CRA changes treatment of U.S. LLPs, LLLPs

Canadian investors received some bad news from the Canada Revenue Agency (CRA) recently.

Ottawa announced that it is changing the treatment of U.S. limited liability partnerships (LLPs) and limited liability limited partnerships (LLLPs). Moving forward subject to transitional relief for structures currently in place, LLPs and LLLPs will be taxed as corporations in Canada.

The decision means that Canadian investors could face the threat of double taxation on these U.S. investments—due to differences in the timing of income and taxation between Canada and the U.S.—beyond investments in LLCs, effectively diminishing any benefit for Canadians looking to invest in hybrid entities.

CRA’s clarification likely also means that Canadian investors will be unable to claim as many foreign tax credits, while the move promises to negatively impact existing treaty benefits.

But as outlined in a recent blog by Toronto-based tax law firm Moodys Gartner, CRA is trying to mitigate the impact on investors by grandfathering in the new measures:

“CRA has clearly realized that their classification of US LLLPs and LLPs as corporations will create significant hardship for many taxpayers. Consequentially, the CRA orally announced that short-term grandfathering provisions which will administratively allow taxpayers to treat US LLLPs as partnerships, provided the following conditions are met:

1.The LLLP or LLP was formed before July 2016 and it carried on business before that time;

2.The taxpayers intended the LLLP or LLP to be classified as a partnership for Canadian tax purposes;

3.The LLLP or LLP and each of its owners has treated the entity as a partnership for Canadian tax purposes; and

4.The LLLP or LLP converts to an entity that the CRA recognizes as a partnership no later than 2018.”

The new rules will pose challenges for Canadians with investments in the affected entities, specifically when considering that many U.S. investor partners will resist converting to other partnership structures to avoid losing additional liability protection.

As we always recommend, Canadian investors should seek tax advice prior to making any such investments to ensure they understand the scope and implications of the new rules.

Armando Iannuzzi, Tax Partner