19 April 2012 Internal T.I. 2012-0436221I7 - LLCs and ULCs and Treaty benefits

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: 1. Whether a single member limited liability company ("LLC") created pursuant to the laws of the United States (“U.S.”) which is treated as a disregarded entity for U.S. tax purposes, is entitled to the benefits of the Canada-United States Income Tax Convention ("Treaty")?
2. If so, what documentation should be provided and in whose name (the LLC or the single owner)?
3. Are payments from an unlimited liability company created pursuant to the laws of Canada (“ULC”) to a resident of the U.S. eligible for a reduced Canadian withholding tax rate pursuant to the Treaty?

Position: 1. The LLC described above is entitled to the benefits of the Treaty in respect of any amount of its income profit or gain to the extent that such income, profit or gain is considered to have been derived by a person who is a resident of the United States pursuant to paragraph 6 or Article IV of the Treaty. 2. Form NR303 must be completed by the LLC 3. In certain circumstances, the payments may be eligible for Treaty benefits

Reasons: 1. A single member LLC created pursuant to the laws of the U.S. which is treated as a disregarded entity for U.S. tax purposes is not considered to be a resident of the U.S. under paragraph 1 of Article IV of the Treaty. However, if the provisions of paragraph 6 of Article IV of the Treaty are satisfied in respect of the amounts of any income profit or gains of the LLC, they will be considered to be derived by a resident of the U.S. and as a result the LLC will benefit from the provisions of the Treaty in respect of those amounts. 2. The LLC completes Form NR303 and includes a complete list of all of its members on Worksheet A. 3. See below.

								April 19, 2012

	Janet Schermann					HEADQUARTERS
	Non-Resident Policy Advisor			Income Tax Rulings
	112 Kent St., room 1929				  Directorate
	Place de Ville, Tower B				Angelina Argento
	Ottawa, Ontario, K1A 0L5

								2012-043622

Limited liability company ("LLC"), unlimited liability company (“ULC”) and the Canada-United States Income Tax Convention ("Treaty”)

This is further to your email request of February 9, 2012 wherein you asked for suggested wording to be added to the CRA website which would address the following issues:

1. Whether a single member LLC created pursuant to the laws of the United States (“U.S.”) which is treated as a disregarded entity for U.S. tax purposes is entitled to the benefits of the Treaty?

2. If so, what documentation should be provided and in whose name (the LLC or the single owner)?

3. Are payments from a ULC created pursuant to the laws of Canada to a resident of the U.S. eligible for a reduced Canadian withholding tax rate pursuant to the Treaty?

Analysis Questions 1 and 2: Payments to an LLC

The CRA (footnote 1) has previously confirmed that a single member LLC created pursuant to the laws of the U.S. which is treated as a disregarded entity for U.S. tax purposes does not qualify as a “resident” of the U.S. under the definition in paragraph 1 of Article IV of the Treaty (since it is not itself liable to tax in the U.S). In this respect, the CRA (footnote 2) is not in agreement with the decision in TD Securities (footnote 3) , where the Tax Court of Canada held that an LLC created pursuant to the laws of the U.S. and which is treated as a fiscally transparent entity for U.S. tax purposes is entitled to the benefits of the Treaty in its own right.

However, pursuant to the provisions of paragraph 6 of Article IV of the Treaty and as explained in the Technical Explanation accompanying the Fifth Protocol applicable to that paragraph, to the extent that the provisions of paragraph 6 of Article IV are satisfied in respect of the amount of an income, profit or gain of the LLC, the LLC will be entitled to claim the benefits of the Treaty in respect of any such amount.

Explanation you may consider adding to the CRA Website to respond to Questions 1 and 2: Payments to an LLC

The benefits of a treaty may be available to a non-resident in respect of any income, profit or gains the latter derives through or are paid to the non-resident by a fiscally transparent entity. Entities that are fiscally transparent for U.S. tax purposes include a limited liability company (“LLC”) that is treated as a partnership or is disregarded as an entity separate from its owner for U.S. tax purposes.

It remains the view of the CRA that since a fiscally transparent LLC is not itself liable to tax in the U.S., it is not a resident of the U.S. for the purposes of applying the Treaty. However, paragraph 6 of Article IV of the Treaty establishes the parameters under which the Treaty benefits may be available to an LLC in respect of the amount of its income, profits or gains if the members of the LLC are residents of the U.S. entitled to the benefits of Treaty and under U.S. taxation law the members of the LLC are considered to derive such amounts through the LLC. The provisions of Article XXIX-A (Limitation of Benefits) should be reviewed to ensure that the members of the LLC are entitled to the benefits of the Treaty.

