Based on the recent decision in the TD Securities case, the Canada Revenue Agency ("CRA") has accepted that certain limited liability companies ("LLC") may claim benefits under the Canada-United States Income Tax Convention 1980 (the "Treaty") for periods prior to the introduction in the Fifth Protocol of amendments to the Treaty accommodating LLCs. As described below, LLCs qualifying for such relief may file refund claims in limited circumstances.
The Treaty was amended in 2008 to allow U.S. resident members of
a LLC that is disregarded or treated as a partnership for U.S. tax
purposes to claim the benefit of the Treaty. The amendments to the
Treaty affecting LLCs generally became effective from February 1,
2009. Prior to this, it was the CRA's long-standing position
that such an LLC was not entitled to Treaty benefits because it was
not itself liable to U.S. income tax, and thus was not a U.S.
resident for the purposes of the Treaty.
On April 8, 2010, the Tax Court of Canada held, in TD Securities (USA) LLC v. The Queen, that the taxpayer ("TD LLC"), a disregarded entity for U.S. tax purposes, could claim the benefit of the Treaty as it existed prior to the 2008 amendments.
Since TD LLC's shareholder was a U.S. corporation all of its income was comprehensively taxed in the U.S., albeit not at the LLC entity level. On this basis, the Tax Court determined that TD LLC's profits from its Canadian branch were entitled to the benefits of the Treaty. The TD Securities case is discussed in greater detail in our Flash, dated April 13, 2010, (available at http://www.dwpv.com/en/17620_24853.aspx)
The CRA did not appeal the Tax Court's decision in TD Securities.
Refund claims based on the TD Securities case
On July 7, 2010, the CRA released a written document (No. 2010-0369271C6, dated June 16, 2010) stating that, although it continues to not agree with the decision in TD Securities, it will accept refund claims for periods prior to the 2008 Treaty amendments becoming effective in the circumstances described below.
Taxes on Business Income and Branch Taxes
With respect to business income and branch taxes, refund claims will be entertained where:
- The LLC can demonstrate that it was wholly-owned, throughout the relevant taxation years, by one or more persons who were residents of the U.S. for purposes of the Treaty, and
- A notice of objection for the relevant taxation year is filed within the time prescribed by the Income Tax Act (Canada) (the "Act") (generally within 90 days after the date of mailing of the related notice of assessment), or where the CRA has confirmed an assessment to which the LLC has objected, the LLC appeals the assessment to the Tax Court within the time prescribed by the Act (generally 90 days after the receipt of the date of mailing of the notice of confirmation) and the LLC is not precluded in the notice of appeal from raising the claim for Treaty benefits.
A claim for a refund in respect of Canadian withholding tax based on an LLC's entitlement to benefits under the Treaty will be accepted where the amount subject to Canadian withholding tax was paid by a Canadian resident to an LLC prior to February 1, 2009 and a refund application is made no later than two years after the end of the calendar year in which the amount was paid, provided the amount was taxed in its entirety in the U.S. in the hands of one or more U.S. residents.
Where a taxpayer is subject to an assessment for failure to deduct and remit Canadian withholding tax on an amount paid to an LLC, the CRA will reassess the taxpayer to reduce the amount owing based on the application of the Treaty if the amount was taxed in its entirety in the U.S. in the hands of one or more U.S. residents and the taxpayer has filed a notice of objection or notice of appeal within the period prescribed by the Act (as described above under the heading "Business Income").
Pursuant to the Treaty amendments in the Fifth Protocol (Article IV(6)), the share of an LLC's income that is attributable to members who are U.S. residents for Treaty purposes is entitled to benefits under the Treaty in qualifying circumstances. However, as discussed in our Flash, dated April 13, 2010 (available at http://www.dwpv.com/en/17620_24853.aspx), it is the CRA's position that Article IV(6) will not provide relief in all cases.
The CRA's July document states that the decision in TD Securities is only relevant to periods prior to Article IV(6) becoming effective and, subsequent to this period, Treaty claims by LLCs based on TD Securities will not be accepted where relief is not available under Article IV(6). It is not clear whether the CRA's position in this regard would be accepted by a court.
The CRA has taken a narrow interpretation of the TD Securities case and is providing relief in limited circumstances. Nonetheless, LLCs that do qualify for the relief offered should file their refund claims as soon as possible given the limited time periods for doing so.
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.