Canada: Tax Court of Canada Rules U.S. Limited Liability Company is Treaty Resident

On April 8, 2010, the Tax Court of Canada held that a U.S. limited liability company (LLC) was "liable to tax" in, and therefore a resident of, the United States for purposes of the Canada-United States Income Tax Convention (the Treaty). The case overturns the long-established position of the Canada Revenue Agency (CRA) that LLCs that are fiscally transparent for U.S. tax purposes cannot be U.S. residents for purposes of the Treaty, a position that had greater relevance prior to the Fifth Protocol to the Treaty (which did not apply to the taxation years at issue). The taxpayer was represented by Osler's Al Meghji , Patrick Marley and Pooja Samtani .

In TD Securities (USA) LLC v. The Queen , the Court concluded that TD Securities (USA) LLC (TD LLC) was a U.S. resident since the United States retained and exercised jurisdiction to tax the worldwide income of TD LLC on a comprehensive basis, notwithstanding that such taxation occurred only at the level of its U.S. resident member.

Background Facts

TD LLC was originally formed as a U.S. corporation, and converted into a Delaware limited liability company, a form of business organization that is recognized as a distinct legal entity separate from its members under Delaware law. For U.S. federal income tax purposes, TD LLC was generally disregarded as an entity (i.e., it did not make an election to be treated as a taxable entity). As a disregarded entity, all of TD LLC's income (which included income from Canadian branch operations) was included in computing the income of Holdings II, a U.S. corporation that was the sole member of TD LLC and whose income was in turn included in the consolidated return of TD USA, a U.S. corporation that was the sole shareholder of Holdings II.

From a Canadian tax perspective, TD LLC was considered a corporation and was subject to Canadian branch profits tax on its income from the portion of its business that was carried on in Canada. For the 2005 and 2006 taxation years, the CRA assessed TD LLC for branch tax at the statutory rate of 25%, denying TD LLC the Treaty-reduced rate of 5% based on the CRA's long held position that a fiscally transparent LLC is not a resident of the United States for purposes of the Treaty.


Article IV(1) of the Treaty defines a U.S. resident as any person that, under the laws of the United States, is"liable to tax therein by reason of that person's domicile, residence, citizenship, place of management, place of incorporation or any other criterion of a similar nature." During the relevant taxation years, the Treaty did not expressly address or restrict the entitlement to relief with respect to income derived through a fiscally transparent entity.

The Crown argued that Article IV(1) of the Treaty is clear and unambiguous. Since TD LLC was treated as a disregarded entity for U.S. tax purposes, it was not "liable to tax" in the United States on its own account and therefore was not a U.S. resident for Treaty purposes. The Crown further argued that, even if TD LLC was considered to be liable to tax in the U.S. by virtue of its income being taxed in the hands of Holdings II, such liability to tax was not "by reason of...[TD LLC's] domicile, residence, place of management, citizenship, place of incorporation or any other criterion of a similar nature" as required by Article IV(1) of the Treaty. Finally, the Crown maintained that a judgment in TD LLC's favour could render redundant or meaningless the Fifth Protocol amendments relating to hybrid entities.

TD LLC argued that Article IV(1) must be interpreted by reference to Canadian law, and that the determination of whether a person is "liable to tax" in the United States for purposes of the Treaty differs from the determination of whether a person is itself subject to tax on its income in the United States. TD LLC's position, in particular, was that Treaty benefits should apply because TD LLC was "liable to tax" in the United States to the extent that the United States retained and exercised jurisdiction to tax the worldwide income of TD LLC. Moreover such income had in fact been subject to tax in the United States.

As an alternative, TD LLC argued that Treaty benefits applied because the worldwide income (including the Canadian branch income) derived through TD LLC was taxed in the United States in the hands of Holdings II, which clearly was a Treaty resident. It maintained that benefits under the Treaty should apply in respect of the income derived through TD LLC by a U.S. resident, consistent with the 'look-through' approach endorsed by the Organisation for Economic Co-operation and Development (the "OECD") and generally adopted by Canada and the United States with respect to income derived through other fiscally transparent entities.

Tax Court Decision

The Tax Court of Canada found that during the taxation years in issue the United States retained its jurisdiction to tax TD LLC on a comprehensive basis. The fact that the United States exercised such jurisdiction by taxing that income in the hands of Holdings II did not lead to the conclusion that TD LLC was not liable to tax or that benefits under the Treaty were therefore unavailable.

The Court observed that the Canadian and U.S. tax authorities had previously interpreted Article IV(1) of the Treaty liberally and pragmatically when considering whether treaty benefits should be available to entities that are not required to pay tax under the relevant domestic law. In this regard, it was noted that past Treaty amendments specifying that tax-exempts and governmental entities were "resident" for Treaty purposes were effected as "clarifications" rather than changes in law, and did not require Canadian and U.S. tax authorities to change their practice of granting Treaty benefits to such entities.

