10 November 1997 External T.I. 9728445 - U.S. Limited Liability Company - Check-the-Box RULES

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 the New U.S. Check-the-Box Rules have any Effect on our Position the U.S. LLCs are not Residents of the U.S. for Purposes of the Canada-U.S. Income Tax Convention

Position:

No. Would only be a resident if LLC elected to be taxed in the U.S. as a domestic C corporation.

Reasons:

The legislation of various states of the U.S. regarding the creation of LLCs was set up in a manner that an LLC would have the attributes of a corporation for all commercial purposes but be treated as a partnership for purposes of the Code. The new rules simply make that easier.

972844
XXXXXXXXXX David R. Senécal
(613) 957-9796

Attention: XXXXXXXXXX

November 10, 1997

Dear Sirs/Mesdames:

Re: Limited Liability Companies and the Canada-U.S. Income Tax Convention

This is in reply to your letter of September 23, 1997, to the International Tax Directorate wherein you requested the Department’s views concerning U.S. limited liability companies (“LLCs”) and the new U.S. Treasury regulations on the classification of entities for U.S. federal income tax purposes, commonly known as the “check-the-box rules”.¹ More specifically, you wish to know whether a U.S. LLC that elected to be treated as a corporation under the check-the-box rules would be considered as being a resident of the U.S. within the meaning of paragraph 1 of Article IV of the Canada-U.S. Income Tax Convention (the “Convention”).

It is our understanding that U.S. LLCs would be classified as domestic eligible entities for purposes of the check-the-box rules and, as such, would, by default, be classified as a partnership for U.S. federal income tax purposes if the particular U.S. LLC has two or more members, unless that U.S. LLC elects otherwise to be classified as a corporation. It is also our understanding, that a U.S. LLC that elects to be a corporation would be treated under the Code as a regular domestic C corporation and therefore taxable in the U.S. on its world income.

On this basis, it is our view that a U.S. LLC, which so elects, would be a resident of the U.S. for purposes of the Convention. This is because the U.S. LLC is “liable to tax” in the U.S. in the sense we believe is to be given to those words in paragraph 1 of Article IV of the Convention, namely, full liability to tax, being the most comprehensive form of taxation of a corporation under the laws of the U.S.

Having said this, it is our position that a U.S. LLC, which has not elected to be treated as a corporation, will not be a resident of the U.S. for purposes of the Convention, simply by virtue of the fact that it has the ability to elect under the check-the-box rules to be taxed in the U.S. as a corporation.

We trust that our comments will be of assistance.

Yours truly,

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

ENDNOTES

¹ Regulation section 301.7701-1,-2, and -3, issued December 18,1996, pursuant to section 7701 of the Internal Revenue Code of 1986, as amended (the “Code”).