Question
Consider a situation where US LLC carries on business in Canada through a Canadian branch or permanent establishment (PE). US LLC is treated as a corporation for Canadian tax purposes but as fiscally transparent for US tax purposes. US LLC is owned by four equal shareholders—a Bermudian-resident corporation, a US‑resident C corporation, a US-tax exempt, and a US‑resident individual.
Article IV(6) of the treaty appears to look through US LLC to the identity of the underlying shareholders, who are deemed to have derived the income of US LLC if they are US residents. How does the CRA determine the tax consequences of income earned by US LLC? Are the US C corporation, the US tax-exempt, and the US‑resident individual taxed on the income as though they earned it directly?
Response
Under the Act, US LLC computes its taxable income earned in Canada and is subject to tax at the applicable corporate rates, and it also computes its branch tax at 25 percent under Part XIV.
A reduction of US LLC’s tax under Part I and Part XIV is available under Article XXI of the treaty based on the percentage of the LLC’s branch profits that are considered, by Article IV(6), to be derived by the exempt organization.
A reduction in the branch tax is also available under Article X(6) of the treaty based on the percentage of the LLC’s branch profits that are considered, by Article IV(6), to be derived by the US C corporation.
Article X(6) of the treaty does not provide for any reduction in the branch tax in respect of individual shareholders.
Written guidance on how US LLC reports the reduction in tax in respect of its US-resident shareholder will be provided in the near future. In the meantime, US LLC should provide a sufficient explanation with its T2 return to allow the CRA to understand the basis and calculation of any claimed tax reductions.