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.