20 October 1997 External T.I. 9641375 - FOREIGN TAX DEDUCTION

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

                                   							964137
XXXXXXXXXX	                        				Tim Kuss

Attention: XXXXXXXXXX

October 20, 1997

Dear Sirs:

Re: Subsections 20(11), 20(12) and 126(1)
U.S. Limited Liability Companies

This is in reply to your letter dated December 9, 1996 regarding the above matter. In particular, you would like our views regarding the appropriate Canadian tax treatment of U.S. taxes paid by a Canadian resident individual in respect of the individual's share of income of a U.S. limited liability company ("LLC"). For these purposes you have asked us to assume that the LLC is treated as a partnership for U.S. tax purposes and a corporation for Canadian tax purposes.

We provide the following general comments.

As described in Interpretation Bulletin IT-392, in those instances in which the ownership of a foreign business entity is not divided into units entitled "shares", and in which the foreign business entity is considered to be a corporation, the Department views the foreign business entity as if it had capital stock of 100 issued shares. Each owner of a beneficial interest in the foreign business entity is then considered to own a number of shares proportionate to the owner's beneficial interest in the foreign business entity. This interpretation would apply in respect of a member of an LLC that was considered a corporation for Canadian tax purposes.

It is our opinion that the U.S. tax paid on the shareholder's share of income of the LLC would be considered a tax in respect of income from the share of the LLC for purposes of subsections 20(11), 20(12) and 126(1) of the Income Tax Act, notwithstanding that the tax is computed with reference to the LLC's income.

Where in a particular year an LLC has made a profit distribution to its Canadian resident individual shareholder, for purposes of computing the deduction under subsection 20(11), in our view, the amount determined under paragraph 20(11)(a) should be the U.S. taxes otherwise payable for that year in respect of the shareholder's share of income of the LLC. To put another way, in a year where there has been a distribution by the LLC and the amount of the distribution is different than the shareholder's share of income for that year, there should not be an attempt to prorate the U.S. taxes paid for the year between the amount distributed and the income retained by the LLC. In our opinion, all of the U.S. taxes paid "may reasonably be regarded as having been paid in respect of an amount that has been included in computing the taxpayer's income for the year from the property" for purposes of paragraph 20(11)(a).

The amount deductible under subsection 20(11) will affect the amount deductible under subsection 20(12) or creditable under subsection 126(1), by virtue of its impact on the definition of "non-business-income tax" in subsection 126(7).

Where there is no distribution from the LLC in a particular year, subsection 20(11) would not apply in that year (no amount has been included in computing the taxpayer's income for the year from the property) and all of the U.S. taxes paid by the shareholder in respect of the shareholder's share of income of the LLC would be deductible pursuant to subsection 20(12). To the extent the tax was not deducted under subsection 20(12), the tax would be a creditable tax for purposes of subsection 126(1).

Where an individual resident in Canada disposes an shares of an LLC, any U.S. tax paid in respect of that disposition will be a creditable tax for purposes of subsection 126(1). Such tax would not be deductible under subsections 20(11) or 20(12).

We hope our comments are of assistance.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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