12-Jan-2000
On December 17, 1996 the United States Internal Revenue Service issued final regulations to take effect on January 1, 1997 which should allow Nova Scotia unlimited companies to maintain their status as a vehicle of choice for American investors in Canada.
Nova Scotia unlimited companies have been a popular investment vehicles because, if properly structured, they are taxed as corporations in Canada but as flow-through entities (i.e. partnerships) in the United States. They have been used in all kinds of businesses but have been particularly popular for real estate and energy concerns. In order to be successful in attaining partnership classification for United States purposes, it has historically been necessary to include significant restrictions on share transfers and/or other cumbersome provisions in the articles of the Company.
The 'check-the-box' regulations issued by the IRS will permit any Canadian corporation or company, all of whose members have unlimited liability, to elect partnership status. We believe that only Nova Scotia unlimited companies will qualify. It will no longer be necessary to deal with bothersome restrictions. This will give users of unlimited companies more flexibility and should ultimately reduce the time and cost associated with setting up such companies.
Qualifying companies having unlimited liability will be taxed as flow-through entities unless they elect to be taxed as corporations. Thus, while it may be desirable for an election to be filed by a Nova Scotia unlimited company wanting U.S. partnership status, it may not be strictly necessary.
The new regulations grandfather most companies which existed on January 1, 1997 and had an arguable case for claiming partnership status. Whether any particular company is grand-fathered should be reviewed by the company's United States tax counsel.
We anticipate that this important development will lead even more United States investors to use this vehicle.
The information contained in this Client Update is intended for general information only. For more information about Nova Scotia unlimited companies, please contact our Corporate/Commercial Group.
Stewart McKelvey Stirling Scales
Suite 900, Purdy’s Wharf Tower One
1959 Upper Water Street
P.O. Box 997
Halifax NS B3J 2X2
Telephone: 902.420.3200
Facsimile: 902.420.1417
E-mail Address: smss.com
