1 December 2015 Internal T.I. 2015-0588381I7 F - Classification of US-LLCs -- translation

Principal Issues: Whether various LLCs established under the laws of Delaware, Florida and New York would be treated as corporations for purposes of the Act.

Position: Yes.

Reasons: The provisions of the foreign legislation and other relevant documents in respect of the various LLCs support the conclusion that these entities should be treated as corporations for purposes of the Act.

December 1, 2015

Julie Racette, Advocate, LL.M.Fisc, CGA Central Administration Senior Appeals Officer Income Tax Rulings Directorate Tax Appeals and Charities Directorate

Yannick Roulier General Appeals Directorate 613-670-9006 250 Albert Street Ottawa, ON K1A 0L5 2015-058838

Classification of foreign entities -Delaware LLC, New York and Florida

This is in response to your inquiry of May 25, 2015 in which you requested our view regarding the classification of a Limited Liability Company ("LLC") established under the authority of the laws of the State of Delaware, of two LLC established under the authority of the laws of the State of New York, as well as an LLC established under the authority of the laws of the State of Florida. XXXXXXXXXX.

Submitted Relevant Facts

Our understanding of the relevant facts submitted is summarized as follows:

1. In general, and without limiting the relevance of provisions of the legislation of the State of Delaware other than those referenced below, the current version of the Limited Liability Company Act (Delaware Code, Title 6, Subtitle II, Chapter 18) provides in part as follows:

a. In general, the formation of an LLC requires the conclusion or existence of an operating agreement, and the execution of a certificate of formation which shall be filed in the office of the Secretary of State of Delaware (§ 18 -201).

b. An LLC is a separate legal entity whose existence can be indefinite (§§ 18-201(b) and 18-801).

c. An LLC may generally carry on any lawful business, purpose or activity, whether or not for profit (§ 18-106(a)).

d. An LLC shall possess and may exercise a broad range of powers and privileges (§§ 18-106(b), (c) and (d)).

e. A member of an LLC does not hold any interests in the property of the latter (§ 18-701). A member of an LLC can usually transact with it (§§ 18-107 and 18-501).

f. The liability of members and managers of the LLC is subject to extensive limitations (§§ 18-108, 18-303, 18-406, 18-502, 18-505, 18-607(b), 18-1101(d) and (e)).

g. A limited liability company interest is personal property which means a member's share of the profits and losses of a limited liability company and a member's right to receive distributions of the limited liability company's assets. (§§ 18-101(8) and 18 -701).

h. The acquisition, transfer and assignment of an interest in an LLC are governed by a general legislative framework, subject to the requirements of an operating agreement (§§ 18-101 (7), 18-301, 18- 702 and 18-703).

i. The procedure for allocation of profits, losses and distributions is governed by a general legislative framework, subject to the requirements of an operating agreement (§§ 18-503, 18-504, 18-601, 18-604, 18 -606, 18-607, 18-801, 18-803 and 18-804).

j. The manner of exercise of voting rights and management by LLC members is generally defined, subject to what is provided by the operating agreement (§§ 18-101 (10), 18-302, 18-401 , 18-402, 18-404, 18-407 and 18-1001).

k. The possibility that an LLC is involved in or results from an amalgamation, consolidation, continuation, conversion or "domestication" transaction, is specifically provided for (§§ 18-209, 18-212, 18-213, 18-214 and 18-216).

2. According to our general understanding of the relevant foreign law, it appears to us that the last substantial changes to the Limited Liability Company Act of Delaware essentially go back to 1995 and 1997. We therefore generally rely on the current version of the Act for current purposes, although some specific aspects of the law applicable to the taxation years XXXXXXXXXX may differ in their details.

3. Over the taxation years XXXXXXXXXX, Mr. A was a member of an LLC formed under the authority of the legislation of the State of Delaware (the "Delaware LLC"). Although you have requested it from the taxpayer, you do not have any documentation on the Delaware LLC formation. In addition, the name of the LLC, the percentage of participation of Mr. A in it, as well as information relating to other members of the LLC, if any, have not been brought to our attention.

