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: A. What is the tax treatment for the transfer of personally owned shares to your single member owned LLC registered in Delaware, United States (the "US LLC")?
B. What foreign tax credits are available on amounts distributed to you from the US LLC?
C. Can losses realized on the shares owned by the US LLC (see Question A) be available to you personally for Canadian tax purposes?
D. What are the tax implications in a situation where you transfer cash to your US LLC from a personal loan obtained by you in Canada when the US LLC repays your creditors directly?
Position: A. Possible Capital Gain or Loss to 69(1)(b)(i)
B. Foreign Tax Credits may be available pursuant to 20(11); 20(12); 126
D. 15(1) Shareholder Benefit
September 8, 2010
Re: Transactions with a Delaware Limited Liability Company
This is in reply to your faxed letters of May 27, 2010 and June 1, 2010 in which you inquired into the tax treatment of hypothetical transactions involving your wholly owned Delaware Limited Liability Company ("US LLC").
Here is a list of facts surrounding the hypothetical situations presented:
1. Mr. A is a resident of Canada.
2. Mr. A is the sole-owner of a Limited Liability Company registered in the state of Delaware, United States (the "US LLC"). For US tax purposes, the US LLC is a "disregarded entity separate from its owner".
3. Mr. A transfers publicly traded shares to the US LLC. The shares will not be purchased by the US LLC but will be owned by the US LLC.
4. US LLC will incur taxes in the United States.
5. The publicly traded shares referred to in Fact 3 result in a capital loss upon disposition of the shares by the US LLC. Mr. A has other capital gains on his personal tax return in Canada.
6. Mr. A obtains a $25,000 loan from a bank located in Canada. Mr. A transfers $25,000 to the US LLC. US LLC repays the creditors of Mr. A directly.
A. What are the tax implications with respect to transferring shares that are personally owned by Mr. A to US LLC?
B. What relief is available for foreign taxes paid to the government of the United States ("US")?
C. Can losses realized on the shares owned by the US LLC (see Question A) be available to Mr. A personally for Canadian tax purposes?
D. What are the tax implications in a situation where Mr. A transfers cash to US LLC from a personal loan obtained by Mr. A in Canada when US LLC repays Mr. A's creditors directly?
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Where the particular transactions are complete, the inquiry should be addressed to the relevant tax services office, a list of which is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature only and are not binding on the CRA.
Please also note that we do not typically provide any tax planning assistance and as stated above, the comments are of a general nature only.
A. Transfer of personally owned stocks to US LLC:
You inquired into the tax implications with respect to transferring shares that are personally owned by Mr. A to US LLC (refer to Fact #3).
In certain situations, the Act may provide for the transfer of property from a person or partnership to a corporation on a tax deferred basis such as in subsections 85(1), 85(2) and 85.1(1). Typically, these provisions require that the assets be transferred to a taxable Canadian corporation. Since the hypothetical situation presented involves the transfer of property to a US LLC, a non-resident corporation, the conditions for the rollover provisions are not satisfied and are not available.
Paragraph 69(1)(b)(i) states that where a taxpayer has disposed of anything to a person with whom the taxpayer was not dealing at arm's length for no proceeds or for proceeds less than the fair market value thereof at the time the taxpayer so disposed of it, the taxpayer shall be deemed to have received proceeds of disposition therefore equal to that fair market value.
The US LLC is "disregarded as an entity separate for its owner". It is our long standing position that a LLC registered in the state of Delaware, United States is considered a separate person with powers similar to those accorded to a corporation. In other words, a LLC registered in the state of Delaware, United States is considered a corporation for all purposes of the Act. Since the definition of a "person" in subsection 248(1) of the Act includes a corporation, US LLC is considered a separate person.
Subsection 251(1) of the Act provides the definition of arm's length which states that related persons shall be deemed not to deal with each other at arm's length. Related persons are defined in subsection 251(2) and include a corporation and a person who controls the corporation. Mr. A controls US LLC. Therefore, he is not dealing at arm's length at US LLC.
The definition of "disposition" in subsection 248(1) of the Act states, in paragraph (e), that the disposition of any property does not include any transfer of property as a consequence of which there is no change in the beneficial ownership of the property. It is a question of fact as to whether the beneficial ownership has changed. In light of the fact that the shares will be legally owned by US LLC which is considered a corporation for all purposes of the Act, it is our opinion that the transfer of the shares would represent a change in beneficial ownership.
Therefore, it is our opinion that the transfer of stocks will be deemed to have proceeds of disposition equal to their fair market value pursuant to paragraph 69(1)(b)(i) and a capital gain or loss may result.
B. Foreign Tax Credit
You inquired into the tax relief that is available for foreign taxes paid to the government of the United States ("US") (refer to Fact #4).
Generally, a foreign tax credit ("FTC") is available only to the taxpayer who is considered to have paid tax in a foreign country on income from that country. For example, if the taxes paid are considered paid by US LLC, then Mr. A would not be entitled to the FTC. On the other hand, if the taxes are considered paid by Mr. A, then Mr. A would generally be entitled to a FTC.
Paragraph 2 of Article XXIV of the Canada-US Income Tax Convention (the "Treaty") states that the elimination of double taxation, in the case of Canada, is achieved through deductions available pursuant to the provisions contained in the laws of Canada.
A FTC for non-business income (i.e. dividends) may be available to Mr. A pursuant to subsection 126(1) of the Act. The FTC on non-business income is calculated as the amount of "non-business income tax" paid (generally not exceeding 15%), calculated using the definition in 126(7), but not exceeding the amount calculated in accordance with paragraph 126(1)(b).
C. Credit for losses incurred when stocks are sold though US LLC.
You inquired into whether losses realized on shares owned by the US LLC would be available to Mr. A for Canadian tax purposes (refer to Fact #5).
It is our opinion that the losses of US LLC would not be available to Mr. A for Canadian tax purposes when the shares held by the US LLC are disposed of and result in a capital loss. US LLC and Mr. A are separate taxpayers. Any losses incurred by US LLC would only be available to US LLC and not its shareholder, Mr. A.
D. Interest paid by US LLC with respect to a personal loan from Canada
You inquired into the tax implications in a situation where you transfer cash to your US LLC from a personal loan obtained by you in Canada when the US LLC repays your creditors directly (refer to Fact #6). We do not have enough information to comment on this issue as we do not know how the transaction will be accounted for.
Please also note that the US LLC would be considered a controlled foreign affiliate and as such you may be required to include certain foreign accrual property income ("FAPI") into your income on an accrual basis pursuant to subsection 91(1) of the Act.
We hope this information is of assistance to you.
Section Manager for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Canada Revenue Agency
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