14 November 1995 External T.I. 9521535 - LIMITED LIABILITY CORPORATION-COLORADO

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether foreign taxes paid by a resident of Canada on income received from a limited liability corporation ("LLC") resident in the US which is not a foreign affiliate of the taxpayer qualifies as a "business-income tax" or a "non-business-income tax".

Position:

Subject to the provisions of paragraphs (a), (b) and (c) of the definition of non-business-income tax in subsection 126(7) of the Act, the tax paid in the US will qualify as a non-business-income tax.

Reasons:

Definition of non-business-income tax in the Act.

				952153
XXXXXXXXXX			A. Seidel

Attention: XXXXXXXXXX

November 14, 1995

Dear Sirs:

This is in reply to your letter dated August 10, 1995 with respect to foreign taxes paid by a resident of Canada on income received from a limited liability corporation ("LLC") resident in the United States (the "US") which is not a foreign affiliate of the taxpayer. "Foreign affiliate" has the meaning assigned by subsection 95(1) of the Income Tax Act (the "Act").

It appears that the interpretation you seek relates to specific taxpayers and, therefore, we bring to your attention Information Circular 70-6R2 dated September 28, 1990 and the Special Release thereto dated September 30, 1992, issued by Revenue Canada, Customs, Excise and Taxation. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for particular taxpayers with respect to specific contemplated transactions, a written request for an advance income tax ruling should be submitted in accordance with the Information Circular. Nevertheless, we can offer the following general comments in response to your letter.

Although the Department has not reviewed the applicable LLC legislation for the state of Colorado, the Department has reviewed the applicable LLC legislation for a number of other states. It is our view that the entities formed under those statutes that we have reviewed would be considered corporations for Canadian tax purposes. However, an LLC is generally structured so as to be taxed as a partnership under US tax law.

In the situation where a LLC is treated as a partnership for US tax purposes, it is the shareholders, and not the LLC itself, who will be subject to tax on their share of the LLC's income under US tax law. A shareholder who is resident of Canada will be subject to tax in Canada on any amount distributed by the LLC to the shareholder when it is received by the shareholder since the distribution from the LLC is considered to be a taxable dividend for purposes of the Act.

The following comments address the situation where the LLC is not a foreign affiliate of the Canadian shareholder and where the net income of the LLC has been distributed during the year to its shareholders. These comments do not necessarily apply to any other situation.

The tax paid in the US by a Canadian shareholder in respect of his share of the income of the LLC would not be a "business-income tax" within the meaning thereof in subsection 126(7) of the Act since the Canadian shareholder would not be considered to be carrying on a business in the US.

Subject to the provisions of paragraphs (a), (b) and (c) of the definition of "non-business-income tax" in subsection 126(7) of the Act (the "Definition"), the amount of tax paid by a Canadian shareholder in the US will qualify as a non-business-income tax for the purposes of determining the amount that the Canadian shareholder may deduct from the tax otherwise payable for the year under Part I of the Act. Paragraph (a) of the Definition excludes any amount that was included in computing the business-income tax for the year in respect of any business carried on in the US by the Canadian shareholder and paragraph (b) of the Definition excludes any amount that was deductible under subsection 20(11) of the Act. The amount deductible under subsection 20(11) of the Act would be the amount of tax paid in the US in excess of 15% of the income from a property, in this case the taxable dividend received by the Canadian shareholder. The net effect of paragraphs (a) and (b) of the Definition is that the Canadian shareholder may deduct an amount up to a maximum of 15% of the taxable dividend received by him from his tax otherwise payable under Part I of the Act pursuant to subsection 126(1) of the Act. In the situation where a Canadian shareholder has no Part I tax liability, or a tax liability that is less than the amount of tax credit available to him, and provided that the LLC is not a foreign affiliate of the Canadian shareholder, the Canadian shareholder may deduct such amount in computing his income for a taxation year from a business or property pursuant to subsection 20(12) of the Act. By virtue of paragraph (c) of the Definition, any amount deducted under subsection 20(12) of the Act no longer qualifies as a non-business-income tax paid by the Canadian shareholder.

These comments are provided in accordance with the guidelines set out in paragraph 21 of Information Circular 70-6R2.

Yours truly,

for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch