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: Treatment of tax paid by a US LLC on behalf of a Canadian-resident individual who indirectly holds an interest in the US LLC through an Alberta ULC.
Position: Amount is considered a benefit conferred on the Canadian resident individual pursuant to 246(1).
Reasons: Subsection 246(1) applies.
April 16, 2012
Dear XXXXXXXXXX :
Re: Distribution from a US Limited Liability Company
We are writing in reply to your letter of June 23, 2011, regarding the Canadian tax consequences resulting from a distribution by a United States ("US") limited liability company ("LLC") for the benefit of an individual resident in Canada.
In particular, you have described a situation in which an individual taxpayer, resident in Canada, owns all of the shares of an Alberta unlimited liability corporation ("AULC") that owns a majority of the membership units of a US LLC. The AULC and LLC are both treated as corporations for Canadian tax purposes. It is assumed that the AULC and LLC are fiscally transparent entities under US tax law. As a result, the Canadian-resident individual is required to report his proportionate share of the LLC's income, resulting from his indirect interest in the LLC, using a US non-resident alien income tax return (i.e., Form 1040NR) in order to determine his US tax liability. It is assumed that the individual has no other sources of income that are subject to US taxation.
In this situation, the management of the LLC has agreed to pay the Canadian-resident individual's US tax liability. Amounts paid by the LLC would be treated as a reduction of "members' equity" in the LLC. You have asked whether the payment of tax by the LLC would be viewed as a dividend or as a taxable benefit received by the Canadian-resident individual, or as a payment of the LLC's own liability to the US government.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an Advance Income Tax Ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.
The term "dividend" is not specifically defined in the Income Tax Act ("Act"). Rather, for purposes of the Act, we look to the meaning of the term "dividend" in corporate law, and the accepted "ordinary" meaning of the term. On this basis, the CRA's longstanding view is that any distribution by a corporation of its income or capital gains made pro rata among its shareholders may properly be described as a dividend, unless the corporation can show that it is another type of payment.
Based on this meaning, the payment of taxes by the LLC would not be considered a dividend for Canadian tax purposes as the payment would not constitute a pro rata distribution by a corporation among its shareholders.
In addition, based on the information that you provided, we are of the view that the payment by an LLC of a Canadian-resident individual's US tax liability, as determined on Form 1040NR, would not constitute a repayment of a debt of the LLC itself.
Further, in any particular instance, it remains a question of fact whether a benefit has been conferred on an individual for purposes of the Act. In this regard, we note that pursuant to subsection 246(1), an amount may be included in a taxpayer's income in respect of a benefit conferred on the taxpayer, either directly or indirectly, by another person, if the amount is not otherwise included in the taxpayer's income and would have been included if the payment had been made directly by that person to the taxpayer. In fact, the courts have recently held that a payment by one corporation for the benefit of an individual that indirectly held shares of the corporation through another holding corporation was a taxable benefit conferred by the holding corporation on the individual by virtue of subsection 246(1). (endnote 1)
Where, under a similar structure, the payment of the individual's US tax liability was made by the AULC, rather than the LLC, we would expect that the amount of the payment would be included in the individual's income as a shareholder benefit conferred by the AULC pursuant to subsection 15(1) of the Act. Therefore, in the situation that you described, we would consider the payment by a US LLC of a Canadian-resident individual's US tax liability, resulting from the individual's indirect interest in the LLC, to result in a taxable benefit to be included in the individual's income by virtue of subsection 246(1) of the Act.
We trust that our comments will be of assistance.
Robert Demeter, CGA
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
1 Massicotte et. al. v The Queen, 2008 FCA 60
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