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 particular "sociétés en commandite simple" should be corporations or partnerships for Canadian tax purposes.
Position: Partnerships.
Reasons: The general characteristics of these entities more closely resemble partnerships than other forms of business entities or arrangements under Canadian commercial law.
December 22, 2022
Jason Shepherd Judy Ho
International Large Business Case Manager Income Tax Rulings Directorate
XXXXXXXXXX
2021-089212
Entity Classification – Société en commandite simple (“SCS”)
This is in response to your request for our views with respect to the tax status of two particular “sociétés en commandite simple” that were formed in Côte d’Ivoire and Gabon for the purposes of the Income Tax Act (“Act”).
Unless otherwise stated, all references to a statute are to the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended (the “Act”), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated. The singular should be read as plural and vice versa, where the circumstances so require.
Background
We understand the facts of the situation submitted to be as follows:
1. XXXXXXXXXX (“Ivory Coast SCS”) was registered in Côte d’Ivoire in XXXXXXXXXX SARL (“FA1”), a controlled foreign affiliate of XXXXXXXXXX (“Canco1”) (a Canadian publicly traded company), is the general partner (footnote 1) of Ivory Coast SCS. XXXXXXXXXX(“Canco2”) (a Canadian subsidiary of Canco1) is the limited partner of Ivory Coast SCS.
2. XXXXXXXXXX (“Gabon SCS”) was registered in Gabon in XXXXXXXXXX (“FA2”), a controlled foreign affiliate of Canco1, is the general partner of Gabon SCS. Canco2 is the limited partner of Gabon SCS.
3. Each of the SCSs has a term of XXXXXXXXXX years, but their shareholders can vote to extend the term.
4. XXXXXXXXXX.
5. XXXXXXXXXX.
6. XXXXXXXXXX.
7. FA1 sold its participating interest in the rights and obligations under a XXXXXXXXXX and the corresponding legal and beneficial right, title and interest in respect of XXXXXXXXXX (footnote 2) , including XXXXXXXXXX owned, to Ivory Coast SCS on XXXXXXXXXX. The Sale and Purchase Agreement was made between FA1 and Ivory Coast SCS.
8. XXXXXXXXXX (“FA3”), a controlled foreign affiliate of Canco1, transferred its entire assets and business to Gabon SCS on XXXXXXXXXX. FA3 and Gabon SCS were the parties to the transfer agreement.
9. The assets that were transferred from FA3 to Gabon SCS were FA3’s participating interest in the rights and obligations under the XXXXXXXXXX and the corresponding legal and beneficial right, title and interest of FA3 (a) in and under the “Assets and Business Documents and Contracts” (footnote 3) , (b) in all property and equipment owned or leased pursuant to any of the Assets and Business Documents.
10. The businesses of Ivory Coast SCS and Gabon SCS are the XXXXXXXXXX.
11. The Organization for the Harmonization of Business Law in Africa (“OHADA”) was established by the Treaty on the Harmonization of Business Law in Africa (OHADA) signed on October 17, 1993 in Port – Louis (Mauritius) and revised in Québec (Canada) on October 17, 2008.
12. The Uniform Act on Commercial Companies and the Economic Interest Group (the “Uniform Act”) governs any commercial company whose headquarters is located in a territory that is a party to the Treaty on the Harmonization of Business Law in Africa. Côte d’Ivoire and Gabon are member states of OHADA and parties to the aforementioned Treaty, and Ivory Coast SCS and Gabon SCS were formed in accordance with the provision in the Uniform Act.
13. The Uniform Act provides, among other things, for the following:
a. The commercial company (footnote 4) is created by two (2) or several persons that agree, through an agreement, to contribute to an activity cash, in-kind or service assets for the purpose of sharing profits or enjoying revenues that may derive therefrom. Members commit to bear company losses under the conditions provided for by this Uniform Act. The commercial company is created in the common interest of members. (Article 4)
b. All companies obtain legal personality from the date of registration with the registry of commerce and securities unless otherwise provided for in this Uniform Act. (Article 98)
c. The legal personality of the company shall continue to exist for purposes of the liquidation and until the completion of the liquidation process is published. (Article 205)
d. Securities shall confer to their holders:
1) a right to profits made by the company whenever their distributed have [sic] been decided;
2) a right to net assets of the company at their distribution, at the dissolution of the company or in connection with the reduction of its capital (Article 53)
e. The limited liability partnership is a partnership in which one or more partners jointly and severally liable for the company debts, referred to as “general partners”, coexist with one or more partners liable for the company debts up to the limit of their contributions referred to as “limited partners” or “limited liability partners”, and whose capital is divided into partnership interests. (Article 293)
f. The limited liability partnership shall be managed by all general partners, unless the articles of association contain a provision appointing one or more managers from among the general partners, or provide for the appointment of such manager(s) by a subsequent instrument under the same conditions and with the same powers as in a partnership. (Article 298)
g. In dealings with third parties, the manager binds the company by acts falling within the company’s purpose. Any objection made by a manager to the actions of another manager shall have no effect against third parties, unless it is established that they have had knowledge thereof.
Provisions of the articles of association limiting the powers of managers as stipulated in this article shall not be enforceable against bona fide third parties. (Article 277)
h. The company's creditors may attempt to collect company debts against a partner only sixty (60) days at least after having unsuccessfully made a demand to the company.
