26 April 2017 IFA Roundtable Q. 3, 2017-0691131C6 - U.S. LLPs and LLLPs

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: Update on Florida and Delaware LLP/LLLP compliance committee deliberations

Position: The CRA is, on an administrative basis, prepared to allow Florida and Delaware LLPs and LLLPs created before April 26, 2017 to file as partnerships for all years, subject to certain conditions. Otherwise, the CRA expects them to file as corporations for all years.

Reasons: This approach facilitates compliance and administration.

2017 International Fiscal Association Conference
CRA Roundtable

Question 3 – U.S. LLPs & LLLPs

At the November 2016 Canadian Tax Foundation (the “CTF”) annual conference in Calgary, the CRA announced that it had established an internal working group to study compliance issues related to Florida and Delaware limited liability partnerships (“LLPs”) and limited liability limited partnerships (“LLLPs”) arising from its prior announcement that it would generally consider such entities to be corporations for the purposes of Canadian income tax law. As part of this announcement, the CRA indicated that it was open to a prospective approach whereby prior filings would, in certain circumstances, be allowed to stand.

Can the CRA provide us with an update on the deliberations of the working group?

CRA Response

The working group is continuing its study of compliance issues relating to Florida and Delaware LLPs and LLLPs but it has made significant progress. The working group received many submissions on these compliance issues and would like to thank the tax community for this valuable input.

After an analysis of the complexities for taxpayers and the tax administration of transitioning from partnership filings to corporate filings, the CRA has decided to build on the prospective approach referred to in the November 2016 CTF announcement by offering administrative grandfathering. In particular, the CRA will be adopting the administrative practice of allowing any such entity formed before April 26, 2017 to file as a partnership for all prior and future tax years, provided none of the following conditions applies:

• One or more members of the entity and/or the entity itself take inconsistent positions from one taxation year to another, or for the same taxation year, between partnership and corporate treatment;
• There is a significant change in the membership and/or the activities of the entity; or
• The entity is being used to facilitate abusive tax avoidance.

Where any of these conditions is met in respect of any such entities formed before April 26, 2017, the CRA may issue assessments to the members and/or the entity, for one or more taxation years, on the basis that the entity is a corporation.

For these purposes, the CRA will consider any such entity to have been formed on the day on which the appropriate governmental organization accepts the filing of the required documentation in respect of the establishment of the entity as an LLP or LLLP, as the case may be.

Notwithstanding the above, any such entity that has consistently filed as a corporation for Canadian income tax purposes may continue to file on that basis.

Any such entities that choose to file as corporations notwithstanding the administrative grandfathering relief will be expected to do so for all open taxation years in which the entity has existed, including filing initial corporate tax returns for past years, as necessary. In this regard, previously filed tax returns of entity members may require adjustment in order to eliminate double-counting of income or losses.

Delaware and Florida LLPs and LLLPs formed after April 25, 2017 will be assessed as corporations for all purposes of Canadian income tax law.

To the extent LLPs or LLLPs of other jurisdictions of the U.S. have similar attributes to those of Florida and Delaware and the CRA views them as corporations for the purposes of Canadian income tax law, the CRA’s administrative policy outlined above will be applied to them as well.

It is also notable that the CRA is of the view that Article IV(6) of the Canada-U.S. tax treaty will apply to any such LLPs or LLLPs that are treated as non-resident corporations for Canadian tax purposes and as fiscally transparent entities for U.S. tax purposes. As such, the CRA generally intends to administer that provision vis-à-vis relevant LLPs and LLLPs in a manner similar to its published practices in respect of U.S. limited liability companies.

Dave Beaulne
Yannick Roulier
2017-069113
April 26, 2017

Response prepared in collaboration with:

Alexandra MacLean
International Tax Division
International, Large Business and Investigations Branch