4. In general, and without limiting relevance of provisions of the legislation of the State of New York other than those referenced below, the current version of the New York Limited Liability Company Law (2006 New York Code) provides, as follows:

a. In general, the formation of an LLC requires the preparation or existence of an operating agreement as well as the filing of articles of organization with the Department of State of the State of New York (Sections 203, 207, 209 and 417).

b. An LLC is a separate legal entity whose existence can be indefinite (sections 203(d) and 701(a)(1)).

c. An LLC can generally conduct any lawful business (Section 201).

d. An LLC has and may exercise a broad range of powers and privileges (Section 202).

e. A member of an LLC does not hold any interests in its property (Section 601).

f. A member of an LLC can usually deal with itself (Sections 411, 501 and 611).

g. The liability of members and directors of the LLC is subject to extensive limitations (sections 417, 420, 502, 508, 605 and 609).

h. An interest in an LLC is personal property encompassing a member's aggregate rights, including the right of a member to its share of profits and losses of the LLC, the right to receive distribution of the assets of the LLC, the right to vote and the right to participate in the management of the LLC (Sections 102(r) and 601).

i. The acquisition, transfer or assignment of an interest in an LLC is governed by a general legislative framework, subject to the requirements of an operating agreement (Sections 602-604).

j. The procedures for allocation of profits, losses and distributions are governed by a general legislative framework, subject to the requirements of an operating agreement (Sections 503-509, 703 and 704).

k. The manner of exercise of voting rights and management by LLC members are usually defined, subject to what is provided by the applicable operating agreement (Sections 401-419).

l. The possibility that an LLC is involved in or results from a merger transaction, consolidation or conversion, is specifically provided for (Sections 1001-1007).

5. According to our general understanding of the relevant foreign law, the New York Limited Liability Company Law was enacted in 1994 and has not been significantly modified since. We therefore refer generally to the current version of the legislation for the present purposes, although some specific aspects of the law applicable to the taxation years XXXXXXXXXX may differ in their details.

6. During the year XXXXXXXXXX, XXXXXXXXXX ("New York-LLC-1") was formed under the authority of the law of the State of New York.

7. During the month of XXXXXXXXXX, an operating agreement was concluded under the authority of the law of New York State between two members of New York-LLC-1, i.e., Mr. A and another individual ("Mr. B"), all as set out in the version of the document "XXXXXXXXXX" transmitted to our attention XXXXXXXXXX ("Agreement-1").

8. The Agreement-1 provides in part as follows:

a. the details of capital contributions made by each member during the formation of the LLC and the procedures to be followed to make additional contributions (XXXXXXXXXX);

b. the rules on maintaining a capital account in respect of each member (XXXXXXXXXX);

c. the rules for allocating profits and losses as well as the distribution of net cash flows, subject among other things to maintaining of a reserve (XXXXXXXXXX);

d. member participation in the management of the company and the LLC business, terms of exercise of their voting rights, and the possibility of them acting as agent of the LLC (XXXXXXXXXX);

e. restrictions respecting the transfer by a member of its interest in the LLC (XXXXXXXXXX); and

f. the terms for the liquidation and dissolution of the LLC (XXXXXXXXXX).

9. From the formation of New York-LLC-1 until the end of the taxation year XXXXXXXXXX, Mr. A was a member of New York-LLC-1.

10. On XXXXXXXXXX, XXXXXXXXXX ( "New York-LLC-2") was formed under the authority of the laws of the State of New York by the filing of its articles of organization with the State Department of the State of New York. On XXXXXXXXXX, Mr. B, then the only member of New York-LLC-2, established an operating agreement in respect of this LLC.