The Court also noted other situations in which the Canadian tax authorities had administratively interpreted the Treaty in a liberal manner to make benefits available where doing so was consistent with the spirit of the Treaty, such as with respect to S Corporations (which are generally fiscally transparent for U.S. federal income tax purposes) and partnerships. The "sole anomaly" in this respect was Canada's treatment of LLCs. In light of the "overwhelming consistency" of this approach, the Court held that it was not intended that an entity whose income was comprehensively taxed in the other contracting state would be denied the benefit of a treaty simply because its income was taxed by the other country at the level of its shareholders, members or partners.

In this vein, the Court noted that the Technical Explanation to the Fifth Protocol demonstrated a similar willingness on the part of the tax authorities to overcome certain technical deficiencies in the wording of the Treaty to deal with residence in "a workable manner to achieve a result consistent with its purpose and context".

By analogy, the Court applied the approach adopted by the OECD in the 1999 OECD report entitled The Application of the OECD Model Tax Convention to Partnerships (the "OECD Partnership Report") and in the commentaries to the OECD Model Treaty. The Court noted that neither Canada nor the United States had expressed a reservation or observation in respect of the OECD Partnership Report or related commentary to the OECD Model Treaty. The OECD Partnership Report had considered the case where a source state's tax laws treat a foreign partnership as a taxable entity but the partnership is fiscally transparent under the tax laws of the partners' residence country. The OECD's position was that treaty benefits should apply to the income of the partnership based on the fact that the partners are liable to tax in respect of such income. The Court said that a similar conclusion in principle should apply to a fiscally transparent LLC.

The Court applied the above considerations as part of the context and purpose of the residence provision in the Treaty to decide the case in favour of TD LLC. Given that the Canadian source income of TD LLC had been fully taxed in the United States, the Court concluded that the context, object and purpose of the Treaty would not be achieved (and indeed would be frustrated) if such income did not enjoy the benefits of the Treaty. Therefore, the Court specifically held that TD LLC was entitled to Treaty benefits as a U.S. resident in its own right. The Court reasoned that TD LLC was a U.S. resident as it was "liable to tax" in the United States on the basis that its income was fully and comprehensively taxed in the hands of its sole member, Holdings II. The Court moreover held that such a basis for liability to tax is, as is required by Article IV(1) of the Treaty, "by reason of...[a]criterion of a similar nature" to the enumerated grounds in that Article.

In reaching its conclusions, the Court reiterated (as it has in other cases involving treaty interpretation) that the proper approach to interpreting a treaty is to follow the interpretive approach taken by other OECD countries, the OECD Model Treaty and related commentaries. In the Court's view, this requires, in the case of determining the residence of a hybrid entity, that the source state (Canada in this case) read the text of Article IV(1) in the context of the relevant treaty as a whole, in the context of the object and purpose of the treaty, and in the context of how (if at all) the residence state chooses to fully and comprehensively impose tax under its domestic tax legislation, on the income of the hybrid entity. The Court noted that, in such circumstances, although Canada has the right to select the manner in which it taxes income in its domestic tax legislation, when applying the Treaty, Canada must consider, as part of the context, the manner in which the United States has imposed its domestic tax laws on that income (including at the level of the entity or its members). Thus, the Court agreed with TD LLC that the availability of Treaty benefits should not turn on whether TD LLC made a particular election under U.S. domestic tax law, particularly where such election would not have had any material effect on the extent to which the U.S. taxed its worldwide income.

The Court went on to address the Crown's concerns that a ruling in TD LLC's favour might allow LLCs in the future to choose between claiming Treaty benefits based on the reasoning in the case or the rules relating to hybrid entities introduced by the Fifth Protocol. Consistent with its textual, contextual and purposive approach to interpreting the Treaty for the 2005 and 2006 taxation years, the Court stated that the revised Treaty, including the Fifth Protocol amendments thereto, would be both part of the text and context to be considered when applying the Treaty in future cases. The Court moreover indicated that the factual context of interpreting the Treaty may have been different in a situation that involved an abuse, or where the income of the LLC had not been liable to tax in the United States in the hands of its parent.

This decision is important in that it overturns the long-standing position of the CRA that a fiscally transparent LLC cannot in any circumstance be a U.S. resident and access benefits under the Treaty. It also reaffirms the importance of interpreting the text of tax treaty provisions in light of their context and purpose. In particular, in interpreting the residence provisions of a tax treaty, the judgment is an example of what the Court refers to as "interpreting and applying the chosen language of the treaty to deal with residence in a workable manner to achieve a result consistent with its purpose and context". ­

The Crown has until May 10, 2010 to appeal the decision of the Tax Court to the Federal Court of Appeal.

Al Meghji practice is restricted to tax litigation. Patrick Marley advises on tax issues associated with international tax planning, domestic and cross-border mergers and acquisitions, corporate reorganizations, corporate finance and various other tax matters. Pooja Samtani specializes in advising on tax litigation and dispute resolution matters.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.