Section 96

Table of Contents

Cases

Freitas v. Canada, 2018 FCA 110

Backman statements applied to common law partnerships

The taxpayer, a retired Deloitte partner, was assessed by CRA in 2009 to impose a CPP contribution obligation on an amount of income that was distributed to him under ITA s. 96(1.1) in accordance with the terms of the partnership agreement. Webb JA found that the s. 96(1.1) distribution did not satisfy the applicable requirement in s. 14 of the CPP Act that it be “his income for the year from all businesses … carried on by him” (he instead was retired). He stated (at para. 29):

A partnership, in the common law jurisdictions, is the relationship that subsists between persons carrying on a business in common with a view to profit (Backman v. Her Majesty the Queen, 2001 SCC 10, [2001] 1 S.C.R. 367 at para. 18; section 2 of the Partnerships Act, R.S.O. 1990, c. P.5). Since Mr. Freitas had ceased to be a member of the partnership in 2007, he ceased to carry on business in common with the other members of a partnership at that time. As a result he was not carrying on a business in common with other partners of Deloitte & Touche LLP at any time in 2008 for the purposes of the CPP.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4.2) s. 152(4.2) inapplicable where reassessment, albeit in response to refund request, increased taxpayer’s liability 415
Tax Topics - Income Tax Act - Section 152 - Subsection 152(8) a statute-barred reassessment was valid for the purpose of being objected to and vacated on substantive grounds 192
Tax Topics - Other Legislation/Constitution - Federal - Canada Pension Plan - Section 14 s. 96(1.1) income was not from carrying on business 218
Tax Topics - Other Legislation/Constitution - Federal - Canada Pension Plan - Section 38 - Subsection 38(4) - Paragraph 38(4)(a) CRA has discretion to refund excess contributions 86

Raposo v. The Queen, 2018 CCI 81

illegality of partnership business voided the partnership

The taxpayer and the three other members of the “Raposo clan” were involved in the sale of cocaine in the Gatineau area. The Crown took the position that, as a member of a partnership, the taxpayer was solidarily liable under ETA s. 272.1(5) for uncollected GST on the cocaine sales.

In rejecting this position, Paris J referred to Article 1413 of the Civil Code (“A contract whose object is prohibited by law or contrary to public order is null"), and stated (at para. 26, TaxInterpretations translation) that under the jurisprudence “a purpose which is contrary to the public order and which contravenes a penal provision, in the current case, of the Criminal Code, engages the absolute nullity of the contract” (here, an alleged partnership contract). As no partnership existed, there was no s. 272.1(5) liability.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 272.1 - Subsection 272.1(5) alleged partnership was void as having an illegal purpose contrary to public policy 141
Tax Topics - General Concepts - Illegality partnership for illegal activity was void under Art. 1417 of the Civil Code 148

Rezek v. Canada, 2005 DTC 5373, 2005 FCA 227

spouse carrying on linked legs of integrated trading transactions

The taxpayer and his spouse engaged in spread transactions under which the taxpayer would purchase a convertible security and short sell the common shares into which the security was convertible, and then later in the year realize upon whichever leg had sustained a loss, with his spouse establishing a long or short position similar to that which the taxpayer had closed out.

In finding that the taxpayer and his spouse were engaged in the spread transactions in partnership, Rothstein J.A. noted that "business" was broadly defined in the Partnerships Act (Ontario), that he was not aware of any authority for the proposition that an adventure in the nature of trade cannot be a business for purposes of the Partnerships Act, that the partnership commenced at the time the brokerage accounts were opened and cross-guarantees were signed by the spouses, that the declared intention of the parties that there is no partnership relationship will carry little or no weight, and that their convertible hedge strategy was marketed to them as a "win-win" strategy under which they could profit from the spread, dividends and interest income while at the same time achieving deductible losses for tax purposes.

Whealy v. Canada, 2005 DTC 5276, 2005 FCA 190

no view to profit on gas wells

The Tax Court judge made no palpable and overriding error when he concluded that the taxpayers did not have a view to profit with respect to their 5.4% interest in two gas wells and, therefore, were not engaged in a partnership so as to permit the deduction of losses realized on the sale of real estate.

Water's Edge Village Estates (Phase II) Ltd. v. Canada, 2002 DTC 7172, 2002 FCA 291

exploiting modest business asset was sufficient partnership activity

In December 1991 the taxpayers (who were Canadian residents) acquired most of the partnership interests in a partnership ("Klink") that had been formed approximately 12 years earlier and whose principal asset, in December 1991, was an IBM mainframe computer which originally had cost U.S.$3.7 million but which had a current fair market value of $5,000. Klink then transferred the computer to a recently-formed British Columbia limited partnership in consideration for a partnership interest therein.

In finding that Klink continued to subsist as a partnership at the close of 1991, Noël J.A. noted that in determining this question, in the context of transactions where the predominant motivation was obtaining the benefit of tax losses, it was necessary to determine whether the taxpayers had the ancillary intention to carry on business with a view to profit despite their tax motivation, and that here (p. 7176):

"The putative partners did hold themselves out to others as providers of services derived from their interest in the computer; the partnership through its agents expended time, attention and labour on the project, and they incurred liabilities to other persons in respect of it. They also retained ownership of the asset which gave rise to the loss and continued to exploit it in the same business for a brief time, and thereafter in an attempt to exploit it in other markets ... ."

Witkin v. Canada, 2002 DTC 7044, 2002 FCA 174

intention only to purchase tax loss

The taxpayer and other Canadian residents acquired a 99% interest in a partnership ("Claridge Holding No. 1") whose sole interest was a 99% interest in a Texas partnership whose assets consisted of rights to acquire unsold condominium units in a condominium complex and tax losses of $45 million. As the only intention of the taxpayer was to purchase a tax loss, the taxpayer was not carrying on business in common with a view to profit in respect of his participation in Claridge Holdings No. 1 and, therefore, was not a partner thereof and was not entitled to a share of the losses allocated to that partnership.

McEwen Bros. Ltd. v. The Queen, 99 DTC 5326 (FCA)

purported partners did not jointly manage or provide capital

Two arrangements which, in each case, purported to be a partnership between holding corporations controlled by key employees of the taxpayer and a second corporation ("Bruce Bros.") were found not to be partnerships because effective control and management of the related project was vested in representatives of Bruce Bros. and key employees of the taxpayer and only the taxpayer and Bruce Bros. provided the requisite capital for the two ventures. Accordingly, the parties named in the two arrangements were not carrying on business "in common."

Locations of other summaries Wordcount
Tax Topics - General Concepts - Sham deception of Minister 44
Tax Topics - General Concepts - Tax Avoidance deception of Minister 44

Sunshine Uniform Supply (1983) Ltd. v. The Queen, 2000 DTC 6127 (FCTD)

A purported partnership ("Anwin") of which the taxpayer was a limited partner entered into a joint venture agreement with a corporation ("Anaquan") which was also the general partner of Anwin pursuant to which Anaquan agreed, in consideration for funding by Anwin, to incur qualifying research expenditures on the conduct of research at its facility in Winnipeg and to pay 10% of its gross income from the research facility, up to an annual maximum of 20% of the contract price, for the first five years of the agreement, and for the next five years to pay 5% of such gross income up to an annual maximum of 10%.

Before concluding that Anwin was not a partnership, Evans J. found that Anwin was not carrying on a business given that construction of the Anaquan research facility was never completed and Anwin engaged only in several financial transactions around the time of its closing in connection with its purported establishment, and that any business would not have been carried on with a view to profit. The Court was bound to consider only the subjective intentions of the parties rather than whether those intentions were reasonable or even realistic. However, in light of the insolvent state of Anaquan, which was known to the taxpayer through its solicitor (who was acting for all parties), a view to profit could not have been even an ancillary objective.

Backman v. Canada, 2001 DTC 5149, 2001 SCC 10, [2001] 1 S.C.R. 367

essential Canadian elements of partnership not present as only momentarily "partners" in common

The taxpayer and other Canadian residents purchased all of the partnership interests of Americans in a Texas limited partnership ("Commons") through staggered assignments of partnership interest. When these assignments were completed, the principal property of the partnership (an apartment complex) was transferred to a second partnership consisting of the same U.S. limited partners and a new U.S. general partner.

After finding (at p. 5156) that "even in respect of foreign partnerships, for purposes of s. 96 of the Act, the essential elements of a partnership that exist under Canadian law must be present", the Court found that the taxpayers did not become members of a valid partnership. The Canadian taxpayers had not established the necessary intention to carry on business with a view to profit in respect of the apartment complex given that once they acquired their interest in the alleged partnership, the apartment complex was owned only briefly before it was disposed of according to a pre-closing agenda. Furthermore, the time, labour and money spent on the purchase and holding by the supposed partnership of an oil and gas property was nominal and, indeed, that arrangement might be viewed as co-ownership of property or as an isolated event or adventure as opposed to the carrying on of a business. The obtaining by the taxpayers of their supposed partnership interest by assignment did not improve their position because "in order for a person to enter and become a new partner of the valid and pre-existing partnership, that person and the existing members of the partnership must satisfy the essential elements of a valid partnership at the time of the entry of the new partner".

Accordingly, the taxpayer did not realize a loss under s. 96(1)(g) on the sale of the apartment complex.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Purpose/Intention motivation v. purpose 63
Tax Topics - General Concepts - Tax Avoidance 85
Tax Topics - Statutory Interpretation - Provincial Law foreign "partnership" must have the attributes of a Cdn partnership 143

Spire Freezers Ltd. v. Canada, 2001 DTC 6158, [2001] 1 S.C.R. 391, 2001 SCC 11

secondary property management activity established partnership

A California partnership ("HCP") owned by a U.S. subsidiary of Bell Canada Enterprises ("BDI") and a subsidiary of BDI had expended substantial sums in developing a luxury residential condominium project in California (the "HCP Project"). After transferring a small apartment project ("Tremont") into the partnership, all the interests in the partnership were sold to the taxpayer and a group of Canadian individuals. Immediately thereafter the partnership sold the HCP Project to BDI and BDI and its subsidiary withdrew from the partnership. The partnership continued to hold Tremont.

The taxpayer was found to become a member of a HCP with the result that it and the other Canadian taxpayers could deduct a loss arising on the sale of the HCP Project by HCP. The property management business associated with Tremont was pre-existing and continued by the Canadians; and although the original American partners and the taxpayer held that property management business jointly only for a brief period of time, the duration of carrying on a business is not determinative. Furthermore, the fact that the predominant purpose of the taxpayer was realization of the loss and the fact that the profits subsequently generated by Tremont did not match the quantum of that loss did not establish that the taxpayer did not acquire its interest in HCP with a view to profit.

Continental Bank Leasing Corp. v. Canada, 98 DTC 6505, [1998] 2 S.C.R. 298

5 day partnership with tax motivation

After the cancellation of an agreement for the sale of the shares of the taxpayer by its parent ("Continental Bank") to a third party ("Central Capital"), the taxpayer transferred, purportedly on a rollover basis pursuant to s. 97(2), the assets of its leasing business to a partnership in which two subsidiaries of Central Capital acquired a 1% partnership interest. Five days later, following a winding-up of the taxpayer into Continental Bank, Continental Bank sold its partnership interest to the two Central Capital subsidiaries.