11. On XXXXXXXXXX, Mr. A and another individual acquired an interest in New York-LLC-2, and on XXXXXXXXXX, Mr. A transferred his interest in favor of XXXXXXXXXX, an entity that acted as a nominee for Mr. A. In this regard, although you have requested this from the taxpayer, you do not have any document relating to the formation, organization and operation of XXXXXXXXXX, including documentation permitting the identification of its members. It is the same with respect to documents that could support the existence of a nominee agreement.

12. During the month of XXXXXXXXXX, an amended operating agreement was concluded under the authority of the law of the State of New York between the three members of New York-LLC-2, as set out in the version of the document "XXXXXXXXXX" sent to our attention XXXXXXXXXX ("Agreement-2").

13. Agreement-2 provides in part as follows:

a. Members expressed the intention that the LLC was a "partnership" for US tax purposes (XXXXXXXXXX);

b. documents and legal title relating to the property held by the LLC, as well as property leased by it, must be held in its name (XXXXXXXXXX);

c. details of capital contributions made by each member to date, as well as procedures to be followed to make additional contributions (XXXXXXXXXX);

d. the appointment of Mr B. as LLC manager and the terms of his removal (XXXXXXXXXX);

e. the terms applicable to the management of the business and affairs of the LLC by the manager as well as the circumstances in which the consent of the members is required (XXXXXXXXXX);

f. restrictions with regard to the transfer by a member of its interest in the LLC (XXXXXXXXXX);

g. rules on maintaining a capital account in respect of each member (XXXXXXXXXX);

h. rules for allocating profits and losses as well as the distribution of net cash flows, subject among other things to the advisability of maintaining a reserve (XXXXXXXXXX); and

i. the terms for the liquidation and dissolution of the LLC (XXXXXXXXXX).

14. Over the taxation years XXXXXXXXXX, Mr. A was a member of New York-LLC-2.

15. Generally, and without limiting the relevance of provisions of the legislation of the State of Florida in addition to those referenced below, the version of the Florida Limited Liability Company Act (Florida Statutes, Title XXXVI, Chapter 608) generally repealed on January 1, 2015, provides for the following:

a. In general, the formation of an LLC requires the filing of articles of organization with the State Department of the State of Florida; members can further conclude an operating agreement, which however need not be in writing (sections 608.407 and 608.423).

b. An LLC can be formed by one or more people and is a separate legal entity whose existence can be indefinite (sections 608,405, 608.4383(1) 608.441(1)(a), 608.462, 608.471(3) and 608.601).

c. An LLC can generally carry on any business, object or lawful activity, whether for profit or not (section 608.403).

d. An LLC has and may exercise a broad range of powers and privileges (section 608.404).

e. A member of an LLC does not hold any interests in the property thereof (section 608.425).

f. A member of an LLC can generally transact with it (sections 608.4211(1), 608.4225 and 608.4226).

g. The liability of members and managers of the LLC is subject to extensive limitations (sections 608.4211, 608.4227 to 608.4229, 608.428 and 608.701).

h. An interest in an LLC is personal property referable to the right to receive distributions from it (sections 608.402(23) and 608.431).

i. The acquisition, transfer and assignment of an interest in an LLC are governed by a general legislative framework, subject to the requirements of an operating agreement (sections 608.4232, 608.432, 608.433 and 608.4351 to 608.43595).

j. The procedures for allocation of profits, losses and distributions are governed by a general legislative framework, subject to the requirements of an operating agreement (sections 608.426, 608.4261, 608.4493 to 608.427 and 608.441).

k. The manner of exercise of voting rights and management by LLC members is usually defined, subject to what is provided in the applicable operating agreement (sections 608.422, 608.4231, 608.4232 and 608.4235).

l. The possibility that an LLC is involved in or results from a merger or conversion transaction and its effect, is specifically provided for (sections 608.438 items 608.4383 and 608.439 to 608.4404).

16. According to our general understanding of the relevant foreign law, the version of the Florida Limited Liability Company Act in force immediately before its repeal was not significantly altered in the previous few years. We therefore generally rely on this version of that Act for the current purposes, although some specific aspects of the Act applicable to the taxation years XXXXXXXXXX may differ in their details.

