16 June 2010 Roundtable, 2010-0369271C6 - Canada-US Tax Convention - Treatment of LLCs

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: Impact of the Tax Court of Canada decision in TD Securities (USA) LLC

Position: See response

Reasons: See response

CANADIAN PETROLEUM TAX SOCIETY
2010 ANNUAL CONFERENCE

TD Securities (USA) LLC Decision

On April 8, 2010, the Tax Court of Canada rendered its judgment in TD Securities (USA) LLC v. The Queen. (endnote 1) The Court concluded that TD Securities (USA) LLC, a limited liability company ("LLC") formed under United States law, was entitled to benefits under the Canada-United States Tax Convention (1980) (the "Treaty"). The case was decided under the Treaty as it applied prior to the Fifth Protocol.

Questions

1. If, based on TD Securities, a United States LLC has paid excess income or withholding tax under the Income Tax Act (Canada) ("Act") prior to the Fifth Protocol to the Treaty entering into force, should the LLC apply for a refund of any excess?

2. Subsection 227(6) sets out a two-year period in which the CRA is required to refund any excess tax that was paid under Part XIII of the Act. What is the CRA's position with regard to refunding the excess Part XIII tax?

3. What is the CRA's position on the application of Article IV(6) of the Treaty, as introduced by the Fifth Protocol, in respect of a fiscally transparent LLC (i.e., is this provision necessary for treaty benefits to be claimed by the LLC)?

CRA Response

The CRA continues to be of the view that an LLC that is fiscally transparent under the taxation laws of the United States is not a resident of the United States for purposes of the Treaty. This is consistent with the view of the United States tax authorities, as is evident in paragraph 90 of the decision. However, in light of the decision, the CRA will provide relief under the Treaty to an LLC in the circumstances described below. Where relief is available, the CRA expects there will be corresponding adjustments to any foreign tax credits claimed in the United States that relate to the refunded Canadian taxes.

Pre-Fifth Protocol (taxes other than taxes withheld at source)

The CRA will accept a claim for treaty benefits made by an LLC, in respect of a taxation year of an LLC to which Article IV(6) of the Treaty is not in effect if:

• the LLC can demonstrate that it was wholly-owned, throughout the relevant taxation year, by one or more persons who were residents of the United States for the purposes of the Treaty, and
• a notice of objection for the relevant taxation year is filed within the time prescribed by the Act, or where the CRA has confirmed an assessment to which the LLC has objected, the LLC appeals the assessment, within the time prescribed by the Act, and the LLC is not precluded from raising the claim in the notice of appeal. (endnote 2)

Pre-Fifth Protocol (taxes withheld at source)

Where an item of income that is subject to tax under Part XIII of the Act was paid or credited by a Canadian resident to an LLC prior to February 1, 2009, and a refund application is made before the expiration of the limitation period specified in subsection 227(6), the Minister will refund the excess tax (endnote 3) if the item of income, in its entirety, was fully and comprehensively taxed in the United States in the hands of one or more persons who were residents of the United States under the Treaty.

Where a taxpayer is subject to an assessment for failure to deduct or withhold tax under Part XIII of the Act on an amount paid or credited to an LLC, the CRA will reassess the taxpayer to reduce the amount owing to reflect the application of the Treaty if the amount paid or credited, in its entirety, was fully and comprehensively taxed in the United States in the hands of one or more persons who were residents of the United States under the Treaty and

• the taxpayer has filed a valid objection to the assessment, or
• the CRA has confirmed an assessment to which the taxpayer has objected, and the taxpayer appeals the assessment, within the time prescribed by the Act.

Post-Fifth Protocol

With respect to an amount of income, profit or gain arising in circumstances where Article IV(6) of the Treaty is in effect (endnote 4) , it is our position that Article IV(6) establishes the parameters under which the benefits of the Treaty may be claimed by a fiscally transparent LLC. Treaty benefits claimed by an LLC with respect to an amount of income, profit or gain will be recognized by the CRA only if the amount is considered to be derived, pursuant to Article IV(6) of the Treaty, by a person who is a resident of the United States and that person is a "qualifying person" or is entitled, with respect to the amount, to the benefits of the Treaty pursuant to paragraph 3, 4 or 6 of Article XXIX A.

ENDNOTES

1 2010 TCC 186.
2 The relief provided is consistent with the CRA's policy on adjustments as set out in Information Circular IC 75-7R3, paragraph 4.
3 The excess is the difference between the amount withheld and remitted on behalf of the LLC and the amount that would be required to be withheld if the LLC were a resident of the United States.
4 Article IV(6) is in effect for taxes withheld at source in respect of amounts paid or credited on or after February 1, 2009 and for other amounts, for taxation years beginning after December 31, 2008.

Ross Kauffman
2010-036927
June 16, 2010