In finding that the taxpayer was a partner until its winding-up, Bastarache J. noted that there was no termination of the taxpayer's contracts with its customers during the relevant period and (at p. 6517) that "simply because the parties had the overriding intention of creating a partnership for one purpose [i.e., tax avoidance] does not, however, negate the fact that profit-making and profit-sharing was an ancillary purpose". Furthermore, the duration of the taxpayer's membership in the partnership was not relevant.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Illegality statutory statement that illegal act not invalid 179
Tax Topics - General Concepts - Substance question of constructing the genuinely-reflective documents 192

Bow River Pipe Lines Ltd. v. Canada, 97 DTC 5385 (FCA)

mere assignee of partnership interest was not a partner

A wholly-owned subsidiary ("Lone Rock") of the taxpayer held a 99.9% limited partnership interest in a partnership between Lone Rock and a subsidiary of Lone Rock ("Newco"). Lone Rock assigned its limited partnership interest in the partnership to the taxpayer, the taxpayer on the same day caused Lone Rock to be wound up, and the following day Newco and the taxpayer signed a distribution agreement whereby the partnership assigned all its assets to the taxpayer.

The taxpayer was found not to have become a member of the partnership because the assignment of Lone Rock's limited partnership interest had not complied with provisions of the partnership agreement that required: the assignee of the interest to agree in writing to be bound by the terms of the agreement; the execution by the assignor to be guaranteed by a Canadian chartered bank; and all requisite filings as required by the Partnership Act (Alberta) to be made. There could be no finding of an implicit consent of the parties to these breaches because the partnership agreement also provided that no amendment thereto would be effective unless it had been approved by an extraordinary resolution.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Illegality assignment of partnership interest invalid where assignee not admitted 189
Tax Topics - General Concepts - Transitional Provisions 62

Schultz v. The Queen, 95 DTC 5657 (FCA)

The taxpayers (a husband and wife) were in partnership when they entered into coordinated hedging transactions in which the husband would be long a security when his wife was short the same security or similar security in light inter alia of the following factors: each guaranteed the other's trading account; any additional margin deposits were paid out of their joint bank account; the paired transactions were each dependent upon the other; and they operated their account in tandem and in a highly coordinated fashion rather than independently.

Kuchirka v. The Queen, 91 DTC 5156 (FCTD)

Before going on to find that a farmer and his wife were not a partnership in light of the fact that the property and the bank accounts were not put into their joint names until after some of the taxation years in question, the fact that the wife's share of revenues appeared to have been randomly determined and not truly calculated on the basis of the net returns from their businesses, and the lack of evidence that they operated vis-à-vis third persons as partners entitled to bind the partnership, Strayer J. stated (pp. 5157-5158):

"While the fact that the alleged partners are also married should not automatically exclude the existence of a business partnership between them, one must take care to see if the conduct allegedly establishing the partnership is not simply attributable to the fact of the marriage relationship."

Levy v. The Queen, 90 DTC 6346 (FCTD)

Four investors agreed to enter into a "syndicate" in which one of the investors would be entrusted with the care, training and maintenance of racing horses in consideration for a fee and reimbursement of his expenses, and the four investors would share equally in any revenues. Rouleau J. stated, in obiter dicta:

"[T]he syndicate members had expressly stated the relationship between them was not that of partners. However, this in and of itself is not sufficient to negate the existence of a partnership ... The taxpayer was carrying on a business in association with others, with a view to profit. It matters not that the work was carried on by only one of the four men who was part of the group."

Graves v. The Queen, 90 DTC 6300 (FCTD)

A husband and wife team of Amway distributors was found to be a partnership (rather than a sole proprietorship carried on by the husband) in light of (a) the active participation of only the wife in Amway distributorship activities for the first few months following the introduction of the couple to the concept of an Amway distributorship, (b) the signature of both the husband and wife on the application for distributorship, (c) the initial representation of the husband on his tax return and in correspondence to Revenue Canada that he was in partnership with his wife, (d) the division of significant responsibilities between the husband and wife. There being no written partnership agreement or specific evidence as to how the profits or losses of the partnership should be allocated, MacKay J. found that the respective shares of the husband and wife were 70% and 30% in light of the relatively greater efforts and time commitment of the husband (following the first few months).

Laxton v. The Queen, 89 DTC 5327 (FCA)

In finding that an arrangement styled as a real estate joint venture was not a partnership, and instead was a joint venture that "was a voluntary grouping having no separate legal existence apart from its members" Stone J.A. stated "that a 'joint venture' per se may differ from a 'partnership' has been recognized by the Canadian Courts, and that neither is a legal entity is also plain."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 3 117

The Queen v. CFTO TV Ltd., 82 DTC 6139, [1982] CTC 147 (FCTD)

It may be that the existence of partnership is negated where the alleged partner does not share in partnership losses. However, a partnership still exists even though one partner is obligated to purchase the second partner's interest within 5 years at a price that would have the effect of reimbursing the first partner for its share of the partnership's operating losses, if the possibilities of changes in the regulatory environment or a renegotiation of the partnership agreement render it uncertain that such a purchase will occur.

Cornforth v. The Queen, 82 DTC 6058, [1982] CTC 45 (FCTD)

A partnership was found not to exist between two physiotherapists who were husband and wife in light of such non-determinative factors as the absence of a written partnership agreement, failure to register the alleged partnership, the failure of the wife to file any tax returns despite the unlikelihood of there being insufficient income to attract tax in her hands, and the casual arrangements by which partnership profits were allegedly distributed. Although the wife devoted 2 or 3 days a week to the physiotherapy practice, these efforts were "better explainable by the relationship of husband and wife rather than as crass business partners".

Sandhu v. The Queen, 80 DTC 6097, [1980] CTC 158 (FCTD)

"Where there has been a contribution of capital and a complete sharing of profit and losses [as was found to be the case here], there would have to be very conclusive and convincing evidence for the court to find that the parties concerned were not partners ... ." An Indian resident accordingly was found to be a partner of two Canadian individuals.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Evidence 44
Tax Topics - Income Tax Act - Section 2 - Subsection 2(3) - Paragraph 2(3)(b) partner carries on partnership business 15

Lane v. The Queen, 78 DTC 6535, [1978] CTC 795 (FCTD), aff'd 86 DTC 6568, [1986] 2 CTC (FCA)

A "syndicate" formed for the purpose of acquiring lands and managing the apartments on them, was a partnership.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 100 disposition of partnership interest not disposition of underlying property 59
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Partnership Interests partnership interest distinct from partnership property 59

The Queen v. de Loppinot, 78 DTC 6477, [1978] CTC 705 (FCTD)

An agreement between a retiring chartered accountant ("Peloquin") and a firm of chartered accountants - wherein the firm agreed to pay Peloquin 20% of the fees generated from Peloquin's clients for the five-year period following the date of the agreement and to service those clients in Peloquin's name, and Peloquin agreed to become at least nominally a member of the firm, and to service those clients if asked to do so by the firm - was characterized as a type of partnership contract rather than an agreement for the sale of the goodwill of Peloquin's practice.

Ablan Leon (1964) Ltd. v. MNR, 76 DTC 6280, [1976] CTC 506 (FCA)

Ryan, J. indicated in obiter dicta that it is not clear whether the same persons who are trustees of several trusts can contract with themselves as partners.

Kingsdale Securities Co. Ltd. v. The Queen, 74 DTC 6674, [1975] CTC 10 (FCA)

Urie, J. indicated that trusts per se are not legal persons and cannot become partners.

Northern Sales (1963) Ltd. v. MNR, 73 DTC 5200, [1973] CTC 239 (FCTD)

A marketing arrangement among the taxpayer and two other companies for the 1960-61 crop year, under which the companies would operate independently in the buying and selling of rapeseed, but would split the profits on a defined basis, was held to be a partnership primarily because of this sharing of profits and losses and in light also of their agreement to consult each other, notwithstanding that there was no capital contribution, no jointly-owned facilities for handling the crop, no central accounting system or bank account and no common management (although the parties communicated with each other as to the state of the market). Although marketing expenses were not shared in their totality or on the same basis as profits "the parties to a partnership agreement can make their own particular rules as to how the 'net profits' are to be arrived at."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Foreign Exchange incurred in trading operation 27

MNR v. Strauss, 60 DTC 1060, [1960] CTC 86 (Ex Ct)

The taxpayer, and several other individuals, who purchased land for sale in a housing development were found to have acquired the land in partnership (as they stated in a short joint memorandum) rather than as co-owners. "The purchase of the land was made for business purposes by the parties acting not personally but as a group ... The property acquired was held and applied by the group exclusively for the purpose of the association, to wit for its sale and the realization of the profits to be divided in accordance with the agreement and the terms of the memorandum."

See Also

Samarkand Film Partnership No. 3 & Ors v Revenue and Customs, [2017] EWCA Civ 77

whether partnership exists while only preliminary partners

Arden LJ followed Eclipse in finding that a film tax shelter partnership was not carrying on a trade given that the film it acquired was immediately leased out for a stream of licensing payments which matched its debt servicing commitments - so that in essence its business was “the payment of a lump sum in return for a series of fixed payments over 15 years.” As a “non-trading partnerships,” the targeted trade loss relief was not achieved.

Respecting an argument that “the FTT erred in law in concluding that there were no partnerships in existence before the adherence of the taxpayer partners,” she stated (at para. 67-68):

Section 1 of the Partnership Act 1890 defines partnership as "the relation which subsists between persons carrying on a business in common with a view of profit". The question which arises is whether that test is satisfied where two or more persons carry on a business in common with a view of profit, not for themselves, but for future new partners who will for all practical purposes replace them.

…[I]n view of its potential wider significance I would be reluctant to express a view upon [this issue] unless it were necessary to do so.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Business non-trading business 363
Tax Topics - Income Tax Act - Section 96 - Subsection 96(1) - Paragraph 96(1)(a) rent received qua landlord rather than partner 135

D Marks Partnership by its General Partner Quintaste Pty Ltd v Commissioner of Taxation, [2016] FCAFC 86

association registered as a limited partnership was not a partnership notwithstanding that its registration was stated to be “conclusive”

At issue was whether the appellant was a limited partnership for Australian income tax purposes, so that it was entitled to imputation credits for dividends received by it and so that loans made to it were not taxed as deemed dividends. It was conceded that its two purported partners (the purported general partner and limited partner) were not carrying on business in common with a view to profit. However, the appellant was registered as a limited partnership, and reliance was placed on s 8(4)(a) of the1988 Queensland Act, which provided that the certificate of registration “shall be conclusive evidence that the limited partnership to which it refers was formed on the date of registration referred to therein.”

The dissenting reasons of Logan J referred to Bank of Beirut dealing with a similar provision in the Limited Partnerships Act 1907 (UK), stating (at para 23):

Of this provision, Nugee J observed in Bank of Beirut SAL at 898, [85]:

Once a partnership has been registered, the plain effect of section 8C(1) is that the Registrar is under a duty to issue a certificate of registration; and the plain effect of section 8C(4) is that that certificate is conclusive evidence that a limited partnership came into existence on the date of registration. If that means what it says, it would appear to follow that whatever the circumstances which led to the registration, once the certificate has been issued the partnership must be regarded as having come into existence.

In finding for the majority that the appellant was not a limited partnership, Pagone J noted (at para. 142) that under the “1988 Queensland Act…it was only a partnership that could apply to become a limited partnership,” and stated (at para. 145):

The conclusivity of the date of registration is important because it is the temporal reference point by which any liability is limited, but it does not confer conclusivity beyond that. It does not extend to confer conclusivity of the association being a limited partnership if the association which had sought registration was not a partnership. … It did not create a new fictional category of “limited partnerships” upon registration of associations which had not otherwise been partnerships.

Bank of Beirut SAL was distinguished (at para. 147) inter alia on the basis that the conclusion therein:

...did not, however, result in the partnership being treated as a partnership for any purpose other than on the question of whether the registrar could be required to remove the registration. Other aspects of the judgment indicate an acceptance by Nugee J that the partnership did not in fact exist and that the register might be annotated in such a way to make that clear.

Bank of Beirut SAL v Prince Adel El-Hashemite , [2016] Ch 1, [2015] EWHC 1451

registration of limited partnership was conclusive that limited partnership came into existence

A bank claimed that Prince Adel El-Hashemite had falsely registered a limited partnership with the Registrar of Companies and had used the certificate of registration as an instrument of fraud. The bank sought orders which included the removal of the partnership from the register. Nugee J refused to make such an order reasoning, in part, that the conclusiveness of the certificate required the conclusion that “the partnership must be regarded as having come into existence” notwithstanding that it was based upon fraud or forgery. In this regard, s. 8C(4) of the Limited Partnership Act 1907 (UK) provided:

The certificate is conclusive evidence that a limited partnership came into existence on the date of registration.

Nugee J indicated that the effect of s. 8C(4) was that a limited partnership had come into existence on the date of registration and (at para. 85) stated:

Once a partnership has been registered, the plain effect of section 8C(1) is that the Registrar is under a duty to issue a certificate of registration; and the plain effect of section 8C(4) is that that certificate is conclusive evidence that a limited partnership came into existence on the date of registration. If that means what it says, it would appear to follow that whatever the circumstances which led to the registration, once the certificate has been issued the partnership must be regarded as having come into existence.

At para. 106, Nugee J concluded:

[T]he certificates of registration of each partnership issued by the Registrar are indeed conclusive evidence that each partnership came into existence on the date of registration as section 8C(4) of the 1907 Act provides; and the fact that the registration of each partnership was procured by fraud and forgery does not make any difference to this.

Otteson v. The Queen, 2014 DTC 1173 [at 3637], 2014 TCC 250

no presumption that spouses are not business partners

The taxpayers, spouses, bought a farm in 2003 to start a tree farming business. Hogan found that the farm was owned by the taxpayers rather than being partnership property. On that basis, their ability to claim the capital gains exemption on a sale of the farm turned on establishing that the property was used in a farming partnership rather than being used in a direct farming business of the taxpayers. The Minister argued that the taxpayers were instead engaged in activities as spouses acting for the common good of the couple.

In finding that there was a partnership, Hogan J noted that the authorities cited by the Minister to establish that the courts should be cautious in finding a business partnership between spouses were "almost exclusively dependent on their facts" (para. 45), whereas in the present case (para. 46):

[Both taxpayers] were fully engaged on a regular and continuous basis in the operation of the Tree Farm, and they pursued that venture with the plan of realizing significant annual profits when the trees were ready for harvesting.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1) - Qualified Farm or Fishing Property portion of loss-generating tree farm rented to third party 411

McCormick v. Fasken Martineau DuMoulin LLP, 2014 SCC 39, [2014] 2 S.C.R. 108

equity partner not an employee under (human rights) control and dependency test

The appellant was an equity partner at the respondent law firm, whose partnership agreement required retirement at 65. The respondent applied to have the appellant's age discrimination complaint dismissed on the grounds that, as an equity partner, he was not an employee under BC's Human Rights Code.

The Abella J stated (at para. 28) that in making this determination:

Ultimately, the key is the degree of control, that is, the extent to which the worker is subject and subordinate to someone else's decision-making over working conditions and remuneration... .

She then found (at para. 39) that "as an equity partner, he was part of the group that controlled the partnership, not a person vulnerable to its control." Therefore, he was not an employee under the Code and could not contest the mandatory retirement. Abella J went on to state (at para. 46) an employee finding "would only be justified ... where the powers, rights and protections normally associated with a partnership were greatly diminished."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1) equity partner not an employee under (human rights) control and dependency test 158

Garber v. The Queen, 2014 DTC 1045 [at 2812], 2014 TCC 1

GP had fraudulent intention

Each appellant (along with 600 other taxpayers over several taxation years in the 1980's) bought units in a limited partnership. Each of the 36 limited partnerships was to acquire a large yacht to be used for catered vacation charters. The general partner ("OCGC") engaged in marketing activities and purchased a smaller yacht to be used for the provisioning of supplies to the envisaged fleet, and belatedly bought two more yachts, although none of the yachts was acquired by any particular partnership (paras. 348, 402). The capital raised was grossly insufficient for accomplishing the marketed objectives. Rossiter ACJ found (at para. 113, see also paras. 280, 261, 352) that "any yacht building and charter development efforts by OCGC and its related companies were mere window-dressing [to induce further investments]" and characterized the arrangements as a "Ponzi-like scheme [which] was set to collapse eventually" (para. 344, see also 356).

In finding that "the Limited Partnerships were not genuine partnerships" (para. 382), Rossiter ACJ found (at para. 383) that "there was no ‘business carried on' [as] there was merely a fraud," that there was no business "in common" ("how could there be a meeting of the minds when the foundation of the scheme is fraudulent yet the investors are not aware of or are ignorant of the fraud perpetuated on them" (para. 384), and that there was no "view to profit" as the principal of the general partner "had the intention to profit at the expense of the Limited Partnerships" (para. 385).

Clyde & Co LLP & Anor v Bates Van Winkelhof , [2012] EWCA Civ 1207

partner in partnership cannot be an employee

The claimant, who was a solicitor practising as an equity member of a limited liability partnership, and who was expelled as a member, was found not to be a "worker" entitled to protection under the Employment Rights Act 2010 (UK). This conclusion was assisted by a finding that if the firm had been a partnership rather than an (incorporated) limited liability partnership, she would have been a partner of the firm under the Partnership Act 1890 (UK). In so finding Eias LJ stated (at para 38):

That simply requires an answer to the question whether, by their actions, the parties intended to create a partnership: see M Young Legal Associates v Zahid, [2006] EWCA Civ 613, [2006] 1 WLR 2562. That would be the case where the putative partner is by agreement carrying on a business for the pursuit of profits in common with others. The Zahid Solicitors case shows that a partner need not be remunerated by reference to profit (although the claimant was) and that it is no bar to being a partner that he does not make any capital contribution, although that may be a factor pointing against finding that a partnership has been created.

He also quoted with approval the statement in Tiffin v Lester Aldridge LLP, [2012] EWCA Civ 35, [2012] ICR 647 (para 31) that:

...in law an individual cannot be an employee of himself. Nor can a partner in a partnership be an employee of the partnership, because it is equally not possible for an individual to be an employee of himself and his co-partners....

delaSalle v. The Queen, 2012 DTC 1225 [at 3626], 2012 TCC 278 (Informal Procedure)

The taxpayer incorporated their business but continued to pay personally for expenses incurred in the business, and claimed a business loss on her income personally. Campbell J. did not accept that the business was carried out through a partnership between taxpayer and her sister. Apart from the pattern of incurring expenses personally, all the documentary evidence pointed to the business being carried on by the corporation. This evidence included the corporation's T2 forms, which reported the taxpayer's expenses as corporate expenses.

9098-9005 Quebec Inc. v. The Queen, 2012 DTC 1284 [at 3864], 2012 TCC 324

partner could be officer but not employee of partnership

An individual who managed a partnership for a fixed fee "through" a corporation of which he was the sole officer and shareholder would have been an officer of the partnership but for the interposition of his corporation - so that the corporation was found to be carrying on a personal services business (with a resulting loss of the small business deduction).

Before reaching this conclusion, Bédard J. noted that although it was "well established that a partner cannot be an employee in his own partnership" (given that the control of a partner in the partnership business is inconsistent with the subordinate character of the employment relationship) (para. 27), the same restriction did not apply here as "an 'office'...does not require the individual to be in the service of some other person" (para. 28).

Duivenvoorde v. The Queen, 2012 DTC 1006 [at 2531], 2011 TCC 525 (Informal Procedure)

Jorré found that the taxpayer and her husband were carrying out their garden centre business in equal partnership. He stated (at paras. 36-37):

Both spouses made contributions. The appellant gave up her existing job and worked at the garden centre; the husband worked at the garden centre. Property belonging to both of them was used to guarantee a loan. One or both took out the loan.

Both spouses could write cheques, both had access to the business account and both used money from the account to pay family expenses.

Big Bad Voodoo Daddy v. The Queen, 2011 DTC 1173 [at 955], 2011 TCC 226 (Informal Procedure)

The taxpayer was a U.S. limited liability corporation (LLC) which performed jazz concerts in Canada. A CRA appeals officer stated in his testimony (para. 957) "that a U.S. LLC cannot deduct for Canadian tax purposes, the salaries paid to members of the LLC because a U.S. LLC is a partnership for U.S. federal income tax purposes...."

Favreau J. stated (at para. 26) that "the long-standing position of the CRA is that a U.S. LLC is treated as a corporation for all purposes of the Act regardless of whether the LLC is treated as a corporation or a partnership for U.S. tax purposes." Therefore, salaries paid to band members were deductible from income. However, the taxpayer failed to meet its business record-keeping obligations under s. 230 so its deductions were denied on that basis.

Teelucksingh v. The Queen, 2011 DTC 1052 [at 272], 2011 TCC 22

view to post-dissolution profit

In connection with a limited partnership offering whose final closing was on December 31, 1993, the taxpayer bought units in the partnership for $18,000 and 18 common shares in a corporation for a dollar each. The partnership bought a stallion and a colt at the closing, and prepaid various expenses, thereby giving rise to a loss for the partnership's 1993 taxation year. As contemplated in the Offering Memorandum, two weeks later the partnership transferred its assets to the corporation in consideration for preferred shares, with the preferred shares then being distributed to the partners on the dissolution of the partnership. The taxpayer then sold his preferred shares to his RRSP, and used the cash proceeds to repay a loan that had financed his purchase of his partnership units.

The Minister argued that the taxpayer could not deduct his share of partnership losses (which were restricted farm losses) on the basis inter alia that there was no partnership. The partnership had been structured to dissolve before it would receive any returns - any returns from the business would necessarily come afterwards, from corporate dividends (after dissolution of the partnership): therefore, the alleged partnership was formed without a view to profit. Miller J. stated (at para. 72):

I disagree with the [Minister's] reasoning and logic and overly technical, rather than pragmatic, approach to [whether there was a view to profit]. In reading [Continental Bank] in a practical, commercially sensible manner, the question to ask is not whether the parties intended to profit from the business during the operation of the business as a partnership, but whether the parties intended to profit from that particular business.

Blais v. The Queen, 2011 DTC 1008 [at 55], 2010 TCC 195 (Informal Procedure)

partnership cannot deduct salary paid to a partner

In finding that the Minister properly disallowed the deduction of a $5,000 salary paid by a husband and wife partnership to the husband in computing the partnership's income, Jorré J. stated (at para. 76, citing Blais (different taxpayer)) that "it is settled law that the salary of a partner cannot be claimed by the partnership."

