assets on XXXXXXXXXX, it ceased to exist on XXXXXXXXXX, and the Florida-LLLPs were also liquidated and dissolved in XXXXXXXXXX and XXXXXXXXXX. In this context, we would suggest that consideration be given to allowing the Florida-LLLPs to be treated as partnerships for the purposes of the Act for the relevant taxation years, in light of the intended treatment of other taxpayer files being considered by the CRA.

For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CRA’s electronic library. A severed copy will also be distributed to the commercial tax publishers, following a 90-day waiting period (unless advised otherwise), for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be e-mailed to: ITRACCESSG@cra-arc.gc.ca. In such cases, a copy will be sent to you for delivery to the taxpayer.

We trust that these comments will be of assistance, and thank you for your enquiry.

Yours truly,

Dave Beaulne, CPA, CA
Section Manager
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch