Section 93.3

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… .