Locations of other summaries Wordcount
Tax Topics - General Concepts - Onus 118

O'Dea v. The Queen, 2009 DTC 912, 2009 TCC 295

A partnership in which the taxpayers invested was found (at para. 105) not to be a valid partnership under s. 96 as "the transactions were structured so that it was virtually impossible for the Partnership revenues to meet the debt levels and consequently there was no intention to earn a profit even as an ancillary purpose".

177795 Canada Inc. c. La Reine, 2008 DTC 3771, 2007 TCC 569

The taxpayer, whose principal place of business was in Quebec and who purchased interests in a Texas partnership shortly after the sale of the partnership's asset (a small strip mall) to the bank to whom it was in default, were found not to have an intention to carry on business in common with the U.S. vendor partners notwithstanding that the partnership agreement was amended to provide for the possibility of investing in real property projects other than the foreclosed asset and, indeed, two years later the partnership finally invested U.S.$175,000 in a real property project that it still had at the time of trial. Lamarre J. indicated (at para. 8) that in the Backman case, "the Supreme Court of Canada confirmed the principle that a taxpayer seeking to deduct Canadian partnership losses under section 96 of the ITA must satisfy the definition of partnership that exists under the relevant provincial law", and indicated that in the case at bar, the Quebec civil law governed the question of whether there was a partnership.

Saint-Laurent v. The Queen, 2008 DTC 3668 (TCC)

The taxpayer did absolutely nothing to familiarize himself with his partners in a purported Quebec partnership, the financial quality of his investment or the reliability and credibility of the person heading the project, and signed a form for the sale of his partnership interest almost contemporaneously with his investment in the partnership. Accordingly, the taxpayer's investment "had absolutely nothing to do with a genuine partnership, the essential characteristics of which are a cooperative spirit, a contribution by combining property, knowledge or activities, and, lastly, a sharing of the pecuniary profits from this combining and from carrying on business during a certain period" (para. 98).

Maslanka c. La Reine, 2006 DTC 2560, 2004 TCC 158 (Informal Procedure)

not working together

In finding that investors who sought to deduct investment tax credits for expenditures on scientific research and experimental development were not in partnership with each other , Archambault J adopted (at para. 17) a statement in McKeown v. The Queen, [2001] 4 C.T.C. 2197 (TCC) at para. 393 that "the investors…were merely seeking substantial tax benefits and never demonstrated any intention of working together to undertake scientific research and experimental development activities." Furthermore, the interest of each investor was bought a few weeks after his or her investment.

M. Young Legal Associates Ltd v. Zahid Solicitors (a firm) and Others, [2006] EWCA Civ 613

individual was a partner notwithstanding that his remuneration was fixed
Rowlands v Hodson [2009] EWCA Civ 1042 is similar

A retired solicitor who was asked to become a partner solely for the purpose of meeting the requirements of the Solicitors' Practice Rules 1990 that the more junior members of the firm be supervised by someone with the specified level of experience was found to have become a true partner even though he had no share in partnership business or in its profits (he received a salary at the rate of £18,000 per annum, payable gross monthly). Accordingly, he had the status of partner respecting an action brought against the partners of the law firm at which he so served. Wilson LJ stated (at paras. 32-33):

[A]n agreement for a person to be paid a specified sum for work to be done by him on behalf of a firm does not preclude his thereby becoming a partner of it. … [T]he words of the core definition [of partnership in the Partnership Act 1890] are wide enough to render the recipient of payments in a fixed sum a partner provided that there is a business, that it is carried on with a view to profit and, crucially for present purposes, that he is carrying it on in common with another or others.

It is idle to deny that, indirectly, an employee has an interest in the profitability of the firm for the continuation of his job may well depend on it. Nevertheless the absence of a direct link between the level of payments and the profits of the firm is in most cases a strongly negative pointer towards the crucial conclusion as to whether the recipient is among those who are carrying on its business. But the conclusion must be informed by reference to all the features of the agreement. Thus, for example, provision or otherwise for a contribution on his part to the working capital of the firm will be relevant. And it will be important to discern whether, expressly or impliedly, the agreement provides not only that acts within his authority should bind the acknowledged partners but also that their such acts should bind him; for such is provided by section 5 of the Act to be a necessary incident of partnership but would, of course, be inconsistent with his status as an employee.

Bains v. The Queen, [2005] G.S.T.C. 178, 2005 FCA 378

not partners given no evidnce of mutual agency or other partner indicia

A rental property of a husband and wife found to be held in co-ownership rather than in partnership for ETA purposes given that there was no activity beyond that of co-owners and there was no evidence that either of them “had the legal right to bind the other in any matters relating to the property” (“they were both parties to the lease, and the mortgage on the property.” (para. 8).

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 148 - Subsection 148(1) co-owners not partners 77

Geddes Contracting co. Ltd. v. The Queen, 2005 DTC 92, 2005 TCC 6, briefly aff'd 2006 DTC 6092, 2006 FCA 48

The predecessor of the corporate taxpayer and other Canadian purchasers of a general interest in a New Mexico partnership that subsequently sold raw land at a reported loss of $21.4 million were found not to be carrying on business in common with a view to a profit, and, therefore not to be in partnership. The purchase by the partnership of interests in three oil and gas leases for $15,000 was a passive investment, and the holding by the partnership of an option on real estate would not give them any entitlement to participate in the development of the subject property.

Whealy v. The Queen, 2004 DTC 2888, 2004 TCC 377

purported new partners did not carry on business in common

The original partners in a Texas partnership (the "Old Partnership") formed a second Texas partnership (the "New Partnership"), the Old Partnership purchased interests in an Oklahoma and Texas gas well, and granted an option to the New Partnership to purchase all of its assets other than the interests in the wells, the taxpayers purchased all the partnership interests in the Old Partnership from the previous partners, and the New Partnership exercised its purchase option.

In finding that the taxpayers were not carrying on business in common following their purported purchase of the partnership interests, so that losses on the sale of assets by the Old Partnership could not be allocated to them, Mogan J. noted that the total purchase price for the wells was U.S.$25,000, such wells generated only $3,283 in net earnings over the following 10 years and that the owning of these minimal interests in the wells was so passive that the Old Partnership did not carry on any business after the date the taxpayers acquired their interests.

Ouellet c. La Reine, 2004 DTC 2706, 2004 TCC 308 (Informal Procedure)

The taxpayer and other investors in a supposed partnership were found not to be partners given that there was no manifestation of any intention to work together on the part of the investors including the taxpayers, and there were no discussions on how to manage the partnership and what its activities would be.

Morley v. The Queen, 2004 DTC 2604, 2004 TCC 280, briefly aff'd 2006 DTC 6351, 2006 FCA 171

start-up activities sufficient to constitute carrying on business in common

In finding that a partnership had been formed notwithstanding that it never made any sales of its software, Archambault J. noted that a partnership agreement was executed in writing between the general partner and the initial limited partner, the partnership also worked on its marketing plan and gave some demonstrations; and in the subsequent year it pursued a potential lead and hired consultants to evaluate the software and prepare numerous marketing evaluation documents and prepare demonstrations for potential customers. Archambault J. noted (at p. 2623) that "when a partnership is being formed, it is normal that its energies be devoted initially to raising the capital necessary to finance its business activities".

Makaruk v. The Queen, 2003 DTC 1011 (TCC)

In finding that a husband and wife carried on a business involving the buying and selling of automobiles as a partnership, Campbell T.C.J. noted that they shared one joint account, there was a joint insurance policy on the vehicles, the husband (who alleged that it was his wife who carried on the business alone) had a greater knowledge of the business activity than his wife, the business operated out of the residence that they shared, and the husband handled all of the types of relevant business transactions.

Labbett v. The Queen, docket 1999-4006 (TCC)

The taxpayer and five other individuals made a decision to form a partnership ("Fairway") to purchase units in a limited partnership ("Pinecrest") that had been formed to build and operate a golf club. In rejecting the position of the Crown that Fairway was not a partnership, Sarchuk T.C.J. noted that there was a written partnership agreement for Fairway which had been registered under provincial laws of partnership, existence of the partnership was represented to third parties (both the taxpayer and another individual were authorized to attend meetings of the other partnership at which they always set themselves out as representatives of Fairway) and there was clear evidence that the partners of Fairway had a mutual right of control of management of the enterprise (a joint property interest in Pinecrest) and to share in profits and losses.

Duncan v. The Queen, 2001 DTC 96 (TCC)

purported new partners in loss partnership did not carry on on business in common

On December 13, 1991 some Canadian promoters acquired a 98% interest in a U.S. partnership ("Klink") that has been carrying on a business of leasing a computer which was now fully depreciated for U.S. tax purposes and had a nominal value; and on November 20, 1991 the taxpayers purchased a 93.6% interest in Klink from the promoters. Minutes thereafter, Klink conveyed the computer to another partnership ("ILP") for an agreed price of $50,000 as a contribution of capital to ILP, thereby giving rise to a terminal loss.

Bowie T.C.J. found that neither the promoters nor the taxpayers had any intention of carrying on business in common with the remaining U.S. partners and, instead, "simply intended to create a large tax loss for themselves at a relatively modest cost". Accordingly, the Klink partnership came to an end on December 13, 1991 or, at the latest, on December 20, 1991 and, therefore, there were no partnership losses to be allocated to the taxpayers.

Memec plc v. IRC, [1998] BTC 251, [1998] EWCA Civ 941 (CA)

German silent partnership not a partnership: purely contractual right with no participation in business

In order to minimize German corporate tax payable by its German subsidiary ("GmbH"), the taxpayer, which was a UK company, formed a silent partnership (stille gesellschaft) with GmbH, which entitled it to annually receive most of the profits of Gmbh. In order for the taxpayer to receive a UK foreign tax credit for local trade tax payable by subsidiaries of GmbH, it was necessary to conclude either that (1) the silent partnership was fiscally transparent, so that GmbH as the silent partner was to be treated for UK corporation tax purposes as entitled to a share of the dividends paid by the GmbH subsidiaries to GmbH (all of which, in turn, were paid to the taxpayer), or (2) that the share of the profits of the silent partnership paid to the taxpayer could be treated as dividends paid by GmbH to the taxpayer.

Respecting the first issue, Peter Gibson LJ stated (at p. 258) that the court was required

to consider the characteristics of an English or Scottish partnership which make it transparent and then to see to what extent those characteristics are shared or not by the silent partnership in order to determine whether the silent partnership should be treated for corporation tax purposes in the same way.

In applying this test he noted that although a silent partnership (like an English partnership but not a Scottish partnership) was not a separate legal entity, the silent partner did not have any proprietary right in the shares of the subsidiaries or in the dividends arising on those shares (albeit, not a strong point of contrast with a Scottish partnership), it did not (unlike a partner in a Scottish partnership) have even an indirect interest in the profits of the silent partnership as they accrued or in the assets, with its interest instead being purely contractual, and the business was solely that of the GmbH rather than the business being carried on with the silent partner in common with a view to profit.

As the second argument also failed, the taxpayer's appeal was dismissed.

Witkin v. The Queen, 98 DTC 1933 (TCC)

The taxpayers and other Canadians purchased a 99% interest in a partnership ("CL 1") which, in turn, owned a 99% interest in a Texas gen(at CL A had lost over $59 million in about four years and that the taxpayers had no right to reduce the costs of CL A given that all decisions regarding management of the partnership were required to be made by unanimous written consent of the partners.

