25 November 1998 External T.I. 9810015 - DEEMED SHARES OF AN LLC

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: "Deemed Shares" of an LLC

Position: Viewed as if had 100 issued shares.

Reasons: Admin position in IT-392 reviewed for this letter.

XXXXXXXXXX 981001
J. Stalker
Attention: XXXXXXXXXX

November 25, 1998

Dear Sirs/Mesdames:

Re: U.S. Limited Liability Company: Foreign Affiliate Status

We are writing in response to your letter dated April 13, 1998 in respect of how a Delaware limited liability company (“Delaware LLC”) with different classes of interests would be treated for the purposes of the foreign affiliate rules.

You have described a Delaware LLC which is formed pursuant to the terms and provisions of a Limited Liability Company Agreement (“Agreement”) between the members and in accordance with the Delaware Limited Liability Company Act.

Pursuant to the terms of the Agreement, Delaware LLC’s capital is divided into two classes: Class 1 Interests represent the common equity and Class 2 Interests represent the preferred equity. The Class 2 Interests may be issued in series. Class 1 Interests and each series of Class 2 Interests are represented by certificates. Delaware LLC is authorized to issue a limited number of each class and series.

You have asked how one would determine whether Delaware LLC would be a foreign affiliate of a Canadian corporation which owned a percentage of Class 1 Interests, Class 2 Interests or a combination of Class 1 and Class 2 Interests, that is, how one would determine the “equity percentage” or “direct equity percentage” as defined in subsection 95(4) of the Income Tax Act. (The “act”) of a Canadian corporation in Delaware LLC. Revenue Canada has previously stated its position that a limited liability corporation formed under the laws of Delaware is a corporation for purposes of the Act.

In your letter, you appear to have outlined a factual situation which has already taken place and which involves a specific taxpayer. As indicated in Information Circular 70-6R2, requests for a written opinion involving completed transactions should be directed to the appropriate Tax Service Office of Revenue Canada, as responsibility for the review of these transactions lies with such Office. However, we provide the following general comments.

The Department maintains its administrative position set out in Interpretation Bulletin IT-392 entitled “Meaning of the Term ‘Share’” and described in previous technical interpretations which is as follows. In those instances, such as the one you have described, in which the ownership of a foreign business entity is not divided into units entitled “shares”, and in which the foreign business entity is considered to be a corporation, the Department views the foreign business entity as if it had capital stock of 100 issued shares. Each owner of a beneficial interest in the foreign business entity would be considered to own a number of shares proportionate to the owner’s beneficial interest in the foreign business entity.

Accordingly, for purposes of the foreign affiliate rules, Delaware LLC would be considered as if it had capital stock of 100 shares, and each owner of a beneficial interest would be considered to own a number of shares proportionate to its beneficial interest in Delaware LLC.

You have also asked what basis and method would be appropriate to measure an owner’s beneficial interest. In our view, it would be appropriate to measure an owner’s beneficial interest based on fair market value.

Finally, you ask if, in the case where the foreign entity is a corporation formed with separate classes of share capital having similar attributes as those described for Delaware LLC, would Revenue Canada propose to treat the issued share capital as 100 shares of one class? We suggest this question is moot, as in such a case a deeming or administrative rule would not be necessary as the entity involved is a corporation whose ownership is in fact divided into shares.

We trust you will find our comments of assistance.

Yours truly,

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