17. On XXXXXXXXXX, XXXXXXXXXX ("Florida LLC") was formed under the authority of the Florida state law by filing its articles of organization with the State Department of the State of Florida, as appears in the version of the document "XXXXXXXXXX" sent to our attention on XXXXXXXXXX.

18. On XXXXXXXXXX, an operating agreement was concluded under the authority of the law of the State of Florida between Mr. A, Mr. B and another individual, in their capacity of the three original members and XXXXXXXXXX of Florida LLC, the whole as appears in the version of the document "XXXXXXXXXX" sent to our attention on XXXXXXXXXX ("Agreement-3").

19. Agreement-3 provides in part as follows:

a. the details of capital contributions made by each member during the formation of the LLC and the procedures to be followed to make additional contributions (XXXXXXXXXX);

b. documents and legal title related to the LLC property must be held in the name of the LLC (XXXXXXXXXX);

c. rules on maintaining the capital account in respect of each member (XXXXXXXXXX);

d. the rules for allocations of profits and losses and distributions of net cash flow, subject among other things to the advisability of maintaining a reserve (XXXXXXXXXX);

e. the terms applicable to the management of the company and business of the LLC by one or more member managers, the terms of exercising their voting rights, as applicable, and the circumstances in which the consent of the members who are no not managers is required (XXXXXXXXXX);

f. the terms for the liquidation and dissolution of the LLC (XXXXXXXXXX); and

g. restrictions with regard to the transfer by a member of its interest in the LLC (XXXXXXXXXX).

20. As of XXXXXXXXXX, Mr. B. transferred XXXXXXXXXX of his interest in Florida LLC in favor of two other members of the LLC, bringing their respective interests in Florida LLC to XXXXXXXXXX, all as appears in the version of the document "XXXXXXXXXX", concluded on XXXXXXXXXX and forwarded to our attention on XXXXXXXXXX.

21. During the taxation years XXXXXXXXXX, Mr. A was a member of Florida-LLC.

The statement of these facts is based on the information you provided to us along with your request for our views by an email dated XXXXXXXXXX, all as discussed between you and the agent assigned to the file during various telephone conversations held during the month of XXXXXXXXXX. We referred to state legislation as well as the above documents for a complete statement of the relevant facts for the current purposes. It is appropriate to note that besides the documents which are referred in the statement of facts, no other relevant documents to support the facts submitted were provided to us. Finally, the general submissions of the taxpayer in respect of the classification for the present purposes of LLCs accompanied your request.

Question

You wish to receive confirmation that Delaware-LLC, New-York-LLC-1, New-York-LLC-2 and Florida LLC are corporations for the purposes of the application of the Income Tax Act (RSC 1985, c. 1 (5th Supp.)) as amended (the "Act").

Comments

We are of the view that the dominant characteristics of Delaware-LLC, of ​​New-York-LLC-1, of New-York-LLC-2 as well as of Florida-LLC, support the conclusion that those entities are corporations for the purposes of the application of the Act in accordance with the definition of "corporation" in subsection 248(1) of the Act. These classifications are the result of an analysis of all relevant facts submitted and are primarily supported by multiple positions previously issued by our directorate.

The CRA generally uses the following two-step approach to determine the status of a foreign entity or arrangement for the purposes of the Act:

1. Determine the characteristics of the foreign entity or business arrangement on the basis of the applicable law and the terms of the agreements relating to the entity or arrangement;

2. Compare the characteristics of the foreign entity or business arrangement with those of Canadian corporations or business arrangements to determine what type of entity or arrangement it most fundamentally resembles.

The classification of the foreign entity or business arrangement for the purposes of the Act will correspond to the Canadian legal entity or business arrangement which it most resembles. This classification involves a thorough analysis and interpretation of various relevant legal documents in the context of the applicable foreign law. It is essentially a determination of fact for purposes of the application of the Act. In this context, the CRA has not established a list of essential features that a foreign entity or arrangement must have in order to be classified as one or other of the various categories of entities or arrangements recognized for purposes of the application of the Act. All the characteristics of a given entity or arrangement may be relevant to this analysis. In particular, an entity’s status as a separate legal person appears to us to be an important feature, but one that is not exclusive to corporations.

