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. 

Subscribe to our newsletters

Subscribe


HOW CAN WE HELP YOU?

Contact us by phone +1.855.420.8473 or submit your questions, comments or proposal requests


CONTACT

Maria Severino

National Tax Leader


Recent Tax Alerts

Tax primer on asset versus share sale

This article highlights key considerations for the sale of a Canadian private business from both the seller’s and buyer’s perspective.

  • December 04, 2019

Increasing assessments and exposure under section 160

Recent court cases suggest that the CRA is using section 160 – which entails assessing a person for another’s tax debt – more aggressively.

  • November 27, 2019

Tax consequences of demolition costs in the real estate sector

Tax treatment of demolition costs is fact-sensitive and requires an in-depth analysis of the taxpayer’s intent and business considerations.

  • November 20, 2019

Tax Court applies sham doctrine to disallow partnership losses

Will the CRA increase its use of the sham doctrine as a basis to reassess taxpayers? Read here for further details.

  • November 13, 2019

2019 Post-election review of potential tax changes

This article highlights proposed tax measures presented by the Liberal Party of Canada in their 2019 election platform.

  • November 08, 2019