14 February 2006 Internal T.I. 2005-0118521I7 - Art XV of Canada-US Convention employees of LLC's

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 US LLC can be considered to have a PE in Canada for the purposes of paragraph XV(2) of the Canada-US Tax Convention?

Position: Yes

Reasons: A US LLC which is treated as a partnership under US tax laws is not liable to tax in the US and does not qualify as a resident under the Convention. However, paragraph 9 of Article V provides that, for the purposes of the Convention, the provisions of Article V apply in determining whether a person (in this case, a LLC) other than a resident of Canada or the US has a PE in any State.

								February 14, 2006

Anne Armer							Isabeau Morrissette
International Tax Section, Calgary TSO		(613) 957-2118
220-4 Ave S.E.
Calgary AB  T2P 3T5

								2005-011852

Application of Article XV of the Canada-US Tax Convention to employees of US Limited Liability Companies ("LLC's")

This is in reply to your email letter to us of February 24, 2005, in which you asked us to consider the application of article XV of the Canada-U.S. Tax Convention (the "Convention") to employees of a US LLC.

Paragraph 1 of Article XV of the Convention provides that, in general, remuneration derived by a resident of a Contracting State in respect of an employment is only taxable in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, paragraph 2 of Article XV provides that the entire remuneration derived therefrom (to the extent the total in the year exceeds $10,000) may be taxed in that other State but only if the recipient is present in the other State for a period or periods exceeding 183 days or if the remuneration is borne by an employer who is resident of that other State, or by a permanent establishment ("PE") that the employer has in that other State.

As you are aware, the default treatment of a US LLC is a flow-through entity under US tax laws. Therefore, since it is not liable to tax in the US, CRA's longstanding position is that such an LLC does not qualify as a resident of the US for the purposes of the Convention, notwithstanding the fact that such entity may be treated as a corporation resident in the United States for the purposes of the Income Tax Act (the "Act").

The definition of a PE generally requires that the entity qualify as a resident of a Contracting State for the purposes of the Convention. However, paragraph 9 of Article V of the Convention specifically provides that, for the purposes of the Convention, the provisions of Article V apply in determining whether "any person has a PE in any State". The Technical Explanation to the Convention provides that the provisions of Article V would therefore apply to determine whether a person other than a resident of Canada or the US has a PE in Canada or in the US. In our view, an LLC is a person within the definition of "person" in Article III of the Convention. Accordingly, it can have a PE for the purposes of the Convention by virtue of paragraph 9 of Article V. In light of the above, we are of the opinion that both the wording and the purpose of the provisions of the Convention require that we consider it possible for a US LLC to have a PE notwithstanding the fact that the LLC is not a resident of a Contracting State. Therefore, our view is that the remuneration received by employees of a US LLC can be considered to be borne by a PE which the employer has in Canada for the purposes of paragraph 2 of Article XV of the Convention.

We trust our comments are of assistance.

Olli Laurikainen, CA
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch