Conversions of LLPs or LLLPs after 2017 to LPs may occur at FMV

At 2016 IFA Roundtable, Q. 1, CRA orally indicated that Florida and Delaware limited liability partnerships and limited liability limited partnerships are corporations for ITA purposes – but indicated it will treat an existing LLP or LLLP (that had been formed from scratch rather than being converted from an LLC) as a partnership if it is clear that the members are carrying on business in common with a view to profit, all members and the LLP or LLLP have been treating it as a partnership for ITA purpose, and the LLP or LLLP converts to a “true” partnership before 2018.

26 U.S. states provide for LLLPs, and nearly all of these also allow for the formation of LLPs. LLLPs and LLPs are essentially LP, except that the general partner also has limited liability.

An LLP may be a partial shield or a full shield. In a partial-shield jurisdiction, a partner is protected from partnership obligations that arise from the negligence of another partner, but not those that arise in the ordinary course of business. (The CRA oral comments did not address this distinction.)

A Canadian who is a minority partner of an LLP may not be able to convince the majority to convert to an LP by the end of 2017. If such a conversion occurs after this grace period, it may be challenged by CRA as giving rise to a FMV disposition at both the partnership and partner level given existing CRA views on conversions from a U.S. corporation to partnership (see 2004-0104691E5).

Neal Armstrong. Summaries of Allan Lanthier, "Limited Liability Partnerships", Canadian Tax Highlights, Vol. 24, No. 6, June 2016, p. 10 and Roy A. Berg, "CRA Classifies US LLLPs and LLPs as Corporations", Canadian Tax Highlights, Vol. 24, No. 6, June 2016, p. 9 under s. 96.