Corporation

Given the recent CRA' announcements on US LLLP classification and the introduction of anti-hybrid mismatch rules in countries like Luxembourg, which may apply depending on how Canada treats a particular Luxembourg entity for tax purposes (e.g., a Luxembourg special limited partnership), will CRA publish and maintain an online list of foreign entities that CRA has classified?

CRA noted that under its two-step approach to entity classification, it “examines the nature of the relationship between the various parties that are involved and their rights and obligations in respect of the foreign entity or arrangement under the applicable law and documentation,” and that as the classification of particular foreign entities or arrangements is thus “to be determined on a case-by-case basis” this “does not generally lend itself well to the type of standard or universal classification requested by this question”: it will “not be in a position to publish and maintain an online list of foreign entity or arrangement classifications.”

Taxpayer’s seeking a ruling in this regard should:

include with their request a complete description of the characteristics described above, their analysis as to the proper classification of the entity or arrangement for purposes of the [ITA] along with a discussion on the way their relevant provisions would appropriately apply to proposed transactions involving or affecting the rights and obligations of the entity or arrangement and its stakeholders, a copy of the foreign legislation applicable to the entity or arrangement and any other relevant documents described above.

Under the UK’s Limited Liability Partnerships Act 2000, a limited liability partnership (“UK LLP”) is treated in the UK as a separate legal entity, but the profits of its business are taxed as if the business were carried on by partners in partnership, rather than by a body corporate

CRA stated that it would consider the UK LLP to be a corporation. Under its two-step approach, it looks at the entity’s characteristics under foreign law, and at the characteristics of different forms of association under Canadian commercial law. Having regard to the following attributes of the UK LLP, it would be regarded as a corporation:

• A UK LLP has a legal existence separate from its members.
• A UK LLP, and not its members, carry on the business.
• A UK LLP, and not its members, acquires and owns property in its own name for use in its business, and is responsible for any debts or obligations incurred as a result of carrying on its business.
• The capital of a UK LLP serves the same function as the share capital of a corporation.

2017-0691131C6 stated that one of the conditions for allowing Delaware or Florida LLLPs formed before April 26, 2017 to file as a partnership was that “no member of the entity and/or the entity itself takes inconsistent positions from one taxation year to another … between partnership and corporate treatment.” Two LLLPs (held by Canadian resident corporations) that had filed as partnerships for Canadian tax purposes since the time of their formation proposed to now treat themselves as corporations on a prospective basis. CRA found that this would violate such condition (“the change by the LLLPs from partnership to corporate treatment constitutes taking an inconsistent position from one taxation year to the next”) and added:

As stated at IFA 2017, where any of these conditions is not met in respect of any such entities formed before April 26, 2017, the CRA may issue assessments or reassessments to the members and/or the entity, for one or more taxation years, on the basis that the entity was always a corporation.

The LLLPs will not be viewed as corporations for Canadian tax purposes on a solely prospective basis.

CRA also declined to rule that a specific French SLP (Société de Libre Partenariat) that was a société en commandite simple was a partnership for ITA purposes, and apparently viewed it as a corporation.

After providing a detailed description of the relevant provisions of the Florida Revised Uniform Limited Partnership Act of 2005 respecting LLLPs, including distinct entity status, perpetual duration and limited liability of the general partner, the Rulings Directorate concluded that two Florida real estate LLLPs had been corporations, but nonetheless suggested that they be treated as partnerships for the years in question given the transitional relief announced in 2016-0642051C6,

A secondary assessing position of a TSO was that a Delaware LLLP, which had been wound-up, had been a corporation for ITA purposes. In the course of confirming this characterization, the Directorate provided a detailed listing of the relevant provisions of the Delaware legislation (the DRULPA), as well as summarizing the (unexceptional) features of the partnership agreement. The Directorate went on to note that since it had recently determined to provide grandfathering relief re the application of its position to existing LLPs and LLLPs (see 2017 IFA Roundtable, Q.3), it recommended against treating this LLLP as having been a corporation.

