CRA position on partnerships under the Delaware Revised Uniform Partnership Act (p. 31:5)
Effectively, the CRA concluded [in ITTN No. 20, June 14, 2001, see also 2004-0104691E5] that the existence of a separate-legal-entity clause in Delaware partnership legislation would not, in itself, prevent a business association from being considered a partnership for Canadian tax purposes. However, subsequent comments by the CRA indicated that it still considers the proper characterization of partnerships formed under DRUPA to be an open question. [f.n. 23: … 2006-021645117] Effectively taxpayers have since been faced with a "don’t ask, don’t tell" situation.
Anson result not applicable in Canada (p. 31:7)
In any event, the same issue would not have arisen in Canada. The Act treats LLCs as corporations: an LLC is an "incorporated company," and as such it is explicitly included in the meaning of "corporation" as defined at subsection 248(1). Other provisions, such as article IV(6) of the Canada-US tax treaty and new section 93.2 and regulation 5907 (11.2)(b) of the Act, also contemplate that an LLC would have corporate status. Also, Canadian courts have accepted that both the CRA and taxpayers treat LLCs as corporations. [f.n. 31: TD Securities (USA) Llc v. The Queen, 2010 TCC 186; and Exida.Com Limited Liability Company v. Canada, 2010 FCA 159.] Finally, and perhaps of greatest practical relevance, is the fact that if Mr. Anson had been a Canadian resident (and assuming that the payment of US taxes and the making of distributions had been effectively timed), the credit issue would not arise in Canada because section 126 of the Act requires not that the foreign tax relate to any particular foreign-source income, but only that income and tax be sourced in the same foreign country.
CRA position on partnerships under the Delaware Revised Uniform Partnership Act (p. 31:5)
Effectively, the CRA concluded [in] ITTN No. 20, June 14, 2001, see also 2004-0104691E5] that the existence of a separate-legal-entity clause in Delaware partnership legislation would not, in itself, prevent a business association from being considered a partnership for Canadian tax purposes. However, subsequent comments by the CRA indicated that it still considers the proper characterization of partnerships formed under DRUPA to be an open question. [f.n. 23: … 2006-021645117] Effectively taxpayers have since been faced with a "don’t ask, don’t tell" situation.
Commercial law character of Florida LLPs and LLLPs (pp. 31:8-31:11)
Florida's partnership laws are contained in chapter 620 of title XXXVI "Business Organisations". ...
Section 620.1104 of the Florida statute states that a limited partnership is an entity distinct from its partners and that it has a perpetual duration. ...
[A]lthough the term "entity" as it is used in the Act denotes a level of individuality and separate existence, it is a more diffuse concept than it is in the US legislation and does not go as far as being a synonym for "legal person." ...
What distinguishes LLLPs is the provision of section 620.1404(3), which states that an obligation of a limited partnership incurred while the limited partnership is a LLLP, whether arising in contract, tort, or otherwise, is solely the obligation of the limited partnership. ...
[W]hat ultimately matters is that a Florida LLLP is formed, exists, and is dissolved by a virtue of the contractual arrangements between two or more persons instead of being a legal person formed and dissolved only by state action. In this regard, section 620.1110 is significant: it provides that, subject to certain specific exceptions, the limited partnership's partnership agreement governs relations among the partners and between the partners and the partnership. ...
Both the formation and dissolution provisions show that the existence of a limited partnership, including an LLLP, is fundamentally a contractual matter, not a function of a governmental act.
Inappropriate reduction of reserve by blocking deficit of intermediate FA Holdco (pp. 31:31-31:34)
One of the fundamental issues with the reserve mechanism, an issue that the CRA has apparently not discussed, is the role played by blocking deficits.
In the example depicted in figure 14, FA Opco makes a $200 loan to Canco at a time when FA Opca has exempt surplus of $300 and FA Holdco has an exempt deficit of $100. The shares of FA Holdco have a nil ACB. On a consolidated basis, the amount of the loan does not exceed the surplus of the relevant entities in the group. However, the test is not applied on a consolidated basis.
One calculates the reserve by assuming that FA Opco paid a notional dividend of $200 to FA Holdco, which paid a notional dividend of $200 to Canco. Because of the deficit of $100 at the FA Holdco level, the $200 dividend deemed paid to Canco would be considered to have been paid $100 out of exempt surplus and $100 out of pre-acquisition surplus. Because the FA Holdco shares have no ACB, only $100 would be considered to have been received tax-free in Canada. Canco could claim a subsection 90(9) reserve only in respect of a $100 notional deduction under paragraph 113(1)(a).
The result would be even worse if FA Opco made two successive loans of $100 to Canco, because in each case, the notional dividend would not exceed the FA Holdco deficit. In that case, no reserve would be available in respect of either loan. Although the rules provide that surplus cannot be counted more than once in a determination of the available reserve in respect of subsequent loans, there is nothing to deem the deficit to have been "used up" by a prior loan.
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