• Fiscally Transparent U.S. LLC Entitled To Canada-U.S. Treaty Benefits
  • April 26, 2010
  • Law Firm: Borden Ladner Gervais LLP - Toronto Office
  • In TD Securities (USA) LLC v. The Queen, Canada’s Tax Court considered for the first time whether a fiscally transparent U.S. LLC (TD LLC) was a “resident” of the U.S. and therefore entitled to the 5% reduced rate of Canadian branch profits tax under the Canada-U.S. Income Tax Convention (“Treaty”). Under Article IV of the Treaty, TD LLC would qualify as a resident of the U.S. for the years in question if, under U.S. law, it was liable to U.S. tax by reason of its domicile, residence, citizenship, place of management, place of incorporation or “any other criterion of a similar nature”. TD LLC, which had a permanent establishment in Canada and was subject to Canadian branch profits tax on its Canadian earnings, was an indirect wholly-owned subsidiary of the Toronto-Dominion Bank (TD). TD LLC’s income was included for U.S. tax purposes in the income of its sole member, Holdings II, which income in turn was consolidated and subject to U.S. tax with the income of its direct parent (and wholly-owned direct subsidiary of TD), TD USA. The taxation years in question preceded the Fifth Protocol amendments adding the look-through rule in Article IV(6) for determining treaty benefits in respect of income derived through fiscally transparent entities. Historically, Canada had denied treaty benefits to fiscally transparent LLCs and their members, while applying a look-through approach to granting treaty benefits for U.S. partnerships and S Corporations based on the U.S. residence of their member(s).