Canadian tax treatment of U.S. LLC.

• Author: Corcoran, Peter N.
• Position: Limited liability company

Revenue Canada takes die position that U.S. limited liability companies (LLCs) structured to be treated as partnerships for U.S. tax purposes are not U.S. residents under the Canada-U.S. income tax treaty. As a result, a U.S. LLC doing business in Canada or receiving income from Canada is not eligible for treaty relief, even if all its members are U.S. residents. The Competent Authorities of Canada and the U.S. are working to resolve this issue.

Article IV (Residence) of the treaty defines "resident of a Contracting State" to mean "any person that, under the laws of that State, is liable to tax therein by reason of that person's domicile, residence, place of management, place of incorporation . ..." (Emphasis added.) In the case of a partnership, Revenue Canada looks through the partnership and determines treaty benefits based on the status of the individual partners. Revenue Canada takes the position that a U.S. LLC is to be treated as a corporation rather than a partnership for Canadian tax purposes. Revenue Canada's position is that LLCs that have been structured for U.S. tax purposes to qualify as partnerships, rather than corporations, are not to be treated as US. residents for purposes of the treaty because, as a passthrough entity, the LLC is not liable for tax in the US. Therefore, Revenue Canada does not look through the LLC and grant treaty benefits based on the residency of its members.

Revenue Canada takes a different position for U.S. S corporations. It treats a U.S. S corporation as a U.S. resident for treaty purposes because the S corporation is not taxable in the U.S. as the result of an election...