Real Estate Advisory: Canada Revenue Agency Announces Changes to Treatment of U.S. LLLPs and LLPs

By Janet G. Betts and Timothy P. Burr

The Canada Revenue Agency (CRA) recently announced a change in the treatment of U.S. limited liability limited partnerships and U.S. limited liability partnerships (the “Entity Types”) for Canadian tax purposes. For Canadian taxpayers with an interest in such Entity Types, the interest held by a Canadian will now be treated by the CRA as an interest in a corporation. However, U.S. tax authorities will continue to consider the entity types to be flow-through entities. This differential treatment in entity classification creates the potential for negative tax consequences, particularly where the entity earns passive income—such as a real estate investment.

Therefore, to comply with the new CRA policy changes and to prevent adverse tax consequences to the partners of such Entity Types, actions may need to be implemented to change the structure of a limited liability limited partnership or limited liability partnership to a limited partnership (the “Entity Choice Compliance”). The CRA has announced that, in general, if the following conditions are met on or before December 31, 2017, absent any tax avoidance, a change in structure may be made without triggering any adverse Canadian tax implications:

  • Neither the entity nor any of its partners have taken the position that the entity is not a partnership for Canadian income tax purposes;
  • The entity must have been formed, and must carry on business, prior to July 2016;
  • The members must have intended the entity to be treated as a partnership from the time of its formation for Canadian tax purposes; and
  • The entity must be converted into some other form of partnership recognized by the CRA as a partnership prior to January 1, 2018.

Before commencing any Entity Choice Compliance actions, a careful review of any loan documents, lease agreements, management agreements and other contracts should be undertaken to avoid any unintentional results. Care should be taken to confirm that Entity Choice Compliance actions do not trigger an event of default or the imposition of fees/penalties under any loan documents.

In addition, for any real property owned, title companies should be contacted to confirm that, after the Entity Choice Compliance, the limited partnership will remain the “Insured” as defined in the owner’s title policy or in the lender’s title policy.

Sherman & Howard’s attorneys are experienced in assisting clients with compliance issues and review of their existing partnership, operational and, financing documents. We recommend that clients considering any such action consult with experienced Canadian legal counsel and accountants. If you have questions about this advisory please contact our Real Estate or Corporate Practice Groups.

Sherman & Howard L.L.C. has prepared this advisory to provide general information on recent legal developments that may be of interest. This advisory does not provide legal advice for any specific situation and does not create an attorney-client relationship between any reader and the Firm.

©2017 Sherman & Howard L.L.C.                                                                                 January 5, 2017