CRA further extended its grandfathering relief from its view of Florida and Delaware LLPs and LLLPs as corporations, so that any such entities formed before 26 April 2017 would be accepted as partnerships for all prior years as well as all future years, provided that none of the following applies:

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

Where a Florida or Delaware LLP and LLLP is precluded from converting to a “true” partnership, CRA will entertain submissions to allow it to file as a corporation on a going-forward basis while leaving the previous years’ filings unchanged. CRA will review such submissions to see that there is no unwarranted benefit or undue tax advantage, including a review of the relevant tax attributes.

A Quebec individual resident was a member of Delaware, New York and Florida LLCs. His representatives submitted that in light of Backman and the introduction of s. 8.1 of the Interpretation Act, and on the basis of a comparison of the attributes of a partnership under the Quebec Civil Code (“QCC”), which were relevant in light of the individual's residence, and those of the LLCs, that the LLCs were partnerships for purposes of the application of the Act to the individual. In rejecting this submission, CRA stated (TaxInterpretations translation):

[W]e are maintaining our position… that they should generally be considered as corporations for the purposes of the Act under the two-step approach outlined above. …

[W]e are not convinced that a comparative analysis involving partnerships governed by the QCC by itself supports the conclusion submitted by the representatives… . However, if it were determined that such a comparative analysis supported the conclusion that a US LLC must be considered as a partnership for the purpose of application of the Act, we suggest that it would not be appropriate to adopt a classification approach to entities and foreign arrangements which could result in a different classification according to the province or territory of the residence (or permanent establishment) of the taxpayer holding an interest in the entity or the arrangement. Otherwise, for example, simply changing the province or territory of residence or the establishment would be susceptible to the triggering of complex and onerous tax consequences to the taxpayer involved. …

[I]t appears to us, based in particular on the conflict of law rules, that the provincial and territorial laws of property and civil rights in Canada provide for mutual recognition of different types of entities or arrangements established under the respective jurisdictions of the various provinces and territories, thus providing an expanded base for analysis that is uniform across Canada for the purposes of applying the two-step approach.

Before ruling that the contribution of shares of a Netherlands private limited liability company to a newly-formed Netherlands cooperative (Dutch Co-op, or "DC"), in consideration for a credit to the membership accounts of the contributing foreign affiliates, was eligible for s. 95(2)(c) rollover treatment, CRA ruled that DC was a corporation for the purposes of the Act, and a non-resident corporation without share capital for purposes of s. 93.2.

In connection with this ruling, the factual description noted the following:

• Upon the registration of the notarial deed with the commercial register, DC will be regarded as a legal entity that exists separately from its members under the Dutch Civil Code and the Netherlands domestic income tax law.
• The Articles will provide that each member must make capital contributions to DC as unanimously agreed upon by all members, the number of votes that a member may cast at a general meeting of members will generally be proportionate to its percentage of ownership in DC, a distribution of retained profits will only be made with the unanimous agreement of all members and such distribution will be proportional to the respective ownership percentages, and the members will not be liable for any debts or losses incurred by DC that are in excess of their required contributions to the capitalization of DC.
• The Dutch Civil Code provides that “a Dutch cooperative may, by its articles of association, exclude or limit to a maximum, any liability of its members or former members to contribute to a deficit.”

A taxpayer holds an interest in a Dutch Co-Op. Is it a partnership or a corporation? After referring to the two-step approach to entity classification, the Directorate stated:

Based on our analysis of the Deed, the Annual Report and the Dutch Legislation, provided that the Dutch Co-op complies with the Dutch Legislation, it is our view that the Dutch Co-op is a corporation for purposes of the Act.

CRA largely repeated its position immediately below in 2016 IFA Roundtable, Q. 1 (as well as indicating that Anson has not changed its views on LLCs). One change was that after listing the four conditions respecting when it will continue respecting an LLP or LLLP as a partnership, CRA added that “where some but not all of those conditions are met, those cases may be dealt with on a facts and circumstance basis.”

A syndicate of co-owners holding condominium units sold one of the condominiums at a capital gain and distributed the gain to its members. CRA stated:

[U]nder section 1039 of the Civil Code of Québec (the "C.c.Q."), the community of co-owners of a building held as condominiums constitutes a legal person, called a syndicate, whose object is the preservation of the immovable. The position of the CRA since the introduction of section 1039 C.c.Q. is to consider that a syndicate of co-owners is a "corporation" for the purposes of the Act.

