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: Whether a particular LLLP governed by the laws of Delaware would be considered to be a corporation or a partnership for the purposes of the Act?
Reasons: The provisions of the foreign legislation and other relevant documents in respect of the Delaware LLLP support the conclusion that this entity should be considered to be a corporation for the purposes of the Act. However, based on administrative concessions under development, consideration should be given to maintaining the partnership treatment of the entity for the relevant taxation years, as per the filings made by the taxpayers.
February 13, 2017
Ms. Leslie Bafia HEADQUARTERS
Manager – Legislative Applications Section Income Tax Rulings
Large Business Audit Division Directorate
International and Large Business Directorate Yannick Roulier
Entity Classification – Delaware Limited Liability Limited Partnership
This is in reply to your correspondence of May 15, 2015, wherein you requested our views with respect to the tax status of a particular Limited Liability Limited Partnership governed by the laws of the state of Delaware, for the purposes of the Income Tax Act (“Act”). We apologize for the delay in responding.
We understand the facts of the situation submitted to be as follows:
1. XXXXXXXXXX (“CanLP”) and XXXXXXXXXX (“CanGP”) are related taxable Canadian corporations for the purposes of the Act.
2. On XXXXXXXXXX, CanGP constituted XXXXXXXXXX (“Delaware-LLLP”) under the authority of the laws of the state of Delaware by filing the required certificate with the Secretary of State.
3. In general, and without limiting the relevance of the law applicable in the state of Delaware to the provisions referred to below, the current version of the Delaware Revised Uniform Limited Partnership Act (Delaware Code, title 6, chapter 17; “DRULPA”) provides, among other things, for the following (capitalized words refer to terms defined in the DRULPA):
a. A Limited Partnership is a partnership having at least one General Partner and one Limited Partner, which is formed under the laws of the State of Delaware by the execution of a Certificate of Limited Partnership filed in the Office of the Secretary of State (§§ 17-101 and 17-201).
b. A Limited Liability Limited Partnership (“LLLP”) is generally a Limited Partnership that files the following documents in accordance with the requirements of the law: a Statement of Qualification stating that it is an LLLP, and an Annual Report (§§ 15-1001, 15-1003, 17-101, 17-214).
c. An LLLP is a separate legal entity that has a perpetual duration; specific rules are provided for General Partners or Limited Partners to withdrawn from the LLLP, subject to the applicable Partnership Agreement (§§ 17-201(b), 17-214(e), 17-801(1), 17-402, 17-602 and 17-603).
d. A Partner has no interest in specific LLLP property and a Partnership Interest is personal property (§ 17-701).An LLLP may carry on any lawful business, purpose or activity, and has and may exercise extended powers and privileges as are necessary or convenient to the conduct, promotion or attainment of its activities, including the power to sue and be sued and to assume liabilities of its own (§§ 17-106 and 17-107).
e. Limited Partners of an LLLP have limitation of liability in respect of the obligations of the LLLP (§§ 17-214(d), 17-303 and 17-304).
f. Subject to the Partnership Agreement, General Partners of an LLLP have limitation of liability in respect of the obligations of the LLLP (§§ 15-306 and 17-214(d)).
g. In general, and subject to the Partnership Agreement, each General Partner is an agent of the LLLP for the purposes of the LLLP’s activities and has specific fiduciary duties to the LLLP and the other Partners (§ 17-403).
h. Profits and Losses of an LLLP shall generally be allocated among the Partners on the basis of the value of their Contributions, subject to another method provided in the Partnership Agreement. (§ 17-503).
i. Partners have generally no right to receive a Distribution before the LLLP decides to make such Distribution; once the decision is made, Partners become entitled to receive their share of the Distribution and have the status of creditors of the LLLP with respect to it; such share is determined on the basis of the value of the Partners’ Contributions unless the Partnership Agreement provides otherwise; LLLP has to satisfy a solvency test in order to make Distributions (§§ 17-504, 17-601 to 17-608).
j. The possibility for an LLLP to continue into another jurisdiction, to convert into another type of listed entity, to merge with other such entities, or that an LLLP be created from these types of transactions or from a domestication involving various listed entities, is contemplated by the law (§§ 17-211, 17-215, 17-216, 17-217 and 17-219).
k. A listed entity that has been converted pursuant to the DRULPA is generally the same entity that existed before the conversion; title to all real property and other property at the time of conversion remains vested in the converted entity, and all debts, liabilities and obligations of the former entity continue as obligations of the converted entity (§§ 17-211, 17-215, 17-216, 17-217 and 17-219).
l. Unless otherwise provided in the Partnership Agreement, a Partnership Interest can generally be assigned or transferred (§§ 17-702).
4. Based on our general understanding of the applicable law of the foreign jurisdiction, the versions of the DRULPA applicable to the relevant taxation years in question have not been substantially modified in comparison to its current version. Accordingly, we are relying on the current version of that law for the purposes of the present document, notwithstanding that certain aspects of the applicable version of the law to taxation years since XXXXXXXXXX may vary in their details.
