Principal Issues: What are the essential characteristics to be considered in order to classify a foreign entity as a corporation, a trust or a partnership for the purposes of the Act?
Position: Question of facts.
Reasons: Previous positions.
FINANCIAL STRATEGIES AND INSTRUMENTS ROUNDTABLE 5 OCTOBER 2012
2012 APFF CONFERENCE
Question 12 - Criteria for qualifying a foreign entity as a corporation, trust or other entity
With personal mobility and corporate globalization, it is not uncommon for foreign structures to be taken into account in Canadian taxation. Some foreign entities do not fall precisely into a foreign entity classification and legal and taxation characterization requires an analysis.
Can you elaborate on the criteria that, according to the CRA, should be used to characterize a foreign entity, that has issued a security held by a Canadian resident, as a corporation, trust, partnership, or other entity?
CRA Response
The CRA generally uses the following two-step approach to determine the status of a foreign entity, institution or arrangement ("Entity") for Canadian taxation purposes:
1. Determine the characteristics of a foreign commercial Entity under foreign commercial law;
2. Compare those features with the categories of commercial Entities that are recognized under Canadian commercial law, considering the rights under the applicable provincial law based on the facts and circumstances of a particular situation, in order to classify that foreign commercial Entity into one of those categories.
The classification of foreign entities under this approach involves an in-depth analysis and interpretation of various relevant legal documents in the context of the applicable foreign law. This is essentially a determination of fact for purposes of the Income Tax Act. In the context of the administration of the Canadian self-reporting taxation system, it appears to us that a reasonable determination of that classification must be made by the taxpayer involved according to the facts specific to the taxpayer’s particular situation.
The CRA has not established a list of essential features that a foreign Entity must possess to be classified in any of the different categories of recognized Entities for purposes of the application of the Income Tax Act. All characteristics specific to a given Entity may be relevant to this analysis. However, the most important attributes appear to us to be the nature of the relationship between the parties and the rights and obligations of the parties arising under the foreign law and relevant legal documents. This could include the nature of the rights to the assets of the Entity, the right to participate in the profits or receive distributions, the right to vote or participate in the decisions of the Entity, the right to share in the distributions of assets during the liquidation of the Entity as well as the obligations of the various parties involved. Status as a separate legal entity appears to us to be a distinctive but not exclusive feature of corporations.
Yannick Roulier
(613) 957-2134
2012-045126
October 5, 2012