At a series of International Fiscal Association (IFA)
roundtables, most recently in May 2018, the Canada Revenue
Agency (CRA) commented on the classification of certain foreign
entities for Canadian tax purposes. These statements have
created some uncertainty as to how Canada will treat foreign
entities styled as 'partnerships'.
The CRA classifies foreign entities by first ascertaining
the legal attributes of the entity under the relevant foreign
law, and second determining what type of Canadian entity or
arrangement (e.g. corporation, trust, partnership,
co-ownership) is most closely approximated by those legal
attributes. In a technical interpretation released in 2008, the
CRA emphasised that the most important attributes are the
nature of the relationship between the various parties and the
rights and obligations of the parties under the applicable laws
and agreements.
At the 2016 IFA CRA roundtable, the CRA concluded that
Florida and Delaware limited liability partnerships (LLPs) and
limited liability limited partnerships (LLLPs) should generally
be treated as corporations for Canadian tax purposes. The CRA
later indicated that the same position would apply to the LLPs
and LLLPs of other US jurisdictions with similar attributes. In
reaching these conclusions, the CRA pointed to two key
attributes of the LLPs and LLLPs:
- The separate legal personality of the
partnership under the relevant state law (e.g. the Delaware
statute uses the words "separate legal entity"); and
- The fact that the liability of all of the
partners is limited. The CRA had previously indicated that
the first factor alone would not be sufficient to cause an
entity to be treated as a corporation, and it is interesting
to note that limiting the liabilities of all of the partners
is in fact a characteristic shared by some partnerships
formed under Canadian law (e.g. Ontario LLPs).
It had previously been widely understood in the Canadian tax
community that US LLPs and LLLPs would be treated as
partnerships – no doubt in large part because they
were called "partnerships". At the 2017 IFA CRA roundtable, the
CRA appeared to acknowledge the unexpected nature of its new
positions by allowing limited grandfathering for certain
existing entities.
In another recent statement at the 2018 IFA conference, the
CRA considered the classification of a French
"Société de Libre Partenariat" (SLP),
which the CRA also suggested (though did not definitively
state) should be treated as a corporation. Although the CRA
concluded that SLPs (unlike the US LLPs and LLLPs described
above) do not have limited liability for all members (as they
possess a "general member" with unlimited liability, similar to
Canadian limited partnerships), the CRA found analogues to
Canadian corporations in the facts that an SLP computed
"earnings at the entity level" and had a "distribution
mechanism akin to the declaration and payment of a dividend"
(which the CRA contrasted with the "effective entitlement to
share profits and losses" that characterises partnerships).
As the examples above show, the CRA's entity classification
procedure can be difficult to apply or predict. These examples
highlight the need to review carefully any Canada-related tax
planning that involves foreign entities on which the CRA has
not yet expressed a definite view. Obtaining an advance tax
ruling from the CRA may be appropriate in such cases.
Shavone Bazarkewich (shavone.bazarkewich@blakes.com) and Ian Caines (ian.caines@blakes.com)
Blake, Cassels & Graydon
Tel: +1 416 863 2994 and +1 416 863 5277
Website: www.blakes.com