Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: In the facts outlined, for purposes of determining US LLC’s 2024 earnings from its active business in accordance with regulation 5907(2.03), should the maximum CCA be considered to have been claimed by US LLC for the 2017 to 2023 taxation years?
Position: No.
Reasons: See below.
IFA 2025 Annual Conference - CRA Roundtable
May 28, 2025
IFA Question 6: Application of Regulation 5907(2.03)
With respect to a foreign affiliate that is a (single member) disregarded US limited liability company (US LLC), the CRA’s position is that the “earnings” or “loss” from carrying on an active business for a particular taxation year of the affiliate is required to be computed pursuant to subparagraph (a)(iii) of the definition of “earnings” in Regulation 5907(1), with any modifications required for purposes of computing a loss. Regulation 5907(2.03) provides that the determination of the “earnings” or “loss” of an affiliate under the definition in subparagraph 5907(1)(a)(iii) is to be made as if the affiliate had, in computing its income or loss from the business for each taxation year that is the particular year or a preceding taxation year that ends after August 19, 2011, claimed the maximum amount of deductions available under the Act.
Assume that US LLC was formed in 2017 by a regarded US corporation (USP). US LLC has a December 31st taxation year end. It acquired and used depreciable assets in the operation of its active business carried on in the US in 2017 and all subsequent years. All US LLC’s membership interests were acquired by an arm’s length foreign affiliate (FAH) of a Canadian resident corporation (Canco) on January 1, 2024. What would the UCC of US LLC’s depreciable assets be on January 1, 2024 for purposes of computing US LLC’s “earnings” or “loss” in accordance with regulation 5907(2.03) for its 2024 and subsequent taxation years? Would CCA under the Act be considered to have been claimed for taxation years that ended before US LLC became a foreign affiliate of Canco?
CRA Response
US LLC was not a foreign affiliate of Canco during its 2017 to 2023 taxation years. For purposes of the Act, US LLC became a foreign affiliate of Canco on January 1, 2024, and as such the computation period of surplus balances commences on January 1, 2024.
CRA document 2016-0669761C6 states that “earnings” from a US active business of a US resident, single member LLC that is disregarded for US 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 in Regulation 5907, which reads as follows:
“5907(1) “earnings” of a foreign affiliate of a taxpayer resident in Canada for a taxation year of the affiliate from an active business means
(a) in the case of an active business carried on by it in a country,
(i) […]
(ii) […]
(iii) in any other case, the amount that would be the income from the active business for the year under Part I of the Act if the business were carried on in Canada, the affiliate were resident in Canada and the Act were read without reference to subsections 12.7(3), 18(4), 18.2(2), 18.4(4), 80(3) to (12), (15) and (17) and 80.01(5) to (11) and sections 80.02 to 80.04,
Regulation 5907(2.03) reads as follows (emphasis added):
(2.03) The determination — under subparagraph (a)(iii) and paragraph (b) of the definition "earnings", and paragraph (b) of the definition "loss", in subsection (1) — of the earnings or loss of a foreign affiliate of a taxpayer resident in Canada for a particular taxation year from an active business is to be made as if the affiliate
(a) had, in computing its income or loss from the business for each taxation year (referred to in this paragraph as an "earnings or loss year") that is the particular year or is any preceding taxation year that ends after August 19, 2011,
(i) claimed all deductions that it could have claimed under the Act, up to the maximum amount deductible in computing the income or loss from the business for that earnings or loss year, and
(ii) made all claims and elections and taken all steps under applicable provisions of the Act, or of enactments implementing amendments to the Act or its regulations, to maximize the amount of any deduction referred to subparagraph (i); and
(b) had, in computing its income or loss from the business for any preceding taxation year that ended on or before August 19, 2011, claimed all deductions, if any, that it actually claimed under the Act, up to the maximum amount deductible, and made all claims and elections, if any, and taken all steps, if any, under applicable provisions of the Act, or of enactments implementing amendments to the Act or its regulations, that it actually made.
Regulation 5907(2.03) was enacted on June 26, 2013, effective for taxation years of foreign affiliates that end after August 19, 2011. Although not relevant to this question but in the interest of completeness, CRA document 2017-0691201C6 discusses the computation of the earnings of foreign affiliates that are disregarded US LLCs for taxation years that ended on or before November 29, 2016.
The interpretative issue raised by this question is the determination of the undepreciated capital cost (UCC) balance on which CCA will be claimed by US LLC under paragraph 20(1)(a) of the Act to determine its 2024 “earnings” from its active business in accordance with subparagraph (a)(i) of Regulation 5907(2.03).
The Explanatory Notes to paragraph (a) of Regulation 5907(2.03) indicate that the rule in 5907(2.03) to force maximum deductions to be taken in computing the foreign affiliate’s “earnings” under Canadian tax rules is meant to prevent taxpayers from purposely inflating surplus by choosing not to take discretionary deductions under the Act.
In the circumstances described (involving an arm’s length acquisition of all the US LLC’s interests by FAH), for purposes of computing the income of the US LLC under Part I of the Act as if the business was carried on in Canada and US LLC was resident in Canada, the UCC of its depreciable assets on January 1, 2024 would, in the context of applying Regulation 5907(2.03), be equal to the lesser of the capital cost and the fair market value of those assets on that date.
Komal Patel
2025-105263
May 28, 2025
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