As part of the submitted relevant facts, some attributes of the LLC under analysis appear to be those of a corporation, while others may be more similar to those of a partnership. However, the nature of rights to the assets of the LLC, the scope of the limitations applicable to the liability of the members of the LLC, the terms of the formation of these entities, as well as the recognition by the applicable legislation of the foreign jurisdictions of the separate legal personality of the various LLC, are among the key attributes that support in our view the position to the effect that the LLCs under review are corporations for the purposes of the application of the Act.

In addition, the taxpayer’s representatives rely on the case of Backman v. Canada (2001 SCC 10) as well as section 8.1 of the Interpretation Act (RSC 1985, c I-21; by SC 2001, c 4, and entered into force on June 1, 2001) to develop an argument based on a comparison of the general attributes of the LLC established under the authority of the law of the State of Delaware with those of partnerships governed by the Québec Civil Code (the "QCC"). Use of this comparable for the purposes of applying the two-step approach is justified, they say, because of the fact that Mr. A is a resident of Québec. In this context, they propose an overall conclusion to the effect that a Delaware LLC is a partnership for the purpose of the application of the Act.

While some of our previous positions concerning LLC were issued before the advent of these authorities, Backman was a source of law at the time of issuance of our more recent publications involving LLC established under the authority of US state laws. Moreover, the Federal Court of Appeal recognized in 9041-6868 Québec Inc. v. Canada (2005 FCA 334, para. 5) that the addition of section 8.1 of the Interpretation Act occurred for clarification purposes, and that this legislative amendment was not intended to change the state of applicable law.

Based on the foregoing, we consider it neither opportune nor appropriate to reconsider our general approach to the classification of U.S. LLCs. Accordingly, we are maintaining our position to the effect that they should generally be considered as corporations for the purposes of the Act under the two-step approach outlined above. We state "generally" as we have not analyzed the laws of all states, nor updated, subject to this letter, many of our opinions in light of changes that have been made to the legislation initially analyzed.

Furthermore, and in support of our overall conclusion, we are not convinced that a comparative analysis involving partnerships governed by the QCC by itself supports the conclusion submitted by the representatives of the taxpayer in respect of the relevant submitted facts. However, if it were determined that such a comparative analysis supported the conclusion that a US LLC must be considered as a partnership for the purpose of application of the Act, we suggest that it would not be appropriate to adopt a classification approach to entities and foreign arrangements which could result in a different classification according to the province or territory of the residence (or permanent establishment) of the taxpayer holding an interest in the entity or the arrangement. Otherwise, for example, simply changing the province or territory of residence or the establishment would be susceptible to the triggering of complex and onerous tax consequences to the taxpayer involved.

Our position is inter alia supported by the principles of predictability and horizontal equity to be promoted under the administration of the Canadian self-reporting tax system. Furthermore, it appears to us, based in particular on the conflict of law rules, that the provincial and territorial laws of property and civil rights in Canada provide for mutual recognition of different types of entities or arrangements established under the respective jurisdictions of the various provinces and territories, thus providing an expanded base for analysis that is uniform across Canada for the purposes of applying the two-step approach. We suggest that generally the legal system (e.g., civil law, common law) of origin of a foreign entity or arrangement is more likely to influence the mode of the comparative analysis to be performed.

For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. A severed copy will also be distributed to the commercial tax publishers, following a 90-day waiting period (unless advised otherwise to extend this waiting period), for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be e-mailed to: ITRACCESSG@cra-arc.gc.ca. In such cases, a copy will be sent to you for delivery to the taxpayer.

We trust that these comments will be of assistance

Dave Beaulne, CPA, CA
Section Manager
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch