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 there is a disposition of the shares of a Delaware LLC or its underlying assets upon a conversion of the LLC to a Delaware limited partnership (LP)?
Position: Depending upon the facts and the partnership agreement, there may be a disposition of the shares and the assets of the LLC.
Reasons: The conversion is from one legal form to another (i.e. a corporation to a LP) and the Delaware legislation contemplates that the assets of the partnership can be assets of the partners if so provided in the partnership agreement.
XXXXXXXXXX Gilles Gosselin
March 29, 2004
Re: Conversion of an LLC to a Limited Partnership
We are writing in response to your letter dated November 18, 2003. You have asked us whether a conversion from a limited liability company governed by the Delaware Limited Liability Company Act (an "LLC") to a limited partnership ("LP") governed by the Delaware Revised Uniform Partnership Act ("DRUPA") and the Limited Partnerships Act (the "LPA") results in, for the purposes of the Income Tax Act (the "Act")(Canada):
- A deemed disposition of the shares of the LLC where the shares are held by a resident of Canada or the shares are "taxable Canadian property" ("TCP") held by a non-resident of Canada; and
- A disposition of any property, including TCP, owned by the LLC.
We have not completed a thorough analysis of the provisions of the relevant legislation and we therefore cannot state absolutely that such a conversion does not result in a disposition of the shares of the LLC or its underlying assets. Such an analysis would only be completed on a case-by-case basis once we have all of the relevant documents, including copies of the partnership agreements.
The provisions that we have analysed (e.g. section 17-217 of the LPA) contemplate that upon such a conversion, unless otherwise agreed, or as required under applicable non-Delaware law, the converting other entity shall not be required to wind up its affairs or pay its liabilities and distribute its assets, and the conversion shall not be deemed to constitute a dissolution of such entity and shall constitute a continuation of the existence of the converting other entity in the form of a domestic limited partnership. It is not clear to us whether the principles the Canada Revenue Agency ("CRA") generally consider in determining whether a corporation formed in and governed by a jurisdiction and subsequently continues or converts as a corporation governed by another jurisdiction are applicable where, for Canadian tax purposes, the entity is initially a corporation and is continued in the form of a partnership, whether or not the partnership is a separate legal entity.
Furthermore, in certain cases, the assets of the LLC can become assets of the partners of the LP such that a disposition of the assets of the LLC may occur. More specifically, pursuant to paragraph 17-217(f) of the LPA, upon a conversion from an LLC to a LP the property of the LLC becomes property of the LP. However, the LPA is silent regarding whether the LP or the partners are the legal owner of the assets of the partnership. But section 17-1105 of the LPA states that the DRUPA governs in any case not provided by the LPA and sections 15-203 and 15-204 of the DRUPA contemplate that the assets of the partnership can be the assets of the partners if so provided in the partnership agreement, notwithstanding that the partnership is a separate legal entity from the partners unless the partnership agreement provides otherwise (DRUPA paragraph 15-201(a)).
Also, we understand that upon such conversion the LP is considered to have been in existence since the creation of the LLC (LPA 17-217(d)) and there does not appear to be any restriction in the legislation that prevents the LP from converting back to an LLC or further subsequent conversions. This raises some concerns to the CRA that can only be addressed on a case-by-case basis.
In your letter you also asked us to confirm whether our views stated in Ruling 9922923 can be applied to a conversion from an LLC to a LP. In that ruling we essentially stated, among other things, that a conversion from a corporation governed by the Delaware General Corporation Law (the "DGCL") to an LLC does not result in a disposition of the shares of the DGCL or its underlying assets. At this time we are not prepared to extend the principles in the ruling to your request because the conversion in the ruling was from one corporation to another and the conversion in your request is from a corporation to a limited partnership, which for the reasons already mentioned raises more difficult issues depending upon the facts of the situation. Also, the position stated in Ruling 9922923 is currently being revisited.
Accordingly, we would be happy to reconsider your request in the form of a request for an advance ruling if we are provided with all of the relevant documents, including the limited partnership agreement, as well as your submissions stating the reasons that a disposition of the shares of the LLC and its underlying assets does not occur upon such a conversion. Information Circular 70-6R5 explains, among other things, how to request an advance income tax ruling.
We trust that our comments will be of assistance to you. If you have any questions or comments please feel free to contact the writer, Gilles Gosselin, at (613) 946-3553.
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch
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