Grocott v. The Queen, 95 DTC 1025 (TCC)

In obiter dicta, Bowman TCJ. indicated that his decision - that the taxpayer, by virtue of being a limited partner in an Ontario limited partnership, was carrying on business in Canada - was not based solely on the definition of partnership in the Partnerships Act (Ontario), and stated (at p. 1027) that "something that is done by an individual - such as deriving rent from property - that would not constitute carrying on business, does not become a business simply because the individual takes in a partner."

Mahon v. MNR, 91 DTC 878 (TCC)

At the end of 1981 the taxpayer was a partner in a real estate partnership units of which he had subscribed for on December 28, 1981, notwithstanding that in June 1982 the taxpayer negotiated a reversal of the subscription and a refund of the subscription proceeds on the basis of the failure of the general partner to provide notice of acceptance of the taxpayer's subscription and to amend the partnership certificate to reflect the taxpayer's admission as a limited partner, and in light of the filing of various liens against title to the partnership development.

Blackpool Marton Rotary Club v. Martin, [1988] BTC 442 (Ch.D.)

A club, which had adopted the standard constitution prescribed by Rotary International, was not a partnership because members were only entitled to benefits conferred by the club's constitution and were only liable to pay subscriptions, rather than being entitled to profits and being responsible for losses.

Marigold Holdings Ltd. v. Norem Construction Ltd., [1988] 5 WWR 710 (Alta. Q.B.)

A general partner who received a fee for managing the partnership but no share of the profits was a partner. "The Partnership Act does not require that the partners share in the profits of the business. The definition essentially excludes non-profit relationships from the purview of the legislation. The Act simply requires a profit motive."

Volzke Construction Ltd. v. Westlock Foods Ltd., [1986] 4 WWR 668 (Alta. C.A.)

The defendant, which signed an agreement for the acquisition of an undivided 20% interest in a shopping centre, was held to be a partner of the company ("Bonel Properties Ltd.") holding the other 80% interest, in light of such factors as "the introduction of the principals of Bonel Properties Ltd. as his partners: the bank account and the printed cheques [in the name of both companies]; the Treasury Branch and Investors Syndicate financing [creating joint and several liability]; the right to be consulted about new tenants; the sending of prospective tenants; the 'on the spot' looking after the construction faults and repairs; the bank account and the admission that they were to share the costs on an 80-20 basis as well as the profits being divided on that same basis."

Canadian Pacific Ltd. v. Telesat Canada (1982), 133 DLR (3d) 321 (Ont CA)

An agreement between Telesat Canada and the nine principal Canadian telephone companies setting up the Trans-Canada Telephone System did not create a business, the profits from which were shared by the parties but instead provided for the interprovincial connection of the parties' individual telecommunication signals and for a complicated method of revenue settlement, whereby certain revenues received from the operation of the system were attributed to each party in order that it could receive a return on its investment for its particular part in the transmission of telecommunications. There was no community of capital and there was a well-defined separation of interest and ownership (i.e., there was no partnership business as such), and by virtue of the requirement of unanimity for every decision taken that affected the group, there was no delegation of management powers to the partnership. The consortium accordingly was not a partnership.

Mathewson v. MNR, 63 DTC 490 (TAB)

A New York private company whose two shareholders (including the taxpayer, who was a U.S. citizen resident in Canada) had elected under subchapter S of the Internal Revenue Code to be dealt with as a partnership, was not a partnership for purposes of the Act. Accordingly, the taxpayer was not entitled to deduct his share of a loss of the company that he was permitted to recognize for purposes of the Code.

Newstead v. Frost, [1980] A.C. 562, 53 TC 525 (HL)

Although it may be that there cannot be a partnership between an individual and a corporation to entertain on television (since a corporation cannot be a television entertainer), there is no reason why the corporation and the individual entertainer cannot agree to join in partnership to exploit his skills.

Porter v. Armstrong, [1926] 2 DLR 340, [1926] S.C.R. 328

The assumption of both co-owners of a real estate property that the second co-owner was free to assign his interest in the property to a third party was inconsistent with the presence of a partnership. "English law does not regard a partnership as a persona in the legal sense. Nevertheless, the property of the partnership is not divisible among the partners in specie. The partner's right is a right to a division of profits according to the special arrangement, and as regards the corpus, to a sale and division of the proceeds on dissolution after the discharge of liabilities. This right, a partner may assign, but he cannot transfer to another an undivided interest in the partnership property in specie."

Administrative Policy

2017 Ruling 2015-0605161R3 - Fonds commun de placement (FCP) - Luxembourg

Luxembourg investment mutual fund was a co-ownership arrangement
This essentially is a reissuance of 2007-0231581R3

Foreign pension funds invested in particular securities’ portfolios including, in some cases, Canadian securities through acquiring “units” in particular sub-funds of a Luxembourg FCP (“fonds commun de placement,” which might literally be translated as an “investment mutual fund”). Their units were stated to give them a proportionate ownership interest in the sub-fund. The portfolios were managed by a manager and held by separate custodians.

CRA ruled that the FCP including the constituent sub-funds would be treated as fiscally transparent for purposes of the Act so that, for example, dividends or interest paid by a particular Canadian investment in a sub-fund would be considered an amount paid directly to the unitholder “in proportion to its co-ownership interest in the assets and Gross Income of the particular Sub-Fund.” This ruling letter essentially constitutes the reissuance of 2007-0231581R3.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(1) a Luxembourg FCP was a co-ownership arrangement 412

27 March 2018 Internal T.I. 2015-0592551I7 - Excluded property status of partnership interest

Icelandic Sameignarfelag was partnership

The Directorate accepted the TSO view that an Icelandic “Sameignarfelag” was as a partnership, stating:

As indicated in Income Tax News No. 38, to determine the status of a foreign entity for Canadian tax purposes, the two-step approach is generally followed:

1. Determine the characteristics of the foreign business association under foreign commercial law;

2. Compare these characteristics with those of recognized categories of business associations under Canadian commercial law in order to classify the foreign business association under one of those categories.

Under Canadian law, the three essential ingredients to the formation of a valid partnership are: a business, carried on in common, and with a view to profit. In this case, you have informed us that you have accepted as fact that FORP qualifies as a partnership for purposes of the Act. In this regard, we note that in Advance Income Tax Ruling #2006-0187681R3, issued in 2007, the Rulings Directorate concluded that the Sameignarfelag discussed in that ruling would qualify as a partnership for purposes of the Act.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 95 - Subsection 95(1) - Excluded Property partnership interests no longer were excluded property on dissolution given prior disposition of s. 95(2)(a)(ii) loans 501
Tax Topics - Income Tax Regulations - Regulation 5908 - Subsection 5908(10) partnership interests no longer were excluded property on dissolution given prior disposition of s. 95(2)(a)(ii) loans/potential qualification of partnership interest under para. (c) ignored 289
Tax Topics - Income Tax Regulations - Regulation 5903 - Subsection 5903(5) - Paragraph 5903(5)(b) foreign affiliate parent cannot carry back FAPLs generated by wound-up foreign affiliate 371
Tax Topics - Income Tax Act - Section 95 - Subsection 95(2) - Paragraph 95(2)(f.14) once partnership interests were no longer excluded property, the components of their ACB calculation was to be translated at the rates when those components first arose 240
Tax Topics - Income Tax Act - Section 98 - Subsection 98(2) partnership interest disposition occurred no sooner than final distribution date 77

16 May 2018 IFA Roundtable Q. 8, 2018-0749481C6 - Update on Entity Classification

French limited partnership viewed as corp/grandfathering relief re LLPs/LLLPs

CRA essentially repeated the points made in the 21 July 2017 Email of the CRA Delaware/Florida Working Group respecting grandfathering of existing LLPs/LLLPs.

CRA also declined to rule that a specific French SLP (Société de Libre Partenariat) was a partnership for ITA purposes. CRA stated:

The entity was to be created as a French SLP – which is a “Fonds Professionnel Spécialisé” – established as a “société en commandite simple” (“SECS”). A SECS is considered to be a “société commerciale” under French law, as is also the case for a “société en nom collectif”, “société à responsabilité limitée” and a “société par actions”.

CRA noted the following salient characteristics of an SLP established as a SECS [usually translated as "limited partnership"]:

  • the existence of a separate legal personality that is recognized under the law of the relevant foreign jurisdiction – meaning the entity’s full legal capacity to acquire and own property, to sue and be sued, to carry on its own activities and to incur liabilities of its own;
  • the limitation of liability afforded to all of its “limited members”;
  • the unlimited liability of the “general member”; and
  • the computation of earnings at the entity level, with a distribution mechanism akin to the declaration and payment of a dividend.

CRA went on to state:

The existence of a separate legal personality alone is generally not sufficient to distinguish certain foreign partnerships from Canadian partnerships. However, in our view, the absence of legal authority to support an effective entitlement to share profits and losses earned through the entity along with the other corporate like characteristics noted above, were sufficiently important in this case to conclude that this entity should not be treated as a partnership for Canadian tax purposes.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Corporation French société en commandite simple (SECS) a corp 36

2016 Ruling 2015-0606141R3 - XXXXXXXXXX

common contractual fund was fiscally transparent

Investors subscribe for units of “Subfunds” of an “Umbrella” fund, both situated in and governed by the laws of a redacted non-resident jurisdiction. The units are described both as a claim against the fund manager and as representing a co-ownership interest as tenant in common in the investment assets of a particular Subfund (with each Subtrust having a different investment focus as to the bonds or shares it invests in), which are managed by the non-resident fund manager on a discretionary basis and held by a non-resident custodian bank. CRA ruled that the funds were fiscally transparent, so that a non-resident pension fund holding units in a Subfund that, in turn, held Canadian equities, could rely on its exempt pension fund status for Part XIII tax purposes.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(1) a foreign common contractual fund is a co-ownership arrangement rather than a unit trust 442

Excise and GST/HST News No. 103, December 2017

After listing general guidelines that might assist in distinguishing joint ventures and partnerships in the common law provinces, CRA stated:

The joint venture relationship is not recognized in Quebec civil law. Nevertheless, Quebec civil law does not prohibit the formation of a joint venture. Therefore, where an arrangement in Quebec is, according to the common law guidelines outlined above, a joint venture and not a partnership, it will generally be regarded as a joint venture for GST/HST purposes.

21 July 2017 External T.I. - General answer for Delaware/Florida Working Group Submissions / Questions

CRA elaborates on its grandfathering of LLPs and LLLPs
this position was essentially repeated at the 2018 IFA Roundtable, Q.8 (supra)

At the 2017 IFA Roundtable, CRA announced that it will allow Delaware & Florida LLPs and LLLPs formed before April 26, 2017 to continue filing as partnerships, provided none of the following applies:

  1. The entity or one or more of its members takes inconsistent positions for a taxation year, or from one to another, as between partnership and corporate treatment;
  2. There is a significant change in its membership or activities; or
  3. It facilitates abusive tax avoidance.

CRA clarified the grandfathering relief.

The following filings or registrations by such partnerships based on the announcement at the 2016 IFA Conference that they were corporations would not be considered as “inconsistent positions” (re the 1st condition): the “protective filing” of T1134s or T106s; being assigned a Business Number; or filing a T2 return.

Re the 2nd condition, a transfer of membership between parties not dealing at arm’s length or the issuance of additional memberships to them will not be considered a “significant change”.

Where any of the three conditions occurs in a year ending after the IFA 2017 pronouncement, CRA may issue assessments respecting that and subsequent, but not prior, taxation years based on the corporate status.