5. The agreement concerning Delaware-LLLP (“Agreement”) was entered into between CanGP and CanLP on XXXXXXXXXX, and was further amended on XXXXXXXXXX. It generally provides the following (capitalized words refer to defined terms in the agreement):
a. that CanGP and CanLP agreed to form and CanGP did form, by filing a certificate with the Secretary of State of Delaware, an LLLP under the DRULPA XXXXXXXXXX;
b. that the LLLP may engage in any and all lawful business activities and do all things generally necessary in connection with or incidental to its own activities XXXXXXXXXX;
c. the details of the Partners’ Capital Contributions and the Partnership Percentage XXXXXXXXXX;
d. the rules to maintain each Partner’s Capital Account XXXXXXXXXX;
e. the rules for the allocation of Profits or Losses to Partners XXXXXXXXXX;
f. the timing and amount of Distributions, generally determined by CanGP, of Cash Flow From Operations, and of Sale or Refinancing Proceeds, which involve CanGP’s discretion to set aside sufficient Reserves XXXXXXXXXX;
g. that CanGP has the exclusive management and control of the business of the LLLP, shall make all decisions regarding the management and affairs of the LLLP, and has extended rights and powers to do so XXXXXXXXXX;
h. the setting up of a Board of Managers that shall provide overall guidance to CanGP in the management and affairs of the business and that shall provide direction to CanGP in carrying out the day-to-day operations of the LLLP XXXXXXXXXX;
i. that CanLP will have no right or power to take part in the management or control of the LLLP or its business and affairs or to act for or bind the LLLP in any way, except where CanLP may vote on the matters that expressly require its approval under the Agreement XXXXXXXXXX;
j. the obligations and duties of CanGP, including CanGP’s duty of loyalty to the LLLP and to CanLP as specifically limited, and the requirement that CanGP shall use its best efforts to carry out the purposes of the LLLP for the benefit of all the Partners XXXXXXXXXX;
k. limitation of liability for CanGP and CanLP in respect of the obligations of the LLLP XXXXXXXXXX;
l. for the termination of status of CanGP XXXXXXXXXX;
m. that CanLP may, among other things, transfer, assign, pledge, mortgage or donate all or any part of its Partnership Interest with the prior written consent of CanGP XXXXXXXXXX; and
n. the Liquidating Events, which don’t include a predetermined date XXXXXXXXXX.
6. The Statement of Qualification and an Annual Report for each relevant year were duly filed by Delaware-LLLP in the Office of the Secretary of State of Delaware.
7. The participating interests of CanGP and CanLP in Delaware-LLLP were respectively as follows: initially at XXXXXXXXXX and XXXXXXXXXX modified to XXXXXXXXXX and XXXXXXXXXX as of XXXXXXXXXX; and further modified to XXXXXXXXXX and XXXXXXXXXX starting on XXXXXXXXXX.
8. For all relevant taxation years, Delaware-LLLP was treated as a corporation for U.S. tax purposes.
9. The profits or losses of Delaware-LLLP were allocated to its partners on a yearly basis based, amongst other provisions, on the application of section 96 of the Act, as reflected in forms T5013 – Statement of Partnership Income, prepared by the taxpayers in respect of the XXXXXXXXXX taxation years (not attached to the request).
10. In XXXXXXXXXX, Delaware-LLLP disposed of all of its assets. It principally used the proceeds received to end contracts for services and was subsequently dissolved. In this respect, each of CanGP and CanLP claimed capital losses in their respective tax return for their XXXXXXXXXX taxation year.
11. On XXXXXXXXXX, the XXXXXXXXXX Tax Services Office issued notices of reassessment to CanGP and CanLP for their respective XXXXXXXXXX, XXXXXXXXXX and XXXXXXXXXX taxation years. The primary position developed XXXXXXXXXX. We understand that the assessments issued could also be supported, at least in part, by a secondary position based on the argument that the Delaware-LLLP should be considered a corporation for the purposes of the Act.
These facts are based on your request for an opinion, including the Memorandum from XXXXXXXXXX dated XXXXXXXXXX, the documents attached to the request, and conversations held with you and XXXXXXXXXX in dealing with the request. Note that all the facts pertaining to this particular situation are not fully repeated herein and one should refer to these documents for additional details, where necessary. No written representations or correspondence from the taxpayers or their representatives were provided with this request.
In this context, you are asking for our views with regard to the classification of the Delaware-LLLP as a corporation or a partnership for the purposes of applying the Act to the relevant taxation years.
We are of the view that the dominant characteristics of Delaware-LLLP support the conclusion that it should be classified as a corporation for the purposes of the Act. We reach this conclusion based on a so-called “two-step” approach, considering our understanding of the facts described above and a combined interpretation of the Agreement and the DRULPA.
The main factors we considered in our analysis of this entity are the existence of a separate legal personality that is recognized under the DRULPA – meaning the full legal capacity to acquire and own property, to sue and be sued, to carry on their own activities and to incur liabilities of their own – and the limitation of liability afforded to all of its members. This conclusion is consistent with our general position adopted in document 2016-0642051C6 (the “IFA-2016 Position”).
In the IFA-2016 Position, we stated, among other things, that LLLPs governed by the laws of the state of Delaware should generally be treated as corporations for the purposes of Canadian income tax law. XXXXXXXXXX.
In addition, in the fall of 2016, an internal committee was put in place in order to deal with certain compliance issues that might result from the implementation of the IFA-2016 Position. This committee is being led by the International Tax Division of the International, Large Business and Investigations Branch, and involves the active participation of our Directorate. XXXXXXXXXX.
In this context, considering that Delaware-LLLP disposed of all of its assets, and was subsequently dissolved, in XXXXXXXXXX, we would suggest that consideration be given to dropping the secondary position supporting the notices of reassessment issued to CanGP and CanLP on XXXXXXXXXX. In the present circumstances, considering Delaware-LLLP as a partnership for the purposes of the application of the Act to CanGP and CanLP’s XXXXXXXXXX, XXXXXXXXXX and XXXXXXXXXX taxation years would appear to us to be consistent with the intended treatment of other taxpayer files being considered by your Branch.
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CRA’s electronic library. A severed copy will also be distributed to the commercial tax publishers, following a 90-day waiting period (unless advised otherwise), 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, and thank you for your enquiry.
Dave Beaulne, CPA, CA
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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