LLC1, which is wholly owned by a Canadian partnership, held 49.9% of the units in LLC3 - with a further 0.1% held by LLC2 (a wholly-owned subsidiary of LLC1) and the remaining 50% of the LLC3 units held by a third party. LLC3 was converted into US LP2 (a Delaware limited partnership, or "DLP") pursuant to s. 17-217 of the Delaware Limited Partnership Act. Under the Internal Revenue Code, the conversion was treated as a continuance of LLC3 as a DLP. For ITA purposes, the Conversion resulted in the disposition by LLC1 and LLC2 of their respective units in LLC3 and the acquisition by LLC1 and LLC2 of units in US LP2, so that LLC1 recognized a foreign accrual property loss. In finding that the LLC3 and US LP2 units were not identical property, so that s. 40(3.3) did not apply to deny the loss, CRA stated:
These differences in inherent qualities and elements could result in a prospective buyer to have a preference of one property over the other, which would then result in the membership units in DLLC and the partnership units in DLP not being considered identical properties.
…The conversion of an entity from one legal form to another, such as the conversion from a DLLC to a DLP, is not one of the situations covered in subsection 40(3.5).
The economic similarities between the LLC1’s economic situation before and after the Conversion cannot be taken into account as this is not an inherent quality or element of the properties themselves.