Canada

Changes to tax regulations for U.S. LLPs & LLLPs create liabilities

TAX ALERT  | 

Canadians investing in U.S. real estate often use limited liability partnerships (LLPs) and limited liability limited partnerships (LLLPs) to confer liability protection while still facilitating flow-through income treatment.

LLPs and LLLPs have now come under the scrutinizing gaze of the Canada Revenue Agency (CRA).  Moving forward subject to transitional relief for structures currently in place, LLPs and LLLPs will be taxed as corporations in Canada which means that Canadian investors could encounter double taxation on their U.S. investments.  If you own these types of investment entities then your tax liability may increase suggesting you may wish to consider other options.

Previously, LLPs and LLLPs were viewed by the CRA as partnerships. For a Canadian taxpayer to apply foreign tax credits (FTCs), tax on U.S. income has to have been paid by the same person or partnership that claims the FTC. The former tax categorization facilitated profits and losses by the same entity within the same tax period, which allowed investors to align their income from U.S. and Canadian sources and avoid being taxed twice.

The CRA will grandfathering in the new measures, where:

  • The partnership was created before July 2016 and engaged in active business before July 2016;
  • Each of the entity’s owners has treated the entity as a partnership for Canadian tax purposes;
  • For Canadian tax purposes, the partners intended for the entity to be categorized as a partnership; and
  • The LLP or LLLP converts to an entity recognized as a partnership by the CRA no later than 2018.

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

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