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Saturday, December 31, 2016

CRA changing position on tax treatment of LLPs

OK, this is not good news for those of us who chose to hold properties in LLPs. As a reminder, some of us chose this route for two main reasons: protecting other assets from liability claims related to investment properties; and because LLCs were seen by the CRA as commercial entities and therefore subject to double taxation.

The second point, double taxation, could occur because the US IRS would see income received in an LLC as partnership (personal) income while the Canadian CRA would see it as corporate income. The tax treaty does not support claiming a Foreign Tax Credit to claim one type of tax in the US against the other type of tax in Canada. By contrast, an LLP would achieve the liability isolation, and the CRA would see the LLP as generating personal tax.

Now it seems that the CRA is changing their position. Officially, as a CRA employee explained, the CRA didn't have a position before so they really aren't changing their mind. Right. Maybe not one that was written in CRA publications, but it was clearly their position in practice.

Now it seems that the CRA is changing their interpretation of tax law so that LLPs will be considered corporations. To date, the position is specifically targeted at LLPs created in Delaware and Florida, but the expectation is that the scope of the decision will expand to cover LLPs in other states as well. A search on LLP, Florida, Delaware will find several links to discussions by tax experts. Here is one link to look at: https://taxinterpretations.com/content/367354#Q1 . Further, one article posted an email address for the CRA Working Group on this. delawareflg@cra-arc.gc.ca

- The CRA has said that they will provide "administrative relief" where these conditions are true: "

- the entity is formed and begins to carry on business before July 2016;

- it is clear from the surrounding facts and circumstances that:

- the members are carrying on business in common with view to a profit (the general condition for partnerships); and they intended to establish an entity that would be treated for Canadian income tax purposes as a partnership and not a corporation; neither the entity itself nor any member of the entity has ever taken the position that the entity is anything other than a partnership for Canadian income tax purposes; and

- finally (and most importantly) the entity has to convert to an entity that we will recognize as a partnership, for example a general partnership or a limited partnership, before 2018"

So I guess, unless any of you have better ideas, we have until the end of December 2017 to convert the LLPs to LPs or General Partnerships. Of course this defeats the purpose of protecting other assets from liability related to rental properties. Thanks CRA!

Anyway, Happy New Year!

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