The fact that an LLC was converted before April 26, 2017 to a Delaware & Florida LLP or LLLP would not prevent it from accessing the grandfathering relief.

The above relief will be applied to LLPs and LLLPs of other jurisdictions having similar (corporate) attributes where they were set up before April 26, 2017.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Corporation CRA elaborates on its grandfathering of LLPs and LLLPs 182

13 February 2017 Internal T.I. 2015-0568011I7 - Classification of Florida LLLP

Florida real estate LLLPs were corporations (subject to transitional relief)

An LP governed by provincial law and with Canadian-resident members, invested as a limited partner in two LLLPs governed (“Florida-LLLP-1” and “Florida-LLLP-2”) governed by the Florida Revised Uniform Limited Partnership Act of 2005 (“FRULPA”), which provided:

  • An LLLP is an entity distinct from its Partners that has a perpetual duration.
  • General Partners have limitation of liability in respect of the obligations of the LLLP.
  • Each General Partner is an agent of the LLLP for the purposes of the LLLP’s activities, and a Limited Partner does not have the right or the power to act for or bind the LLLP.
  • Profits and losses of an LLLP shall generally be allocated among the Partners on the basis of the value of their Contributions.
  • It may be continued into another jurisdiction, converted into another type of listed entity, or merged with other such entities.

The Agreement for the Florida-LLLP-1 (and similarly for Florida-LLLP-2) provided:

  • the LLLP is a separate and distinct legal entity, all business of which should be conducted in its name;
  • all property owned by the LLLP shall be owned by it as an entity and Partners shall generally have no ownership interest in any of the LLLP’s property, their interest in the LLLP being a personal property for all purposes; and
  • the details of the Partners’ Capital Contributions, and the rules to maintain each Partner’s Capital Account and for the yearly allocation of Profits or Losses to Partners and for the distributions.

The Florida-LLLPs owned and operated Florida real estate, but then were liquidated and dissolved, with the surrender of their property being reported in accordance with the s. 79 rules. The LP reported capital losses on land, and terminal losses on Class 1 and Class 8 assets. Assessments disallowed terminal losses and capital losses on the basis that the Florida-LLLPs were corporations.

The Directorate indicated that, consistently with 2016-0642051C6, a Florida LLLP generally should be considered as a corporation given “the existence of a separate legal personality that is recognized under the FRULPA – meaning the full legal capacity to acquire and own property, to sue and be sued, to carry on their own activities and to incur liabilities of their own – and the limitation of liability afforded to all of their members.” However, in light of the transitional relief being afforded to such partnerships, the Directorate suggested “that consideration be given to allowing the Florida-LLLPs to be treated as partnerships for the purposes of the Act for the relevant taxation years.”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Corporation Florida LLLPs found to be corporations 68

13 February 2017 Internal T.I. 2015-0587691I7 - Classification of a Delaware LLLP

Delaware LLLP that was wound up before 2016 treated as partnership for capital loss purposes

Two related taxable Canadian corporations (CanGP and CanLP) were the general and limited partner, respectively, of a Limited Liability Limited Partnership (“Delaware-LLLP “) that had been constituted by filing a certificate with the Delaware Secretary of State. Under the Delaware Revised Uniform Limited Partnership Act (“DRULPA”):

  • an LLLP is a separate legal entity that has a perpetual duration;
  • Limited Partners (and subject to the Partnership Agreement) the General Partners;
  • each General Partner is an agent of the LLLP for the purposes of the LLLP’s activities;
  • profits and Losses of an LLLP shall generally be allocated among the Partners on the basis of the value of their contributions, subject to another method provided in the Partnership Agreement; and
  • it may be continued into another jurisdiction, converted into another type of listed entity, or merged with other such entities.

The Partnership Agreement contained the agreement of CanGP and CanLP respecting the maintaining of capital accounts and sharing of profits and losses, stipulated CanGP’s exclusive management responsibility and authority and provided for a Board of Managers to provide overall guidance to CanGP, and specified the “Liquidating Events,” which did not include a predetermined date.

Delaware-LLLP disposed of all of its assets, used the proceeds received principally to terminate services contracts, and was subsequently dissolved, with CanGP and CanLP claiming capital losses. The Tax Services Office reassessed, with the reassessments being buttressed by a secondary position that Delaware-LLLP should be considered as a corporation.

The Directorate indicated that, consistently with 2016-0642051C6, a Delaware LLLP generally should be considered as a corporation given “the existence of a separate legal personality that is recognized under the DRULPA – meaning the full legal capacity to acquire and own property, to sue and be sued, to carry on their own activities and to incur liabilities of their own – and the limitation of liability afforded to all of its members.” However, in light of the transitional relief being afforded to Delaware LLLPs so that, in the taxation years involved, Delaware LLLPs would be considered as a “partnership for the purposes of the application of the Act to CanGP and CanLP’s XXXX…” it was suggested that the secondary position be dropped so as “to be consistent with the intended treatment of other taxpayer files being considered.”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Corporation de facto listing of relevant corporate-like attributes of LLLP 99

26 April 2017 IFA Roundtable Q. 3, 2017-0691131C6 - U.S. LLPs and LLLPs

further extension of grandfathering relief for Florida and Delaware LLPs and LLLPs

Are there further developments on CRA’s policies respecting its view of Florida and Delaware LLPs and LLLPs as corporations? CRA indicated that any such entities formed before 26 April 2017 would be accepted as partnerships for all prior years as well as all future years, provided that none of the following applies::

  • one or more members of the entity, or the entity itself, takes inconsistent positions from one taxation year to another, or for the same taxation year, as between partnership or corporate treatment;
  • there is a significant change in the membership or the activities of the entity; or
  • the entity is being used to facilitate abusive tax avoidance.

LLPs and LLLPs of other US jurisdictions have similar attributes to those entities, and therefore the CRA views them as corporations, will also be eligible for this administrative grandfathering. Any such grandfathered entities that choose to file as a corporation must do so for all taxation years.

Any such entities formed after 26 April 2017 will be treated as corporations.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Corporation general grandfathering of pre-April 26, 2017 LLPs and LLLPs 105
Tax Topics - Treaties - Income Tax Conventions - Article 4 Florida and Delaware LLPs and LLLPs treated like LLCs 26
Tax Topics - Income Tax Act - Section 93.2 - Subsection 93.2(2) Florida and Delaware LLPs and LLLPs subject to s. 93.2 21

25 February 2016 CBA Roundtable, Q. 7

arrangement for sharing employees not a partnership in Quebec or ROC

A group of professionals (e.g., dentists), each operating as sole proprietors, hire common staff members (e.g., receptionists, file clerks, etc.) Before going on to address whether the professional, who is acting as agent in employing the staff, can make all payroll remittances under the professional's own Payroll account, without jeopardizing the status of the other professionals as also being employers of the staff, CRA stated:

The Supreme Court of Canada has expressed its view on the essential elements present in a relationship that is a partnership: (1) a business, (2) carried on in common, (3) with a view to profit. In the Civil Code of Québec, a contract of partnership is defined in section 2186 as “a contract by which the parties, in a spirit of cooperation, agree to carry on an activity, including the operation of an enterprise, to contribute thereto by combining property, knowledge or activities and to share among themselves any resulting pecuniary profits.” Both common law and civil law’s approach to partnership require an element that relates to profit sharing.

[Here] the professionals each operate as a sole proprietor; they agree to share certain expenses but do not operate as a partnership as they do not carry on a business in common with a view to sharing profits; rather, they only share expenses. They jointly hire a group of employees … [so that] [e]ach professional is an employer at law….

Locations of other summaries Wordcount
Tax Topics - General Concepts - Agency dentist handles source deductions and payroll as agent for colleagues 127
Tax Topics - Income Tax Act - Section 153 - Subsection 153(1) - Paragraph 153(1)(a) joint responsibility of joint employers 434
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Service dentists jointly employ staff so as to avoid GST 296
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Taxable Supply dentists jointly employ staff so as to avoid GST 203

29 November 2016 CTF Roundtable Q. 10, 2016-0669751C6 - U.S. LLPs and LLLPs

CRA may allow LLPs and LLLPs to file as corps only on a going-forward basis

Certain U.S.-based Florida and Delaware LLPs and LLLPs, with many partners, which carry on business in Canada, are unable to qualify for relief, from CRA’s position on such entities being corporations, by converting to LPs because, for business reasons, they cannot do so. Amending all previous years’ returns for all individual partners would be impractical. Would the CRA consider allowing these entities to file as a corporation on a go-forward basis while leaving its previous years’ partnership/partner filings unchanged?

CRA indicated that if taxpayers were unable to convert to a partnership in accordance with its previous announcements on this issue, it is open to prospective treatment as a corporation, with prior problems being allowed to stand. Submissions from taxpayers and their representatives are welcomed. CRA will review such submissions to see that there is no unwarranted benefit or undue tax advantage, including a review of the relevant tax attributes.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Corporation potential prospective filings of LLPs/LLLPs as corps 64

1 December 2015 Internal T.I. 2015-0588381I7 F - Classification of US-LLCs

corporation/partnership classification of foreign entity not affected by Quebec residence of member

A taxpayer’s representative submitted that Delaware, New York and Florida LLCs of which the taxpayer was a member should be treated as partnerships because the taxpayer was a Quebec resident and the attributes of an LLC were similar to those of a partnership under the Civil Code.

CRA indicated that it was not convinced that an analysis of the Civil Code provisions pointed to this conclusion, but went on to state (TaxIntepretations translation):

[I]f it were determined that such a comparative analysis supported the conclusion that a US LLC must be considered as a partnership for the purpose of application of the Act, we suggest that it would not be appropriate to adopt a classification approach to entities and foreign arrangements which could result in a different classification according to the province or territory of the residence (or permanent establishment) of the taxpayer holding an interest in the entity or the arrangement. …

[I]t appears to us, based in particular on the conflict of law rules, that the provincial and territorial laws of property and civil rights in Canada provide for mutual recognition of different types of entities or arrangements established under the respective jurisdictions of the various provinces and territories, thus providing an expanded base for analysis that is uniform across Canada for the purposes of applying the two-step approach.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Corporation status of Delaware, NY and Florida LLCs as corps not affected by Quebec residence of member 317
Tax Topics - Statutory Interpretation - Interpretation Act - Section 8.1 8.1 effected no change/2 step-approach should be inter-provincial 255

21 June 2016 Internal T.I. 2015-0581151I7 - Dutch Co-Op Entity Classification

Dutch co-op a corp., not partnership

CRA briefly concluded (after referencing its two-step approach to foreign entity classification) that a Dutch Co-op was a corporation rather than a partnership for purposes of the Act. (See also 2010-0373801R3 and 2015-0571441R3.)

