Wednesday, 1 June 2016
Delaware and Florida LLPs and LLLPs deemed corporations for Canadian Income Tax Purposes
State legislation authorizing limited liability partnerships (LLPs) and limited liability limited partnerships (“LLLPs) are more recent than the legislation authorizing limited liability companies. And in recent years LLLPs are seen more in cross-border structure including a tower structure described in CRA Ruling 2010-0386201R3. CRA however did not comment in that ruling on how the LLLP would be viewed in Canada – i.e. would it be viewed as a partnership or as a corporation. In a partnership, partners are jointly and severally liable for the partnership debts. In a limited partnership, it is the general partner that is subject to the liability of the partnership. In a limited partnership, a limited partner is shielded from another partner’s errors, omissions, negligence or malfeasance provided that the partner was not directly involved in the other partner’s activity or had knowledge of the activity at the time of occurrence. A general partner in a limited partnership however does not enjoy the same protection as a limited partner and is not shielded from the negligence of his/her partners. Partnerships in the US are governed by State law similarly to Canada where provincial legislation governs partnerships. When a limited partnership becomes an LLP or an LLLP all partners qualify for the limited liability protection. LLPs in the US have to be registered in the State under which they are formed and where such entity carries on business. LLP legislation tend to be based of the Revised Uniform Partnership Act (1994)(RUPA) however LLP legislation is not uniform from State to State. For example certain States including New York, New York and Nevada only permit professionals to use a limited liability partnership – this is similar to Canada. In other States one does not have to be a group of professionals in order to qualify as an LLP. Attempts have been made to ensure that LLP legislation is uniform across the States and in 1996 there was an attempt to unify the LLP legislation across the States by promulgating Limited Liability amendments (ULLPA) to the RUPA. However some States follow RUPA while others follow the ULLPA amendments. This lack of uniformity has resulted in some States with legislation imposing corporate characteristics on that State's LLP or LLLP. This is why CRA did not blankly deem all LLPs/LLLPs to be a corporation for Canadian income tax purposes and singled out for now the Florida and Delaware LLP/LLLPs. CRA did allow transitional provisions absent tax avoidance to allow Florida and Delaware LLPs and LLLPs to be treated as partnerships retroactively if the following conditions are met: - The partners of the LLP/LLLP are carrying on a business with a view to profit; - The Florida/Delaware LLP/LLLP was formed prior to July 2016 and the - LLP/LLLP will convert to a partnership recognizable as a partnership by the CRA before 2018.