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CRA announces flexible treatment for some Canadian investors in LLLP and LLP

At the Canadian Tax Foundation’s 68th Annual Tax Conference held in Calgary from November 27-29, 2016, the Canada Revenue Agency (CRA) orally announced further efforts to ensure fair treatment for Canadians impacted by the May 26, 2016, announcement that US limited liability limited partnerships (LLLPs) and US limited liability partnerships (LLPs) would be classified as corporations for Canadian tax purposes. We previously discussed this announcement in our May 27th blog, entitled “CRA confirms US LLLPs and LLPs are indeed corporations”.

In response to a question submitted to the CRA Roundtable session, the CRA indicated that it recognizes there may be situations where it is not possible for a US LLLP or US LLP to convert to an entity that the CRA will recognize as a partnership, and thus qualify for the transitional relief provisions previously announced. Therefore, the CRA will consider allowing certain taxpayers to prospectively treat the entity as a corporation. Taxpayers who qualified for this treatment would simply start to file their tax compliance as if their investment in a US LLLP or US LLP were an investment in a corporation, without first going back to amend prior tax filings that treated the US LLLP or US LLP as a partnership. Decisions with respect to which taxpayers qualify for this treatment will be made on a case-by-case basis, provided the CRA determines that this treatment would not result in any unintended tax consequences or an advantage to the taxpayer. Requests for this treatment would need to come from taxpayers or their advisors, and would require a statement of fact with respect to their respective situation. In particular, the CRA would want to consider the carryforward tax attributes of the entity prior to allowing this. If you wish to be considered for this treatment, you can reach out to the CRA LLP/LLLP audit working group via email at the dedicated address set up for this purpose: delawareflg@cra-arc.gc.ca.

Accessing the CRA LLP/LLLP audit working group may be a viable option for some taxpayers. For example, where a Canadian taxpayer is a minority investor in an entity with predominately US partners, there may be little appetite from the US partners to convert from a US LLLP or US LLP to Limited Partnership (LP). However, we are concerned that the IRS may soon issue regulations under IRC§721(c) that would result in the taxable recognition of any built-in gains where a US LLLP or US LLP converts to a US LP. And while we applaud the CRA’s efforts to make the classification of these entities as corporations as painless as possible for taxpayers, we have some reservations with respect to the ad-hoc nature of this potential relief. The CRA LLP/LLLP audit working group is a “win-win” for taxpayers and the CRA as it provides taxpayers with hope for flexibility in respect of their situations, and allows the CRA to consider the costs relative to the benefits in its determination of the appropriate treatment for each US LLLP.