US LLCs may claim refunds in certain circumstances
November 3, 2010
The Canada Revenue Agency (CRA) recently announced that it will accept claims for treaty benefits by US limited liability companies (LLCs) in certain circumstances. This announcement is in response to the decision of the Tax Court of Canada in TD Securities (USA) LLC v. Her Majesty The Queen (2010 DTC 1137) released earlier this year, wherein the court held that US LLCs should be treated as residents of the United States for the purposes of the Canada-United States Tax Convention (1980) ("Canada-US Treaty"), and as such may be entitled to the benefits thereunder. This was in contrast to the CRA’s longstanding position that LLCs that were fiscally transparent for US tax purposes were not residents of the United States for the purposes of the Canada-US Treaty.
The CRA’s written document No. 2010-0369271C6, released on July 7, 2010, stated that while it did not agree with decision of the Tax Court in TD Securities, and while it continues to be of the view that an LLC that is fiscally transparent for US tax purposes is not a resident of the US for purpose of the Canada-US Treaty, it will accept claims for treaty benefits made by LLCs in respect of a taxation year of an LLC to which Article IV(6) of the Canada-US Treaty is not in effect in the circumstances described below.
In the case of business income and branch taxes, refund claims will be entertained where the following conditions are met:
- the LLC can demonstrate that it was wholly owned, throughout the relevant taxation year, by one or more persons who were resident in the US for purposes of the Canada-US Treaty; and
- a notice of objection for the relevant taxation year is filed within the time prescribed by the Income Tax Act (Canada) ("Tax Act") or where the CRA has confirmed an assessment to which the LLC has objected, the LLC appeals the assessment within the time prescribed by the Tax Act and the LLC is not otherwise precluded from raising the claim in the notice of appeal.
In the case of withholding taxes, refund claims for withholding taxes remitted will be entertained where the following conditions are met:
- the refund claim is made prior to expiry of the limitation periods set out in subsection 227(6) of the Tax Act (i.e., no later than two years after the calendar year in which the amount was paid); and
- the item of income, in its entirety, was fully and comprehensively taxed in the US in the hands of one or more persons who were resident in the US for purposes of the Canada-US Treaty.
In the case where a taxpayer has been assessed for failure to deduct or withhold tax under Part XIII of the Tax Act on amounts paid or credited to an LLC, the CRA will reassess the taxpayer to reduce the amount owing to reflect the application of the Canada-US Treaty where the following condition are met:
- the item of income, in its entirety, was fully and comprehensively taxed in the US in the hands of one or more persons who were resident in the US for purposes of the Canada-US Treaty; and
- a notice of objection for the relevant taxation year is filed within the time prescribed by the Tax Act, or where the CRA has confirmed an assessment to which the LLC has objected, the LLC appeals the assessment within the time prescribed by the Tax Act.
In each of the foregoing circumstances, the CRA expects that there will be corresponding adjustments to any foreign tax credit claimed in the US that relate to refunded Canadian taxes.
With respect to the period of time where Article IV(6) of the Canada-US Treaty is in effect, which in the case of taxes withheld at source is on or after February 1, 2009, and for other amounts, for taxation years commencing after December 31, 2008, the position of the CRA is that Article IV(6) establishes the parameters under which the benefits under the treaty will be extended to fiscally transparent LLCs, and accordingly, the treaty benefit claimed by an LLC in respect of an amount of income, profit or gain will be recognized by the CRA only if the amount is considered to be derived, pursuant to Article IV(6), by a person who is resident in the US and who is a "qualifying person" under paragraph 2 of Article XXIX A or is otherwise entitled to the benefit under the Canada-US Treaty pursuant to paragraph 3, 4 or 6 of Article XXIX A.
The CRA has taken a narrow interpretation of the decision in TD Securities and is providing relief in limited circumstances. It is not clear whether such a narrow interpretation would be accepted by a court. In any event, in order to fall within CRA’s parameters, time will be of the essence in filing refund claims for Canadian taxes withheld at source or filing a notice of objection or appeal in respect of an assessment of Canadian income or branch taxes.
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