Section 93.2

CRA briefly noted that s. 93.2 would apply to Florida and Delaware LLPs and LLLPs that are treated by CRA as corporations.

Before ruling that the contribution of shares of a Netherlands private limited liability company to a newly-formed Dutch cooperative (DC), in consideration for a credit to the membership accounts of the contributing foreign affiliates equal to the FMV of the contribution, was eligible for s. 95(2)(c) rollover treatment, CRA ruled that DC was a corporation for the purposes of the Act, and a non-resident corporation without share capital for purposes of s. 93.2 and that membership interests in DC will be deemed to be shares of a single class by s. 93.2(2).

The "formula" for the equity interests in a U.S. LLC provides for the manager to receive incentive compensation in the form of a 2% income allocation for management, and a 20% profit share in certain circumstances. The residual profits are shared in a sharing ratio. Would there be 3 classes of equity interests, the first providing for the 2% income allocation, the second for the 20% incentive allocation, and the third for the residual amounts? Secondly, if the manager had a special voting right, would this also constitute another class of equity interest? Thirdly, if the income is to be allocated based on, for example, the revenue or net income for the year, between 2 owners say, A and B, would each of A and B have a distinct equity interest, where the value of these equity interests may change from year to year (like 2 separate classes of common shares) – and, if so. is there a disposition when the equity interests change? CRA stated:

…The first step in dividing the equity interests of a non-resident corporation without share capital…into one or more deemed classes…would be to determine the rights and obligations of all the equity interests of the non-resident corporation. …[This] may require looking to the constituting documents of the non-resident corporation, the law under which it was formed, and the agreements between the holders of the equity interests. Pursuant to proposed paragraph 93.3(2)(a), equity interests having identical rights and obligations, save for proportionate differences, would be deemed to be the same class of shares of the capital stock of the non-resident corporation.

For example, if all of the equity interests of the non-resident corporation have identical rights and obligations, save for proportionate differences, the non-resident corporation would be deemed to have a single class of capital stock. … .

…[C]onsider the case of a non-resident corporation in which four individual members have equity interests, and the only non-proportionate differences between those members' equity interests is that one member's equity interest (say the manager's) grants special voting rights and allows for the receipt of an additional allocation of income for management services as well as the potential to receive a further additional allocation of income as a performance incentive. Assuming that under the non-resident corporation's constituting documents, the relevant law, and any applicable agreements each of the four members has a single equity interest, … there would be deemed to be two classes…because the manager would have one equity interest [with] non-proportionate differences… . If, in the alternative, the manager had two different equity interests…each of the four members could be deemed to own a portion of one class of capital stock and the manager could be deemed to own all of a second class of capital stock to which the additional income allocation and voting rights were attached. In both situations the focus is on comparing the equity interests for non-proportional differences, not the number of those differences. …

In response to your third and fourth questions, in cases where the non-resident corporation's income allocation could vary from time to time, we would expect that, in most cases, the differences in allocation would be due to differences in the rights and obligations of the equity interests which would result in different classes of shares being deemed to exist… .

Canco owns all the shares of FA1, which owns all the shares of FA2 and all the member interests of FA3, which is a “non-resident corporation without share capital” as per s. 93.2(1). Based on the application of ss. 93.2(2)(a), (b) and (d), FA3 has 100 shares of a single class of its capital stock, which shares are deemed to have rights and obligations that are the same as those of the corresponding equity interests. FA1 transfers all of its shares of FA2 to FA3 as a capital contribution, i.e. no new member interests are issued by FA3. How would the CRA apply s. 95(2)(c)?

CRA responded:

[D]espite whatever textual challenges might exist… on a unified textual, contextual and purposive analysis paragraph 95(2)(c) applies so as to result in a rollover… .

More specifically, provided this transfer is done in a manner that increases the fair market value of the deemed class of shares of the capital stock of the “non-resident corporation without share capital” (FA3) by an amount equal to the fair market value of the FA2 shares transferred and provided no election is made under paragraph 93.2(3)(b), paragraph 95(2)(c) would apply with the result that the cost of the FA3 shares that are deemed to be owned by FA1 immediately before the transfer will be increased by an amount equal to the relevant cost base to FA1 of the shares of FA2 so transferred and FA1 will be deemed to have disposed of the shares of FA2 for that same amount.