Does CRA still follows the "two-step" approach to entity classification, and what new entities are being considered?
After noting the "contradictory guidance" provided by the English definition of "corporation," which includes an "incorporated company," and the French version, which refers to a "legal person" ("personne morale"), CRA stated:
[A] two-step approach is still the most appropriate approach to be followed and, in particular, that one should not simply consider any entity that has legal personality to be a corporation. Thus, we stand by our previous positions whereby we determined that general partnerships and limited partnerships governed by the laws of Delaware are to be treated as partnerships for the purposes of the Act.
…[W]e are currently analyzing "limited liability limited partnerships" ("LLLPs") governed by the laws of the State of Florida. This analysis has also led us to consider the status of "limited liability partnerships" ("LLPs") governed by the laws of Florida. …
[T]these entities have many characteristics in common with "limited liability companies" ("LLCs") that exist in the U.S., which are generally considered to be corporations for the purposes of the Act, but that they also have many characteristics in common with the various forms of partnerships. ... A particular area of focus for us is the exact nature of the limitation of liability for the partners…[which] seems to go beyond the type of limitation of liability applicable to partnerships governed by the laws of the Canadian provinces.
…[P]artnerships governed by the laws of many states of the U.S. have legal personality, meaning that they own property in their own right and they have the right to sue and be sued in their own name. Under some states' laws, such partnerships can also be converted to LLCs and "regular" corporations without causing any change in the ownership of their assets. …Florida LLLPs and LLPs… also have these elements of legal personality.
To summarize, our main cause for concern with these LLLPs and LLPs is that they seem to have both legal personality and full, or at least very extensive, limited liability for all members… . [W]e wonder whether these two factors…should be considered to be so significant that these entities should be classified as corporations for Canadian tax purposes.
[W]e are inviting comments from the tax community… .