Global Tax Alert (News from Americas Tax Center) | 22 September 2016

Canada Revenue Agency treats certain US partnerships as corporations

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Executive summary

At a 26 May 2016 conference in Montreal hosted by the International Fiscal Association (IFA), representatives from the Canada Revenue Agency (CRA) announced that the CRA will consider limited liability partnerships and limited liability limited partnerships (collectively, LLPs) established under Delaware and Florida law to be corporations for Canadian income tax purposes. The consequences are that these LLPs will be considered separate legal entities for tax purposes taxable at the entity level rather than at the partner level.

Detailed discussion


Over the past few years, the CRA has been formulating its view on the entity classification of LLPs established in Delaware and Florida. At the May 2015 IFA conference, the CRA announced that it was undertaking an analysis of the entity characterization of LLPs. The CRA identified the existence of a separate legal personality and the extensive limitation of liability afforded to all members as the determinative factors, which set these entities apart from entities that are generally recognized as a partnership for Canadian income tax purposes (e.g., a general partnership or limited partnership).

Transitional relief

The CRA provided for transitional relief to taxpayers that have taken a position in previous tax filings that their LLP qualified as a partnership in Canada.

The CRA will treat these entities as partnerships in Canada retroactive to the date of their formation if the following four conditions are met:

  • Neither the entity nor its members have ever taken the position on any Canadian tax filing that the entity is anything other than a partnership for Canadian income tax purposes
  • There is a clear indication that the entity’s members are carrying on business for profit and intend the entity to be treated as a partnership in Canada
  • The entity was formed and started to carry on business before July 2016
  • The entity converts to an entity that the CRA recognizes as a partnership before 2018

The relief will not be available to an entity that was originally formed as a limited liability corporation or other corporation and later converted to an LLP with no substantive change in the entity’s legal context.


  • Historically, these LLPs were treated as partnerships for Canadian income tax purposes, and the partners who participated in the Canadian business were taxed on their Canadian allocated income. Under the CRA’s new interpretation, the LLPs are considered corporations and will be taxed on Canadian sourced income at the full Canadian corporate income tax rate plus a branch tax.
  • The individual partners will no longer be required to file personal income tax returns in Canada, as the Canadian income will be taxed at the LLP level.
  • There is some uncertainty as to whether the Canadian income earned by these hybrids will be eligible for the benefits of Canada’s bilateral tax treaties. For example, under the Canada-US Income Tax Convention (the treaty), the LLP may not be considered to be a US resident, because the LLP is not subject to US federal income tax. Article IV:6 of the treaty is a relieving provision added via the Fifth Protocol amendments to the treaty intended to afford treaty benefits to members of US limited liability companies (LLCs). The LLPs are faced with an analogous situation to the LLCs (i.e., the CRA treats LLCs as corporations for income tax purposes, while the US Internal Revenue Service treats LLCs as disregarded entities). Article IV:6 provides a look-through of the fiscally transparent entity and allows its members to use their US residency status to claim treaty benefits for the Canadian filings and withholding taxes.
  • LLPs encounter similar issues to LLCs with respect to treaty relief on Canadian branch tax, as the CRA has previously stated that the treaty rate for branch taxes of 5% is available to corporate members of an LLC only. The LLPs, like the LLCs, will be faced with a 25% branch tax rate for the share of the LLP’s income that is attributable to non-corporate members.
  • Whether partners are able to obtain relief through foreign tax credits or other methods in their country of residence is an issue for each partner to consider.

As a result of the CRA’s 26 May 2016 statement, the members of Delaware and Florida LLPs need to reconsider their filing position in Canada. Guidance on the Canadian tax treatment of LLPs can be derived by analogy to the CRA’s treatment of US-based LLCs. Should the LLP wish to retain its partnership status for Canadian filings, the transitional relief rules the CRA outlined should be considered. No formal guidance has been issued as to whether the CRA’s view will apply retroactively, and the CRA has not commented on its views of LLPs formed in other jurisdictions.

The CRA Income Tax Rulings Directorate emphasized that its comments were its general view only, and the classification of a particular entity is a question of fact. It is recommended to request an advance income tax ruling in situations where taxpayers are contemplating transactions involving foreign entities whose Canadian income tax status may be unclear, including the conversion of LLPs to a form of entity generally recognized as a partnership for Canadian income tax purposes.

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (Canada), Toronto
  • Linda Tang
    +1 416 943 3421
  • Mark Kaplan
    +1 416 943 3507
  • Phil Halvorson
    +1 416 943 3478
  • Trevor O’Brien
    +1 416 943 5435
Ernst & Young LLP (Canada), Montreal
  • Albert Anelli
    +1 514 874 4403
  • Angelo Nikolakakis
    +1 514 879 2862
  • Nicolas Legault
    +1 514 874 4404
  • Nik Diksic
    +1 514 879 6537
Ernst & Young LLP (Canada), Calgary
  • Karen Nixon
    +1 403 206 5326
  • Mark Coleman
    +1 403 206 5147
Ernst & Young LLP (Canada), Vancouver
  • Eric Bretsen
    +1 604 899 3578
Ernst & Young LLP, Canadian Tax Desk, New York
  • Terry McDowell
    +1 212 773 6332
  • Andrea Lepitzki
    +1 212 773 5415

EYG no. 02994-161Gbl