At the 2011 IFA Roundtable, Q.9, CRA indicated that a disregarded U.S. LLC that is a foreign affiliate and has a single member which is a regarded U.S. corporation should compute its “earnings” in accordance with Reg. 5907(1) – earnings - s. (a)(i). (a) Has this changed following the enactment in 2013 of Reg. 5907(2.03) requiring an affiliate, in computing its “earnings” in accordance with Canadian tax law, to claim maximum discretionary deductions? b) Would the answer change if the LLC had one or more members which were not regarded U.S. resident corporations? CRA responded:
(a) [A]s a result of the context provided by subsection 5907(2.03)…[t]he CRA is now of the view that the “earnings” from a U.S. active business of a U.S.-resident, single member LLC that is disregarded for U.S. tax purposes and that is a foreign affiliate of a corporation resident in Canada should be computed in accordance with subparagraph (a)(iii) of the Earnings Definition. The change in the CRA’s position is effective for the first taxation year of the LLC for which subsection 5907(2.03) has effect, that year being the LLC’s first taxation year ending after August 19, 2011.
The CRA recognizes that subsection 5907(2.03) does not contemplate a scenario where the “earnings” of a foreign affiliate are computed under subparagraph (a)(i) of the Earnings Definition in one taxation year and under subparagraph (a)(iii) of the Earnings Definition the next taxation year. However, for the purposes of such a transition, the CRA is prepared to accept that paragraph 5907(2.03)(b) applies under this scenario and that the deductions claimed in preceding taxation years in computing the LLC’s “earnings” under subparagraph (a)(i) of the Earnings Definition were “deductions…actually claimed under the Act”.
(b) If [a U.S. LLC with two or more members] carries on an active business in the U.S and is required for U.S. tax purposes to compute its income to determine the partners’ distributive shares, it is the CRA’s view that the LLC must compute its “earnings” under subparagraph (a)(i) of the Earnings Definition in accordance with the income tax laws of the U.S.