Last week’s CCH Tax Topics has an interesting article on limited liability companies (LLCs) in light of the B.C. Supreme Court’s decision in Boliden Westmin Ltd. et al. v. The Queen, 2007 BCSC 351.
The issue before the Court was whether a Nevada LLC was a “corporation” for the purposes of B.C. capital tax. If it was, then the taxpayer before the Court would be entitled to an investment allowance for its interest in the LLC, and the taxpayer’s capital tax liability would be reduced accordingly. The Court held that the LLC qualified as a corporation because the Nevada statute creating the LLC provided for limited liability, share ownership and separate legal status.
Subsection 248(1) of the Income Tax Act (Canada) (the “Act”) defines a corporation to include “an incorporated company”. Subsection 35(1) of the Interpretation Act (Canada) states that “‘corporation’ does not include a partnership that is considered to be a separate legal entity under provincial law”.
The CRA sets out its views on whether an entity is a corporation for the purposes of the Act in Interpretation Bulletin IT-343R. (Actually, the Bulletin states that it applies only for the purposes of the foreign affiliate rules, but the CRA itself uses the Bulletin in other contexts.) The IT lists various foreign entities that the CRA is willing to treat as corporations. The Bulletin also sets out the factors the CRA will consider in classifying unlisted entities:
A corporation is an entity created by law having a legal personality and existence separate and distinct from the personality and existence of those who caused its creation or those who own it. A corporation possesses its own capacity to acquire rights and to assume liabilities, and any rights acquired or liabilities assumed by it are not the rights or liabilities of those who control or own it. As long as an entity has such separate identity and existence, the Department will consider such entity to be a corporation even though under some circumstances or for some purposes the law may ignore some facet of its separate existence or identity.
The CRA, in various technical interpretations and rulings, has expanded on the list in IT-343R by adding LLCs from various U.S. jurisdictions. Interestingly, however, the CRA has taken the position that an LLC is not a resident of the U.S. for the purposes of the Canada-United States Income Tax Convention (1980) (the “Treaty”) and therefore not entitled to Treaty benefits because, in general, an LLC is transparent for U.S. income tax purposes. The 2007 federal Budget stated that Canada, in an effort to attract more U.S. venture capital that invests using LLCs, would seek to amend the U.S. Treaty to make it clear that LLCs are entitled to Treaty benefits.
