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  • Writer's pictureDaniel Gray CPA

Canadians should avoid LLP or LLLP

A very recent ruling (2016-0642051C6) by the Canada Revenue Agency (CRA) will make residents of Canada, including US citizens living there, want to avoid investing in US Limited Liability Partnerships, (LLPs) and Limited Liability Limited Partnerships (LLLPs) the same way and for the same reason they’ve needed to avoid USA LLCs.

CRA has stated that LLPs and LLLPs that are formed in Delaware and Florida will be taxed as US corporations for Canadian income tax purposes, which we can presume will also be applied to LLPs and LLLPs formed in other US States.

The old LLC double-tax issue now arises in this context because the Canadian owner will pay US tax immediately in the year the profit is earned. However the Canadian owner will not pay Canadian tax until the profit is paid out from the LLP/LLLP to the owner. If this payout occurs in a subsequent year, the US tax paid might not be creditable (deductible) against the Canadian tax.

Even if the earnings and payout occur in the same year, the amount of the US tax that can be used as a direct deduction from taxes in Canada may be limited to 15% or less of the US income, even if the actual US tax is higher (a deduction against income – not tax – may be available for any excess).

Thus try instead using LPs, which are considered flow-thru in both countries, and even converting to LP if you act soon. A retroactive conversion only succeeds if The LLP or LLLP was formed before July, 2016, and carried on business before July, 2016, and all intent and owner treatment indicate partnership.

Also, if the LLP or LLLP is controlled by Canadians, CRA could assert that it is a corporation resident in Canada and subject to tax on world income without any credit for US tax paid by members.

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