CRA went on to find that as a “shareholder” under s. 248(1) includes a member, such distribution would give rise to a shareholder benefit.

A (presumably U.S.) limited liability partnership (FA1) will pay a distribution proportionately to its partners who directly comprise (i) a limited partner corporation (Canco9), and (ii) a general partner which is a general partnership - whose partners on a s. 212.3(25) look-through basis are two other Canadian corporations in the same group (Canco7 and Canco8). The CRA ruling letter described FA1 as a (non-resident) subject corporation rather than as a Canadian partnership, described the proportionate distribution as being deemed by s. 90(2) to be a dividend and provided a ruling that the distribution will be considered to be received as a dividend in respect of a single class of shares of capital stock of FA1 by Canco7, 8 and 9 for the purposes of s. 212.3(9)(b)(ii) – A(B).

At the 2017 IFA Roundtable, CRA announced that it will allow Delaware & Florida LLPs and LLLPs formed before April 26, 2017 to continue filing as...

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CRA indicated that it has finalized its view that Florida and Delaware limited liability partnerships and limited liability limited partnerships are corporations for ITA purposes in light inter alia of their separate legal personality and limited liability for all members (and noted that "we see little substantive difference between LLPs, LLLPs and LLCs governed by the laws of the states of Florida and Delaware." However, CRA is prepared as an administrative matter to continue accepting that an existing LLP or LLLP (that had been formed from scratch, rather than being converted from an LLC) is a partnership if it is clear that the members are carrying on business in common with a view to profit, they intended for the entity to be a partnership, all members and the entity itself have been treating the entity for ITA purposes as a partnership, and the LLP or LLLP converts to an entity recognized by CRA as a partnership before 2018.

Although a Netherlands Antilles private foundation had separate legal personality (including a separate legal entity clause in the governing legislation) and capacity to acquire rights and liabilities (with no beneficiary liability), CRA nonetheless considered it to be a trust rather than a corporation given that it did not issue shares, the beneficiaries did not pay for their interests in the foundation, they could not transfer their beneficial interests and they did not have a right to participate in any decisions of the foundation. Although it was still quite dissimilar to a common law trust, it was sufficient that it was somewhat similar to a civil law trust.

CRA affirmed its position that a Liechtenstein Foundation "generally will be considered to be a trust for purposes of the Act." See summary under s. 94(1) - connected contributor.

CRA indicated that Florida limited liability limited partnerships and limited liability partnerships potentially may be corporations for purposes of the Act given that "they seem to have both legal personality and full, or at least very extensive, limited liability for all members," i.e., liability protection which "seems to go beyond the type of limitation of liability applicable to partnerships governed by the laws of the Canadian provinces," and invited submissions on this issue.

CRA also noted (before release of Anson) that it accepts that LLC are corporations. See summary under s. 96.

[The] Directorate has reconsidered its 2010 decision [to cease giving entity classification rulings]....Taxpayers wishing to request an advance income tax ruling on...classification...should include with their request a complete description of the characteristics of the entity, their analysis as to its proper classification, and a translated copy of both the legislation under which the entity was created and its organizational documents.

What criteria does CRA apply characterizing a foreign entity, that has issued a security held by a Canadian resident, as a corporation, trust, partnership, or other entity? After summarizing it two-step approach to entity classification, CRA stated:

The CRA has not established a list of essential features that a foreign Entity must possess to be classified in any of the different categories of recognized Entities … . However, the most important attributes appear to us to be the nature of the relationship between the parties and the rights and obligations of the parties arising under the foreign law and relevant legal documents. This could include the nature of the rights to the assets of the Entity, the right to participate in the profits or receive distributions, the right to vote or participate in the decisions of the Entity, the right to share in the distributions of assets during the liquidation of the Entity as well as the obligations of the various parties involved. Status as a separate legal entity appears to us to be a distinctive but not exclusive feature of corporations.

a Liechtenstein anstalt possessed most of the hallmarks of a corporation aside from issuing shares, and was to be treated as a corporation. Furthermore, although it did not issue shares within the meaning of s. 248(1), as there was only one beneficiary, a division of the capital of the anstalt into shares was unnecessary so that it was reasonable to consider that the Canadian resident beneficiary's interest was the equivalent of a share. "For Canadian tax purposes, it should suffice that the interest is what accords him the same rights as are normally conveyed by a share."

