Written on behalf of Feigenbaum Consulting
Last year, the Canada Revenue Agency (CRA) confirmed that US Limited Liability Partnerships (LLPs) and Limited Liability Limited Partnerships (LLLPs) will be characterized as corporations for Canadian tax purposes.* Any income from these entities, which was previously reported on one’s personal tax returns as partnership income, will be treated as being from a foreign corporation.
How does the change in treatment of US LLPs and LLLCs impact Canadian investors
There are several implications of this change for Canadian investors. Generally speaking, the rules that apply to holdings in US Limited Liability Companies (LLCs) will now apply to LLPs and LLLPs, with corresponding tax obligations and penalties.
The equity investments in the partnerships will be considered share investments in corporation, and will need to be reported as such. Canadian dividend tax will apply to any distributions made, and there is a risk of double taxation depending on when distributions are made.
Significantly, Canadians may no longer be able to claim foreign tax credits (FTCs) for US tax paid. While previously, taxes on partnership were paid in the US and in Canada as personal income, this is now treated as personal income in the US and income by a corporation in Canada. In order to claim the FTC, taxes must have been paid by the same entity in both countries. Accordingly, credits may not be available to Canadians with income from US LLPs or LLLPs.
CRA offers transitional relief
To relieve the hardship caused by this change in classification, the CRA will allow taxpayers to treat an LLP or LLLP as an partnership for tax purposes, under the following conditions:
- The entity was formed before July 2016 and carried on business before this date
- The taxpayer(s) intended for the LLLP or LLP to be classified as a partnership
- The LLP/LLLP and all of its owners have treated the entity as a partnership for Canadian tax purposes
- The LLP/LLLP is converted to an entity that is still recognized by the CRA as a partnership no later than tax year 2018
Unfortunately, some investors will not be able to meet these requirements, especially the conversion of the entity in to a recognized partnership. In these cases, certain taxpayers may be eligible to simply begin to file their tax compliance as if the entity were a corporation, with no obligation to amend prior filings. Requests for this treatment will be made on a case-by-case basis, and should be made in coordination with your tax advisor.
Cross-border tax and accounting services for Canadian investors in US LLPs and LLLPs
A cross-border specialist can help minimize any potential tax penalties associated with the conversion of an LLP or LLLP. If you are not able to meet the conditions for transitional relief, we can assist in an application for alternative treatment by the CRA, explore options to minimize any potential tax penalties and develop a tailored plan to meet your needs.
Our lawyers and accountants specialize in cross-border tax planning and business services. If you have questions about your wealth and estate planning, our team of lawyers and accountants can provide expert advice and craft a custom solution to meet your needs. Contact us online, or toll free at (877) 275-4792.
*Although currently only applying to LLPs and LLLPs formed under the laws of the states of Florida and Delaware, the reasoning behind this change could easily be applied to those under other state laws. Accordingly, we suggest that all investments in US LLPs and LLLPs should be reviewed with your tax lawyer or accountant.