Principal Issues
- How a U.S. limited liability company (LLC) is characterized for Canadian tax purposes.
- Whether a U.S. LLC is carrying on business in Canada and subject to Canadian tax.
- The application of the Canada–U.S. Tax Convention, including permanent establishment (PE) and withholding obligations.
- The impact of a U.S. check-the-box election on Canadian tax treatment.
Position
- A U.S. LLC is generally treated as a corporation for Canadian tax purposes.
- Whether a U.S. LLC is taxable in Canada depends on whether it is carrying on business in Canada and whether it has a permanent establishment.
- Payments to a U.S. LLC for services rendered in Canada may be subject to withholding tax under Regulation 105.
- A check-the-box election for U.S. tax purposes does not change the Canadian tax classification of the LLC.
Reasons
For Canadian tax purposes, U.S. LLCs are generally regarded as corporations, regardless of their treatment under U.S. tax law.
The determination of whether a non-resident entity is carrying on business in Canada is a question of fact, based on factors such as where contracts are concluded, where services are performed, and where business operations occur.
Under Article VII of the Canada–U.S. Tax Convention, business profits of a U.S. entity are taxable in Canada only if the entity carries on business through a permanent establishment in Canada.
Certain activities, such as storage or auxiliary activities, may not constitute a permanent establishment under Article V(6) of the Treaty.
Where a U.S. LLC provides services in Canada, payments made to the LLC may be subject to withholding under section 105 of the Regulations, generally at a rate of 15%, regardless of ultimate treaty relief.
However, where the LLC does not have a permanent establishment in Canada, it may be exempt from Canadian tax under the Treaty, and may recover withholding taxes by filing a Canadian return.
With respect to employees of a U.S. LLC performing services in Canada, Article XV of the Treaty may exempt employment income from Canadian taxation where conditions such as the 183-day rule and non-Canadian employer requirement are satisfied.
A check-the-box election under U.S. tax law does not alter the legal nature of the LLC and therefore does not change its classification for Canadian tax purposes, nor does it result in a disposition of the LLC interests.
However, such an election may affect the application of foreign tax credits and treaty provisions, depending on whether the LLC or its members are considered to have paid the U.S. tax.
Limitations
The determination of whether a U.S. LLC is carrying on business in Canada, has a permanent establishment, or is subject to withholding tax is highly fact-specific and depends on the particular circumstances.
These comments are general in nature and do not constitute a binding ruling.
Written confirmation of the tax implications of a specific situation is provided only where the transactions are the subject of an advance income tax ruling request submitted in accordance with CRA administrative procedures.