CRA found that in light of the definition of corporation in the French version of the Act and that the Quebec government was a legal person, the Quebec government was a corporation.

In light of its characteristics, a Liechtenstein anstalt could be treated for Canadian purposes as either a trust or a corporation depending on the specific facts of the particular situation. However, CRA would not change its published position that an anstalt is a corporation without a public announcement to that effect which would only have prospective effect.

Application of CRA's two-step approach to entity classification resulted in a finding that a Delaware LLC governed by the Delaware Limited Liability Company Act that is converted into a limited partnership pursuant to s. 17-217 of the Limited Partnership Act will be considered to have become a partnership for Canadian income tax purposes, so that there is a disposition of the property of the LLC and of the shares in the LLC. CRA stated:

With regard to the classification of a DLP, it has been the CRA's long-standing position that, notwithstanding subsection 17-201(b) of the LPA which provides that a limited partnership is a separate legal entity, an entity formed under the DRUPA (Title 6, Subtitle II, Chapter 15 of the Delaware Code) or the LPA closely resembles a Canadian partnership under Canadian common law, with the effect that an entity governed by the DRUPA or the LPA would be treated as a partnership for Canadian income tax purposes.

A limited liability company organized in Madagascar would be considered to be a corporation for purposes of the Act given that it has several characteristics of a corporation, including separate legal personality.

Under article 1039 of the Civil Code, a community of co-owners of an immovable held in divided co-ownership constitutes a legal person, called a syndicate. CRA found that such a syndicate constituted a corporation.

A Leichtenstein establishment (i.e., a Leichtenstein anstalt) is a corporation for purposes of the Act.

List of states for which CCRA has provided an opinion that a limited liability company formed under the laws of that state is a corporation for Canadian tax purposes.

A Hungarian korlatolt feleossegu tarsasag is a corporation for purposes of the Act because it has legal personality and existence apart from its members. "This would be our view whether or not the Articles of Association of the particular Kft provided that members may be liable for losses of the Kft in excess of their initial capital contributions."

A Tennessee limited liability company is a corporation for purposes of the Act.

A Russian joint stock company would be a corporation for purposes of the Act (including the foreign affiliate definition), as it is a distinct legal entity, separate from its shareholders, directors and officers.

Kazackhstan Limited Liability Partnerships normally will be considered to be corporations given that they have the status of a legal entity under Kazackh Law, their property belongs to them and the participants are not held liable for the partnership's obligations - although it is possible for a particular partnership to possess certain important attributes which are not indicative of a corporate entity, for example, being formed for only a very brief period of time.

The fact that a private company with limited liability incorporated under, and governed by the Netherlands Civil Code may not have an unlimited life or that the shareholders have agreed to assume liability for its liabilities, does not generally affect the determination that it qualifies as a corporation.

RC stated on the basis of its review of the New York Limited Liability Company Law that it was of the opinion "that a company formed under the NYLLCL would be a corporation for the purposes of the Act notwithstanding that all of its members are liable in their capacity as members for all its debts, obligations or liabilities as a result of a statement to such effect in the articles of organization thereof."

A German offene Handelsgesellschaft ("OHG"), as described by the writer, would be considered a partnership for Canadian tax purposes.

A limited liability company organized under the applicable legislation of Florida, Wyoming, Delaware or Indiana will be considered to be a corporation rather than a partnership for Canadian tax purposes.

A limited liability company formed under Chapter 18, Subtitle II of Title 6 of the laws of Delaware will be treated as a corporation for purposes of the Act.

An unlimited liability company incorporated under the Nova Scotia Companies Act is a corporation within the meaning of s. 248 of the Act.

Assuming that the proposed Barbadian Societies Restricted Liability Act is enacted in its proposed form, a foreign entity created under that legislation should qualify as a corporation for purposes of the Act.

A foreign unlimited liability company is a "corporation" and therefore may qualify as a foreign affiliate.