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Corporation Dutch co-op a corporation 68
Tax Topics - General Concepts - Foreign Law two-step approach applied to finding Dutch co-op a corporation 97

10 June 2016 STEP Roundtable Q. 8, 2016-0634951C6 - U.S. LLPs & LLLPs Classification

facts and circumstances test respecting transition of LLPs to corporation status

At 2016 IFA Roundtable, Q. 1, CRA indicated it had finalized its view that Florida and Delaware limited liability partnerships and limited liability limited partnerships are corporations for ITA purposes, but indicated that it was prepared as an administrative matter to continue accepting that an existing LLP or LLLP (that had been formed from scratch rather than being converted from an LLC) is a partnership if it is clear that the members are carrying on business in common with a view to profit, all members and the LLP or LLLP having been treating it as a partnership for ITA purpose, and the LLP or LLLP converts to a “true” partnership before 2018. This position was substantially repeated at the 2016 STEP Roundtable, but with a comment made following a statement of the above conditions that “where some but not all of those conditions are met, those cases may be dealt with on a facts and circumstance basis.”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Corporation perhaps potential flexibility in applying the transition of LLPs from partnerships to corporations 71

26 May 2016 IFA Roundtable Q. 1, 2016-0642051C6 - Classification of U.S. LLPs & LLLPs

LLPs and LLLPs treated as corporations

In concluding that limited liability partnerships (“LLPs”) and limited liability limited partnerships (“LLLPs”) governed by the laws of Florida and Delaware were corporations, CRA referred to their “separate legal personality” and “the extensive limitation of liability afforded to all of their members,” and also stated:

[I]t has become widely accepted that U.S….LLCs…are properly viewed as corporations for the purposes of the Act, notwithstanding…Anson… . We see little substantive difference between LLPs, LLLPs and LLCs governed by the laws of the states of Florida and Delaware. …

We suspect that much of this reasoning may be applicable in respect of entities of other states of the U.S. and perhaps other foreign jurisdictions… .

Respecting transitional relief, CRA stated:

[W]e are prepared to accept that any such LLP or LLLP be treated as a partnership for the purposes of the Act, from its time of formation, where

  • the entity is formed and begins to carry on business before July 2016;
  • it is clear from the surrounding facts and circumstances that the members
    • are carrying on business in common with a view to profit; and
    • intended to establish an entity that would be treated for Canadian income tax purposes as a partnership and not a corporation;
  • neither the entity itself nor any member of the entity has ever taken the position that the entity is anything other than a partnership for Canadian income tax purposes; and
  • the entity converts, before 2018, to a form of entity that is generally recognized as a partnership for Canadian income tax purposes.

…[W]e will not generally accept partnership treatment for a Florida or Delaware entity that starts out as an LLC and then converts, under corporate continuance-like statutory provisions, to an LLP or LLLP where there is no significant substantive change to their legal context.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Corporation Delaware and Florida LLPs and LLLPs as corporations 157

28 May 2015 IFA Roundtable Q. 3, 2015-0581511C6 - IFA 2015 Q.3: Entity Classification

status of LLLPs as partnerships or corporations

Does CRA still follows the "two-step" approach to entity classification, and what new entities are being considered?

After noting the "contradictory guidance" provided by the English definition of "corporation," which includes an "incorporated company," and the French version, which refers to a "legal person" ("personne morale"), CRA stated:

[A] two-step approach is still the most appropriate approach to be followed and, in particular, that one should not simply consider any entity that has legal personality to be a corporation. Thus, we stand by our previous positions whereby we determined that general partnerships and limited partnerships governed by the laws of Delaware are to be treated as partnerships for the purposes of the Act.

…[W]e are currently analyzing "limited liability limited partnerships" ("LLLPs") governed by the laws of the State of Florida. This analysis has also led us to consider the status of "limited liability partnerships" ("LLPs") governed by the laws of Florida. …

[T]these entities have many characteristics in common with "limited liability companies" ("LLCs") that exist in the U.S., which are generally considered to be corporations for the purposes of the Act, but that they also have many characteristics in common with the various forms of partnerships. ... A particular area of focus for us is the exact nature of the limitation of liability for the partners…[which] seems to go beyond the type of limitation of liability applicable to partnerships governed by the laws of the Canadian provinces.

…[P]artnerships governed by the laws of many states of the U.S. have legal personality, meaning that they own property in their own right and they have the right to sue and be sued in their own name. Under some states' laws, such partnerships can also be converted to LLCs and "regular" corporations without causing any change in the ownership of their assets. …Florida LLLPs and LLPs… also have these elements of legal personality.

To summarize, our main cause for concern with these LLLPs and LLPs is that they seem to have both legal personality and full, or at least very extensive, limited liability for all members… . [W]e wonder whether these two factors…should be considered to be so significant that these entities should be classified as corporations for Canadian tax purposes.

[W]e are inviting comments from the tax community… .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Corporation Florida LLLPs potentially corporations 92

S4-F16-C1 - What is a Partnership?

Application of Canadian partnership law to partnership characterization

1.2 In Continental Bank Leasing Corp. v. Canada, [1998] 2 S.C.R. 298, 98 DTC 6505, and later in Backman v. Canada, [2001] 1 S.C.R. 367, 2001 DTC 5149, and Spire Freezers Ltd. v. Canada, [2001] 1 S.C.R. 391, 2001 DTC 5158, the Supreme Court of Canada confirmed that for purposes of the Act the existence of a partnership must be determined by reference to the partnership law of the relevant province or territory, and this is the case even when dealing with a partnership established in a jurisdiction outside Canada.

1.3 In the case of a foreign entity or arrangement, the CRA takes the following two-step approach to determine whether such entity or arrangement should be treated as a partnership for Canadian tax purposes:

  1. Determine the characteristics of the foreign business entity or arrangement by reference to any relevant foreign law and the terms of any relevant agreements relating to the entity or arrangement; and
  2. Compare the characteristics of the foreign business entity or arrangement to the characteristics of business entities or arrangements under Canadian law in order to see which Canadian entity or arrangement it most fundamentally resembles.

Three attributes of common law partnership

1.7 In Continental Bank, Backman and Spire Freezers, the Supreme Court of Canada used the provincial and territorial partnership statutes to identify three fundamental criteria for determining whether a partnership exists in the common law provinces. To conclude that a partnership exists in the common law provinces, the Court affirmed that one must demonstrate that two or more persons are:

  • carrying on business;
  • in common;
  • with a view to profit.

Factual manifestations of the three attributes

1.12 In Continental Bank, the Supreme Court of Canada listed some of the elements of a partnership in the common law jurisdictions which included:

  • the contribution by the parties of money, property, effort, knowledge, skill or other assets to a common undertaking;
  • a joint property interest in the subject matter of the adventure;
  • the sharing of profits and losses;
  • a mutual right of control or management of the enterprise;
  • the filing of income tax returns as a partnership; joint bank accounts; and
  • correspondence with third parties.

Quebec partnership

1.18 Article 2186 of the Civil Code of Québec defines a contract of partnership to be "a contract by which two or more parties, in a spirit of cooperation, agree to carry on an activity, including the operation of an enterprise, to contribute thereto by combining property, knowledge or activities and to share among themselves any resulting pecuniary profits."

Joint venture with profit sharing but no co-ownership

1.22 A joint venture agreement, whereby two or more persons agree that each provides their own property, performs a specific task and receives a specific division of profits from such a task, may be considered a partnership as regards such profits. However, if the property is not held under joint tenancy or tenancy in common, it is not considered to be partnership property. This means that the capital cost allowance provisions relating to partnership property would not apply.

16 June 2014 STEP Roundtable, 2014-0523041C6 - LLLPs

classification of U.S. LLLP

How would a U.S. limited liability limited partnership ("LLLP") be characterized, e.g., one where the governing law does not require there to be a general partner who is liable for the partnership debts? CRA referred to Backman and then referred to its two-step approach (see ITTN, No. 38), stating:

[T]o determine the status of an entity for Canadian tax purposes, we would:

1) Examine the characteristics of the foreign business association under foreign commercial law and any other relevant documents, such as the partnership agreement or other contracts; and

2) Compare these characteristics with those of recognized categories of business associations under Canadian commercial law in order to classify the foreign business association under one of those categories.

The CRA would consider the classification of an LLLP in the context of an advance income tax ruling. Taxpayers should include with their request a complete description of the characteristics of the LLLP, their analysis as to its proper classification, a copy of the legislation under which the LLLP is to be created, and any other relevant documents, such as the partnership agreement or other contracts. [See also 2012-0463021C6.]

2014 Ruling 2013-0496831R3 - Irish Common Contractual Fund

Irish common contractual fund respected as co-ownership

An Irish common contractual fund, which gave the unitholders proportionate undivided co-ownership interests as tenants in common in the property of the funds (investments in shares of listed companies), would be respected as a co-ownership arrangement for purposes of the Act.

See detailed summary under s. 104(1).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(1) Irish contractual fund respected as co-ownership 392

5 December 2012 Internal T.I. 2012-0439301I7 F - Reassessment beyond the normal reassessment period

partnership lacks power to contract debts

Canco made a loan to a partnership (governed by the laws of a province) between two non-resident corporations with which Canco does not deal at arm's length. In order for CRA to be able to reassess Canco under s. 17(1) and (6) in respect of the loan, it was necessary for it to qualify under s. 152(4)(b)(iii) as a loan made by Canco to persons with whom it did not deal at arm's length, namely, the partners. In finding that this requirement was satisfied, so that the reassessment could be made, CRA stated (TaxInterpretations translation):

…Paragraph 96(1)(a)[‘s] … presumption that a partnership is a separate person … does not apply for the purposes of section 152. ...

Furthermore …., under civil and common law, a partnership … is simply the relationship that exists between persons or partners who carry on a business in common for profit. [Furthermore] under the … laws of XXXXXXXXXX and the jurisprudence, a partnership does not have the power to contract debts. We refer you to … Klein [which] stated:

…[T]he partnership itself does not have the capacity to be indebted. The debt of the partnership is owed by the partners … .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) - Paragraph 152(4)(b) - Subparagraph 152(4)(b)(iii) s. 17 assessment of loan made by Canco to non-resident LP was re a transaction with the non-resident partners for s. 152(4)(a)(iii) purposes 282

2010 Ruling 2010-0357061R3 - Split-up butterfly

co-ownership not a partnership

After describing the distribution of property by the distributing corporation (DC) to three transferee corporations (TC1, TC2 and TC3) under a reorganization that is ruled to qualify as a butterfly reorganization and which is later represented not to include an acquisition described in s. 55(3.1)(c) "which is not described herein," the ruling describes a co-ownership agreement that is entered into by TC1, TC2 and TC3:

The co-ownership agreement will indicate that: (i) the co-owners do not intend to create a partnership; (ii) no co-owners can act on behalf of another co-owner without obtaining prior consent from that co-owner; (iii) each co-owner has a well-defined separation of interests in and ownership of the properties subject to the co-ownership agreement; (iv) a co-owner cannot charge and/or grant security over the co-owned properties as a whole (i.e. the other co-owner's interest) as each co-owner only has the right to deal with its own interest in the co-owned properties; (v) profit and loss is calculated by each co-owner individually and there is no mechanism in the agreement that deals with the allocation of profit or loss; and (vi) the liability of the co-owners is limited to their own expenses.

The ruling letter summary states that provided the representation that there is no partnership is accurate, the entering into of this co-ownership agreement will not taint the butterfly.

7 October 2011 Roundtable, 2011-0411911C6 F - Exploitation entreprise par SP

Quebec partnership need not carry on business

A partnership created under the Civil Code may exist even if the partnership does not operate a business.

15 April 2008 Internal T.I. 2008-0266251I7 - Liechtenstein foundation

DRUPA partnership as partnership

The initial concern as to the status of an entity governed by the DRUPA comes from the fact that an entity governed by this legislation is a separate legal entity which is distinct from its partners unless, or to the extent, otherwise provided in a statement of partnership existence and in a partnership agreement. However, an entity governed by the DRUPA has additional characteristics that are similar to the characteristics of a Canadian partnership. ...[T]he attributes of an entity formed under the DRUPA in which its members carry on business in common with a view to profit (in our common law sense) more closely resemble those of a Canadian general partnership under our common law and, as such, an entity governed by the DRUPA would be treated as a partnership for Canadian income tax purposes.

