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: Where a U.S. limited partnership is converted into a limited liability company, what would be the adjusted cost base of the membership interest, and of the LLC assets immediately after the conversion?
Position: General comments provided.
2017 CTF Annual Conference
Question 15: USLP conversion: ACB of inside/outside assets
CRA previously indicated that, upon the conversion of a U.S. limited partnership (“USLP”) into a U.S. limited liability company (“LLC”), the USLP is considered to have disposed of its assets at fair market value (“FMV”) and the holder of a partnership interest is also considered to have disposed of its interest at FMV. Thus such a conversion could trigger a gain or loss in respect of the partnership interests and the partnership's assets.
Can the CRA comment on the adjusted cost base (“ACB”) of the membership interests in the converted entity (i.e. the LLC) to the members, as well as the LLC’s ACB in its assets immediately after the conversion?
It is our understanding that your question refers to CRA positions previously taken in respect of particular cases, after a complete review of all their relevant facts. Any definitive comments about the Canadian income tax implications of foreign entity conversions can only be made on a case-by-case basis after a complete analysis of all the relevant facts, including a review of the applicable foreign legislation, the governing agreements and other surrounding facts and circumstances.
However, we can offer the following general comments regarding your question. The conversion from a USLP to an LLC would generally be considered, from a Canadian tax perspective, to be from one form of legal entity to another (i.e. from a partnership to a corporation). Such a conversion would result in a change in the nature of the interest owned in the entity from a partnership interest to a membership interest in an LLC. Furthermore, such a conversion would result in a change in the person with respect to whom the underlying properties are considered to be sources of income for Canadian tax purposes (i.e. from the partners to the LLC).
In such circumstances, we are of the general view that a disposition of the partnership interests in the USLP and an acquisition of the membership interests in the LLC, as well as a disposition of the assets of the USLP and an acquisition of such assets by the LLC, would occur at FMV. Thus, the total ACB immediately after the conversion of all the membership interests in the LLC to the members would generally correspond to the total FMV at the time of the conversion of all the interests in the USLP. Furthermore, the LLC’s ACB in its assets immediately after the conversion would generally correspond to the FMV of these assets at the time of the conversion.
The above comments should be considered whenever there is a conversion, from a Canadian tax perspective, from a partnership to a corporation. Such conversions could include conversions to U.S. limited liability partnerships or U.S. limited liability limited partnerships, to the extent these types of entities are considered to be corporations for Canadian tax purposes.
These comments are general in nature, and other specific rules might have to be considered depending on the facts and circumstances of a particular case. The CRA remains open to considering the determination of the Canadian income tax implications of a foreign entity conversion in the context of an advance income tax ruling request submitted in accordance with the guidelines set out in Information Circular 70-6R7 dated April 22, 2016.
November 21, 2017
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