Foreign Entity Classification
Since the introduction of IT-343R in 1977, CRA has changed its position regarding the significance of the separate legal entity status in the classification of foreign entities. Separate legal entity status is still considered a distinctive feature of corporations, but it is not a feature of corporations alone. The fact that an entity is a separate legal entity is not in itself determinative of its status for tax purposes.
Question
Which kinds of entities have been considered by CRA and have been classified as corporations when using the new approach followed by CRA?
Response
Using the new approach, we have considered the characteristics of Polish LLCs, US LLCs, S Corporations and French “sociétés par actions simplifiées” and we have concluded that these entities are corporations for Canadian tax purposes.
The British Columbia Supreme Court reached the same conclusion with respect to LLCs in the case of a Nevada LLC in Boliden Westmin Limited and NVI Mining Ltd. v. Her Majesty the Queen, 2007-PTC-BC-4. The Court, considering that a Nevada LLC had numerous hallmarks of a corporation (such as limited liability, separate legal person, issuance of shares of some sort though of a different name, right for that separate legal person to deal with property, to contract, to sue, to receive grants or privileges in its own name), had decided that the Nevada LLC was a corporation under British Columbia taxation statutes and was satisfied that it was the case for federal income tax purposes.
We cannot always reach a general position for a particular foreign entity. In certain situations, we have reached a conclusion after an analysis not only of the foreign legislation under which an entity was formed but also of the agreements like articles of incorporation and contracts between the parties that governed it. For example, after analyzing the foreign legislation and the agreements related to their creation, we concluded that the Dutch cooperative, the Chilean Special contractual mining company and the Chinese-Foreign Contractual Joint Venture were corporations for federal income tax purposes.
We have examined other kinds of entities that we did not consider as being corporations for federal income tax purposes such as DRUPAs, DRULPAs, an Australian limited partnership and the French “sociétés en nom collectif”. Those were considered to be partnerships. The Pakistan association of persons reviewed was found to be a partnership based on the foreign legislation and the agreements and facts related to that particular situation. The German Investment Funds and the Austrian Foundation that we have examined were considered to be trusts after having reviewed the foreign legislation and the relevant agreements.
Our approach remains as stated last year, that is, to determine the status of an entity for Canadian tax purposes, we generally follow the two-step approach described below:
- Determine the characteristics of the foreign business association under foreign commercial law;
- Compare these characteristics with those of recognized categories of business associations under Canadian commercial law in order to classify the foreign business association under one of those categories.
Even if we consider all the characteristics of an entity, the most important attributes are the nature of the relationship between the various parties and the rights and obligations of the parties under the applicable laws and agreements.