International Tax Alert
CRA Reverses December 19, 2025, CRS Position on NFE Partnerships
On December 19, 2025, the Canada Revenue Agency (“CRA”) revised paragraph 3.32 (the “Revision”) of its Guidance on the Common Reporting Standard (“CRS”) to adopt a broader administrative position on partnership residence. The change drew immediate attention because it appeared to expand the circumstances in which Canadian limited partnerships, including those used in cross-border structures, could fall within Canada’s CRS reporting framework. On April 10, 2026, however, the CRA issued an addendum restoring paragraph 3.32 to its prior wording for the current reporting period, pending further review.
Why the Issue Matters for NFE Partnerships
The issue was of particular significance for limited partnerships classified as non-financial entities (“NFEs”), because a change in partnership residence could affect whether a partnership falls within Canada’s due diligence and reporting regime under Part XIX of the Income Tax Act.
An entity is generally treated as a passive non-financial entity (“NFE”) if more than 50% of its income is derived from passive sources, such as dividends, interest, rent, or royalties. Under the CRS, reporting financial institutions must identify and report the controlling persons of a passive NFE. According to the Common Reporting Standard (“CRS”) Implementation Handbook a controlling person includes any natural person who exercises control through direct or indirect ownership of the partnership’s capital or profits, through voting rights, or otherwise through control of the partnership’s management.
The sharing of tax information among tax authorities is a central mechanism for combatting offshore tax evasion. The CRS, developed by the Organisation for Economic Co-operation and Development (“OECD”), provides for the automatic exchange of information about financial accounts maintained in one participating jurisdiction for residents of another. Canada is a signatory to the CRS and, according to the CRA, as of January 1, 2020, 91 jurisdictions had agreed to exchange CRS information with Canada. The United States is not a signatory to the CRS and instead relies on the Foreign Account Tax Compliance Act (“FATCA”), enacted in 2010. Under the FATCA, foreign financial institutions must identify accounts with U.S. indicia and report them either through an applicable intergovernmental agreement or, where no such agreement exists, directly to the Internal Revenue Service.
Comparison to U.S. LLC
Reporting A comparable reporting concern has arisen in the United States in relation to certain limited liability companies (“LLCs”), which provides a useful point of reference for understanding why the Canadian partnership issue matters. Before December 12, 2016, non-U.S. persons frequently used Delaware LLCs to hold assets with minimal public disclosure of beneficial ownership. Delaware requires only limited formation information, and beneficial ownership details are not publicly available on state databases. Although a Delaware LLC is required to pay an annual tax to the State of Delaware, a single-member LLC that did not carry on business in the United States was generally treated as a disregarded entity and often had no ordinary U.S. income tax return filing obligation. The U.S. Treasury and the IRS responded by requiring certain foreign-owned single-member U.S. LLCs to be treated as domestic corporations for the limited purposes of the Internal Revenue Code (the “IRC”) section 6038A. Beginning January 1, 2017, those entities were required to file Form 5472 together with a pro forma Form 1120, even where the LLC held only personal-use assets. Failure to file Form 5472 on time, or to file a complete form, may result in a USD $25,000 penalty. Form 5472 generally requires disclosure of any transaction broadly described in IRS Regulation section 1.482-1(i)(7) as follows:
(7) Transaction means any sale, assignment, lease, license, loan, advance, contribution, or any other transfer of any interest in or a right to use any property (whether tangible or intangible, real or personal) or money, however such transaction is effected, and whether or not the terms of such transaction are formally documented. A transaction also includes the performance of any services for the benefit of, or on behalf of, another taxpayer.
That broad definition may require a single-member LLC to file Form 5472 where non-monetary transactions, or transactions for less than full consideration, occur between the LLC and its sole member. One example is the provision of rent-free accommodation by LLC to its member. A jurisdiction that is party to a bilateral tax treaty with the United States, or to a Tax Information Exchange Agreement (TIEA) with the United States, may be able to ascertain the existence of the LLC through the information-exchange provisions in the treaty or TIEA.
Canadian Partnership Treatment Under Part XIX
Under Canadian law, a partnership formed in Canada that does not carry on business in Canada and whose partners are all non-residents of Canada generally do not incur Canadian tax reporting obligations merely because it was formed under provincial law. The Income Tax Act defines a Canadian partnership as a partnership in which all members are resident in Canada. Accordingly, where all partners are non-residents, the partnership would not ordinarily be treated as a Canadian partnership for those purposes, and no reporting obligation to the CRA would arise on that basis alone. If the partnership’s underlying assets are held in a non-CRS jurisdiction, such as the U.S., the structure may also limit the information available to foreign tax authorities through Canada’s CRS exchange network. In such structures, the limited partnership is not managed in Canada; its only Canadian nexus is its formation under provincial partnership legislation.
CRA’s Revision and Subsequent Reversal
Against that background, the CRA’s December 19, 2025, revision to paragraph 3.32 was notable. It provided that a partnership could be considered resident in Canada for CRS purposes if it was formed under provincial or territorial law, or if all of its partners were resident in Canada, thereby materially broadening the circumstances in which a partnership could be brought within Canada’s CRS due diligence and reporting regime. The revised wording appeared to depart from the narrower prior administrative position, under which residence turned on the place of effective management of the partnership’s business. For many limited partnerships used in cross-border structures, that place of effective management would not be in Canada.
Nonetheless, On April 10, 2026, the CRA reversed course for the current reporting period and restored paragraph 3.32 to its prior wording (the “Reversion”). Under the restored position, a partnership is considered resident in Canada for CRS purposes where the place of effective management of the partnership’s business is in Canada. Canadian formation alone is therefore insufficient for the current reporting period to render a partnership resident in Canada to CRA reporting under Part XIX of the Income Tax Act.
The Reversion dated April 10, 2026, by the CRA therefore preserves, for the current reporting period, the ability of certain non-resident structures to continue the utilization of Canadian-formed partnerships in order to remain outside of the CRS’ reporting regime.