CRA, changing position, now generally requires LLCs to compute their income under ITA rather than Code rules

CRA has changed its view, and now considers that where a foreign affiliate is a disregarded U.S. LLC with a single-member regarded U.S. corp, its earnings should be computed under Canadian income tax law under Reg. 5907(1) – earnings - s. (a)(iii), rather than under the Code under s. (a)(i), effective for taxation years ending after August 19, 2011. The reason for this change of view is the enactment of Reg. 5907(2.03) requiring an affiliate computing its “earnings” in accordance with Canadian tax law to claim maximum discretionary deductions, so that a concern about abuse has fallen away.

However, if the LLC has two or more members and is required for Code purposes to compute its income from a business to determine the partners’ distributive shares, it must compute its “earnings” under Reg. 5907(1) – earnings - s. (a)(i).

Neal Armstrong. Summary of 20 November 2016 CTF Annual Roundtable, Q.11 under Reg. 5907(1) – earnings - s. (a)(iii).