Demand shall be made by deed of a bailiff or by any means that prove actual receipt by the addressee. Such time limit may be extended by a decision of the competent court ruling expeditiously without exceeding thirty (30) days. (Article 271)
i. The SCS shall continue to operate in spite of the death of a limited partner. In the event it is provided that despite the death of one of the general partners, the company continues with his heirs, the latter shall become limited partners when they are unemancipated minors. Where the deceased partner was the sole general partner and if his heirs are then unemancipated minors, he shall be replaced by a new general partner, or the company shall be transformed within a period of one (1) year from the death. Failing this, the company is automatically dissolved after one year from the death. (Article 308)
Issue
You have asked for our views regarding the classification of the SCSs as corporations or partnerships for the purposes of applying the Act.
The CRA’s approach to foreign entity classification is a two-step approach. The first step is to examine the characteristics of the foreign business entity or arrangement under foreign commercial law, along with any other relevant documents such as the agreement governing the relationship or other contracts. The second step is to compare these characteristics with those of recognized categories of business entities or arrangements under Canadian commercial law in order to classify the foreign entity under one of these categories under the Act.
Characteristics of Corporations and Partnerships
Generally, corporations in Canada have the following characteristics, among others:
- Legal personality, which includes:
o Separate legal person;
o Corporation sues or can be sued in court;
o Continuity of life of the corporation (unless it is dissolved);
o Corporation owns its own property, carries on business itself and has its own rights and liabilities.
- Limited liability of shareholders and a corporation can incur losses for which the members are not liable;
- Issuance of share capital to shareholders;
- Distributions: shareholders of a company are entitled to the division and distribution of profits after they are declared by the corporation;
- Centralization of management;
- Free transferability of interests;
- Incorporation by statute or by the registration of memorandum of association.
Generally, to qualify as a partnership under Canadian provincial law, there are three essential elements:
- a business;
- carried on in common by two or more people;
- with a view to profit.
Gabon SCS and Ivory Coast SCS have characteristics of both partnerships and corporations. It is our understanding that Gabon SCS and Ivory Coast SCS carry on businesses in the XXXXXXXXXX, each entity was formed with two partners (one general and one limited), and the businesses were carried on with a view to profit. Although these entities have all of the essential elements of partnerships, they also have additional characteristics that corporations in Canada typically have. Legal personality is a characteristic of the SCS but it is not a characteristic of partnerships in Canada. Some of the qualities that are typically associated with “legal personality” are: the ability to conclude contracts, take legal action, and own property in its own name.
In document 2015-0588381I7, the CRA indicated that generally the legal system (e.g., civil law, common law) of origin of a foreign entity or arrangement is more likely to influence the mode of the comparative analysis to be performed for purposes of entity classification. Section 8.1 of the Interpretation Act provides that the common law and the civil law are equally authoritative and recognized sources of the law of property and civil rights in Canada. Given that Côte d’Ivoire and Gabon are civil law systems and that Quebec is the only province that has a civil law system in Canada, it is appropriate to primarily compare the SCS to partnerships formed under the Civil Code of Quebec.
As previously mentioned, the ability to conclude contracts, take legal action, and own property in its own name are all characteristics that are typically associated with legal personality. Under Article 2219 of the Civil Code of Quebec (“CCQ”), the partners of a partnership bind the partnership for every act concluded in its name in the ordinary course of its activities. In other words, a partnership can conclude contracts in its own name. Article 2225 of the CCQ provides that a partnership may sue and be sued under the name it declares. Article 2199 of the CCQ essentially provides that partnerships have separate patrimonies from those of their partners. Even though a general or limited partnership formed under the CCQ does not have legal personality, it has a many of the characteristics typically associated with legal personality.
A comparison of the provisions of the CCQ and the Uniform Act shows that the provisions of the two sets of legislation are very similar, except that Québec partnerships are not legal persons but SCSs have legal personality. In our view, the unlimited liability of the general partners of an SCS is an important trait that favors partnership status under the Act since the sharing of responsibility for partnership debts is a primary trait of partnerships in Canada while the limited liability of shareholders is generally a primary trait of corporations in Canada. Although legal personality is also a primary trait of corporations in Canada, we have previously stated that the existence of a separate legal personality alone is generally not sufficient to distinguish certain foreign partnerships from Canadian partnerships. (footnote 5) Given the similarities between Gabon SCS and Ivory Coast SCS and partnerships in Canada, these SCSs should be considered partnerships for Canadian tax purposes.
Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.
We hope that the above comments are helpful to you.
Yours truly,
Yves Grondin
Acting Section Chief
For Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 The use of terms such as “general partner”, “limited partner”, and “shareholders” in the “Background” section are not meant to be an indication that we consider the entities to be partners of a partnership or shareholders of a corporation, but rather, we are using these terms to be consistent with the terms used in the Articles of Association.
2 XXXXXXXXXX.
3 The “Assets and Business Documents and Contracts” are various documents relating to FA3’s business such as XXXXXXXXXX.
4 The SCS is a commercial company. It should be noted that the French version of the Uniform Act uses the word “société” which can be a company or a partnership.
5 2018-0749481C6
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