26 October 1998 External T.I. 9814045 - INCOME FROM A U.S. 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: Whether foreign tax credit is available for U.S. tax paid on income of U.S. LLC as a form of compensation for services rendered to the LLC

Position: No position has been established

Reasons: It is not clear whether compensation for services rendered is in fact a payment of dividend

XXXXXXXXXX 981404
S. Leung
October 26, 1998

Dear Sirs:

Re: Income from a U.S. Limited Liability Company

Further to our several phone conversations, we are writing in reply to your letter of May 29. 1998 in which you requested our view as to whether Canadian foreign tax credit is available to the taxpayer in the situation described below for U.S. taxes paid in respect of income from a U.S. limited liability company (“LLC”).

1. Mr. X is a Canadian resident/citizen who is not a U.S. citizen.

2. Mr. X is a member of a U.S. LLC formed under the laws of Delaware, U.S.A. The LLC carries on business through a permanent establishment in the U.S.

3. For U.S. tax purposes the LLC is treated as a partnership in the U.S.

4. Mr. X provides services in the U.S. to the LLC for which he receives compensation of U.S.$100,000. Such compensation is not deductible by the LLC for U.S. income tax purposes but is treated as a partnership distribution.

5. Mr. X files a U.S. income tax return reporting his share of the LLC income of U.S.$100,000 and pays U.S. federal and state income taxes of U.S.$40,000 in respect of such income.

6. Mr. X reports in his Canadian income tax return income of U.S.$100,000 from the LLC.

Our Comments

It appears in the situation described in your letter that Mr. X as a member of the LLC does not have any allocation of profit from the LLC other than the compensation he received as a result of his providing services to the LLC. This is because the share of the LLC income he reported on his U.S. tax return is exactly equal to the U.S.$100,000 compensation he received for services rendered to the LLC. It would not be reasonable if another member of the LLC who does not provide any services to the LLC is entitled to income allocation from the LLC while Mr. X is not.

It is not clear whether the income described in your letter belongs to the LLC or to Mr. X directly and whether the distribution from the LLC to Mr. X is a compensation for services rendered or a dividend in respect of a share of a foreign affiliate (i.e., the LLC) that he owns.

As we do have all the facts of the situation and as more information is needed before the tax consequences of a particular situation in respect of a taxpayer can be determined, we regret that we cannot offer any meaningful comments on the situation described in your letter.

If the situation described in your letter involves seriously contemplated transactions, we are happy to provide you with an advance income tax ruling provided that a request for such a ruling is made in accordance with the procedures described in Information Circular 70-6R3, dated December 30, 1996, issued by Revenue Canada and provided that all of the facts and circumstances of the situation are disclosed to us. If the situation described in your letter involves transactions which have already been completed or partly completed, you should consult the appropriate Tax Services Office.

Yours truly,

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