Under paragraph 6 of Article IV, an amount of income, profit or gain is considered to be derived by a resident of the U.S. if 1) the person is considered under U.S. taxation law to have derived the amount through an entity (other than an entity that is a resident of Canada), and 2) by reason of that entity being considered fiscally transparent under U.S. tax laws, the treatment of the amount under U.S. tax laws is the same as its treatment would be if that amount had been derived directly by that person. The effect of the rule is to suppress Canadian taxation of the LLC to give effect to the benefits available under the Treaty to the U.S. resident members of the LLC in respect of the particular amount of income, profit or gain of the LLC.

If Treaty benefits are available, then the LLC will file a Canadian tax return in which it will claim the Treaty benefits and the LLC will complete Form NR303 and include a list of all of its members on Worksheet A of the NR303. See the instructions for Form NR303 for more information on fiscally transparent entities.

Analysis regarding Question 3: Payments by a ULC to a resident of the U.S.

Paragraph 7 of Article IV of the Treaty may deny the benefits of the Treaty to a resident of the U.S. in respect of an amount of its income, profit or gain by providing that such item of income, profit or gain shall not be considered paid to or derived by a person who is a resident of a Contracting State.

Under subparagraph 7(b) of Article IV of the Treaty, an amount of income, profit or gain is not considered to be paid to or derived by a resident of the U.S. if: (1) Canada views such person as receiving the amount from an entity resident in Canada; (2) the entity is viewed as fiscally transparent under the taxation laws of the U.S.; and (3) by reason of the entity being treated as fiscally transparent under the taxation laws of the U.S., the treatment of the amount under the tax law of the U.S. is not the same as its treatment would be if the entity were not treated as fiscally transparent under the tax laws of the U.S. (i.e., treated as a corporation and not a disregarded entity) (footnote 4) .

The CRA has dealt with the meaning of the term “same treatment” in the context of subparagraph 7(b) of Article IV of the Treaty in document 2009-0318491I7, dated November 13, 2009, a copy of which is attached (see examples 7 to 9, therein).

Also note that a number of rulings (footnote 5) have recently been issued confirming that subparagraph 7(b) of Article IV will not apply to dividends deemed to be paid by a ULC pursuant to subsection 84(1) of the Act as a consequence of an increase in the paid-up capital of a ULC's shares (because the increase in paid-up capital is ignored under U.S. taxation laws, regardless of whether the ULC is fiscally transparent for U.S. tax purposes).

If, as a result of paragraph 7 of Article IV of the Treaty, an amount of income, profit or gain is considered not to be paid to or derived by a person who is a resident of the U.S. that person shall not be entitled to the benefits of the Treaty with respect to such amount (footnote 6) .

Conclusion: Explanation you may consider adding to the CRA Website with respect to Question 3

In certain circumstances, a payment of interest, royalties and/or dividends made by an unlimited liability company created pursuant to the laws of Canada (“ULC”) (which is treated as fiscally transparent for U.S. tax purposes) to a U.S. resident can benefit from reduced rates under the Treaty. However, if, as a result of paragraph 7 of Article IV of the Treaty, a person who is a resident of the U.S. is not considered to have derived or received an amount of income, profit or gain, that person shall not be entitled to the benefits of the Treaty with respect to such amount.

Under subparagraph 7(b) of Article IV it is necessary to compare the U.S. tax treatment of the amount received by a U.S. resident from a Canadian resident entity that is fiscally transparent for U.S. purposes (in this case, the ULC) to the treatment that would result if the Canadian resident entity (ULC) were not fiscally transparent for U.S. tax purposes (i.e. treated as a corporation and not a disregarded entity) .

To conclude that subparagraph 7(b) of Article IV does not apply to a payment of interest, royalties and/or dividends made by a ULC to a U.S. resident, the U.S. income tax treatment of the income to the recipient must be the same (the factors relevant to the determination of same treatment in subparagraph 7(b) of Article IV are timing, character and quantum of the income) regardless of whether or not the ULC payer is fiscally transparent for U.S. tax purposes.

We trust that these comments will be of assistance.

Yours Truly,

Olli Laurikainen
Section Manager
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 XXXXXXXXXX; E 2009-0345771I7 dated August 27, 2010; and 2009-0345351C6 dated February 11, 2010.
2 2010-036927 dated June l6,2010.
3 TD Securities (USA) LLC v. Her Majesty the Queen 2010 DTC 1137.
4 See the Technical Explanation to paragraph 6 of Article IV of the Treaty.
5 2011-0399121R3 XXXXXXXXXX; 2009-0348581R3 XXXXXXXXXX; 2009-0350921R3 XXXXXXXXXX.
6 See the Technical Explanation to paragraph 6 of Article IV of the Treaty.