27 June 2008 External T.I. 2007-0247551E5 - FAPI and Part XIII Tax

DRUPA partnership

If FP is formed under the Delaware Revised Uniform Partnership Act ("DRUPA"), it as been the long-standing position of...CRA...that a partnership formed under DRUPA is a partnership for Canadian income tax purposes.

Income Tax Technical News, No. 34, 27 April 2006 under "Delaware Revised Uniform Partnership Act"

Delaware LPs with separate personality are not corps

Partnerships formed under the DRUPA or DRULPA normally would be considered to be partnerships for purposes of the Act.

Policy Statement P-171R "Distinguishing Between a Joint Venture and a Partnership for Purposes of the Section 273 Joint Venture Election".

To determine whether a particular relationship is a joint venture or a partnership, the circumstances of the relationship should be reviewed to ascertain whether it is either:

(1) an arrangement in which two or more persons work together in a limited and defined business undertaking, which does not constitute a partnership, a trust or a corporation, the expenses and revenues of which will be distributed in mutually agreed portions (i.e. the Department's administrative definition of "joint venture"); or

(2) a relationship that subsists between persons carrying on business in common with a view to a profit (the Department's administrative definition of "partnership").

9 January 2004 External T.I. 2003-003742 -

validity of holding partnership questioned

A farming partnership between a husband and wife transfers its business to a newly-incorporated corporation ("Opco") whose common shares are held by the husband and wife and which issued promissory notes and preferred shares in consideration for the acquired business. Later, the husband and wife transfer their partnership interests in the partnership to a Newco for consideration that includes a note with a principal amount that is in excess of the adjusted cost base of the transferred partnership interest by $500,000 each, and receives redeemable retractable preferred shares for the balance of the consideration.

Respecting whether s. 84.1 would apply to the transfer of the partnership interests, the Agency questioned the validity of the partnership following the transfer of its business to Opco and also indicated that the application of s. 245 to the series of transactions would be considered.

17 March 2003 External T.I. 2001-0095675 - Unit Trust investing in a limited partnership

Ontario partnership debt owing to limited partner respected

Where a loan was made to the limited partnership that qualified as a security for purposes of s. 108(2)(b)(v), CCRA would both require that the loan not represent in excess of 10% of the property of the trust (on the basis that under s. 12(1) of the Limited Partnerships Act (Ontario), a limited partnership may for specified purposes be a debtor of a limited partner) and that, on a look through basis, not more than 10% of the trust's property would consist of bonds, securities or shares of any one corporation or debtor. CCRA stated:

In the absence of a specific example demonstrating otherwise, we would expect that a limited partnership would be a "debtor" for purposes of the provision in instances where a limited partner has lent money to the limited partnership. Consider subsection 12(1) of the Limited Partnerships Act R.S.O. 1990, c. L. 16, which provides..."a limited partner may loan money to and transact other business with the limited partnership" and may participate, along with other general creditors, in any resulting claims against the limited partnership in a prorated share of the assets of the limited partnership. This suggests that for particular purposes, a "debtor/creditor" relationship can be established between a limited partner and the limited partnership.

Additionally, subsection 10(1) of Ontario's Partnership Act...provides...that every partner is jointly liable "for all debts and obligations of the firm[.]" This provision shows that even though a partnership is not a separate legal entity and its debts are the debts of its partners (see Klein above), the debts are also considered debts of the firm (or partnership) under partnership law. This further supports the view that for particular purposes, a partnership may be considered a "debtor".

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 108 - Subsection 108(2) - Paragraph 108(2)(b) partnership look-through 207

14 December 2000 Internal T.I. 2000-005938 -

Description of various clauses that establish that an agreement was a partnership agreement.

21 December 2000 External T.I. 2000-006201 -

Entities that have been set out for non-profit purposes under the Delaware Revised Uniform Partnership Act would not satisfy the common law requirement of carrying on business with a view to profit and, therefore, would not be considered as partnerships for Canadian income tax purposes.

28 November 2000 External T.I. 2000-005776 -

"The attributes of an entity formed under the [Delaware Revised Uniform Partnership Act] more closely resemble those of a Canadian general partnership under our common law and, as such, an entity governed by the DRUPA would be treated as a partnership for Canadian income tax purposes. Furthermore, it is our view that the existence of a separate legal entity clause contained in foreign partnership legislation would not, in and by itself, preclude an arrangement from being considered as a partnership for purposes of the Canadian Income Tax Act."

1997 Ruling 970265

RC would appear to accept that a partnership that had filed for many years as a partnership and that held some units of another partnership (in addition to shares) should be accepted as being a partnership for purposes of the Act.

25 October 1994 T.I. 941925 (C.T.O. "Partnership or Corporation")

A German offene Handelsgesellschaft ("OHG"), as described by the writer, would be considered a partnership for Canadian tax purposes.

8 September 1994 Internal T.I. 7-942093 -

Before discussing the case law in the context of a dispute, RC stated that "in general, an acceptable partnership requires an investment by each partner, a written partnership agreement and proper notices to creditors and financial institutions concerning the existence of a partnership".

23 November 1992 T.I. 922181 (September 1993 Access Letter, p. 417, ¶C96-044)

A société en nom collectif formed under the laws of France will be a partnership for purposes of the Act even though it has elected to be taxed as a corporation under French income tax law.

September 1991 Memorandum (Tax Window, No. 10, p. 12, ¶1478)

Most syndicates and other co-ownership arrangements are partnerships.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 96 - Subsection 96(2.1) 9

90 C.P.T.J. - Q.6

A disclaimer of partnership in a joint venture agreement is not determinative of the nature of the business organization.

88 C.R. - Q.15

In RC's experience, many so-called "joint ventures" are, in fact, partnerships.

Articles

Angelo Discepola, Robert Nearing, "A Reply to the CRA's Classification of Florida and Delaware LLLPs and LLPs as Corporations", 2016 Conference Report (Canadian Tax Foundation), 24:1-39

General characteristics of LLPs (p. 24:13)

In broad terms, LLPs are fundamentally general partnerships and defined as such under LLP legislation. Provided that the general partnership has complied with the registration requirements of the relevant jurisdiction, attached to this specific type of general partnership is the above-mentioned liability shield, which essentially overrides the joint and several liability for general partnership debts and obligations at common law. As explained in greater detail below, the extent of this shield is dependent on the state in which an LLP is created and generally only partially relieves partners from personal liability for the negligence or misconduct of their counterparts, and not for their own misconduct or ordinary-course obligations of the partnership (such an entity is commonly referred to as a "partial-shield LLP")….

[S]ome states have preserved the original partial liability enacted by the Texas legislature, while others (most notably Florida and Delaware) have adopted or migrated toward full-shield legislation. In addition, each state has in some form or other imitated Texas's original registration requirements to allow the partners of a general partnership to benefit from LLP status….

General characteristics of LLLPs (p. 24:15-16)

US LLLPs are lesser-known entities than US LLPs. Also born of the Texas legislature, LLLPs, unlike LLPs (which are fundamentally general partnerships), are limited partnerships at their core. LLLPs are formed when limited partnerships follow a registration process similar to the process followed by general partnerships that elect to become LLPs….

[D]elaware soon imitated Texas, which amended its partnership legislation to allow limited partnerships to register as LLLPs. In both states, LLLPs were designed to offer a shield from liability to both general partners and limited partners….Not all states extend this protection to limited partners, however. For example, Colorado's legislation does not extend its LLP shield to limited partners of LLLPs beyond the protection given to them under traditional partnership law. Accordingly, limited partners appear to have no shield from liability if they become involved in the management of the partnership's business for example.

General comparison of attributes of LLP/LLLPs and Cdn corps (p. 24:17)

1) LLLPs and LLPs are created by a contract between two or more people for the purpose of carrying on business with a view to profit;

2) LLLPs and LLPs can be dissolved by contract;3) partners of LLLPs and LLPs are considered to be agents of the partnership;

4) partners of LLLPs and LLPs share in the profits and losses of the partnership;

5) partners of LLLPs and LLPs can only transfer their economic interests in the partnership;

6) partners of LLLPs and LLPs manage the business of the partnership;

7) partners of LLLPs and LLPs owe each other and the partnership a duty of loyalty and care;

8) LLLPs and LLPs have a separate legal personality; and

9) partners of LLLPs and LLPs (including general partners in the case of LLLPs) are not responsible for obligations of the partnership, whether arising in contract, tort, or otherwise solely by reason of being partners of the partnership.

Each of the attributes described in items (1) to (7) are attributes that are unique to LLLPs and LLPs, and are not shared by Canadian corporations:

1) corporations are created by statute, can be created by one person, and need not have a profit-making purpose;

2) corporations are dissolved by statute;

3) shareholders are not agents of corporations;

4) shareholders are not entitled to the profits of a corporation; rather, their only entitlement is to dividends as and when declared by the board of directors;

5) shares can be freely transferred;

6) shareholders generally do not have a right to manage the business of a corporation in the absence of a unanimous shareholders' agreement; and

7) shareholders do not owe each other any mutual (loyalty) duties and are entitled to exercise their rights (typically voting right) as they please, without regard to the interests of other shareholders.

It follows that separate legal existence and limited liability are the only features common to both Canadian corporations and LLPs/LLLPs.

More on non-assignability of full partner status and duty of loyalty for LLP/LLLPs (pp. 24:26)

Partners of both Florida and Delaware LLLPs/LLPs and Canadian partnerships are generally entitled only to transfer their economic interests in the partnership (their entitlement to share in the profits and losses of the partnership). [fn 93: Section 15-502 of DRUPA, section 620.8502 of FRUPA, and section 21(1) of the OPA] An assignee of a partnership interest (unless he or she becomes a substitute partner) does not therefore step into the shoes of the assignor (for example, with respect, to voting rights and the inspection of partnership accounts).…

Shares of a CBCA corporation are entirely different…

Partners of LLPs owe each other and the partnership a duty of loyalty and care….

The CBCA, however, does not provide for any such fiduciary duty, either among shareholders or between shareholders and the corporation….

Implicit treatment by Interpretation Act of LLP/LLLPs as not being corporations (p. 24:28)

[S]ection 35 of the Interpretation Act…supports partnership treatment of LLLPs and LLPs. The IA definition provides that the word "corporation" "does not include a partnership that is considered to be separate legal entity under provincial law."… [T]he better view is that the IA definition confirms that a partnership that is considered to be a separate legal entity should nevertheless be considered to be a partnership. …

[T]here is a strong argument that the IA definition applies for greater certainty to ensure that LLLPs and LLPs are not treated as corporations. Further, the phrase "a partnership which is considered to be a separate legal entity under provincial law" does not necessarily limit the application of the IA definition to partnerships governed by provincial law. On the contrary, the IA definition arguably applies when provincial private international law requires foreign law to be taken into account in considering the treatment of a foreign partnership that is a separate legal entity. [fn 106: See Gerling Global …. v. Canadian Occidental…, 1998 ABQB 714. In this case, the court indicated that Alberta's conflict-of-law rules …required that it look to Delaware law to determine whether a Delaware partnership was a "legal entity" under Alberta law….]

Relevance and extent of limited liability (pp. 24:29 – 32)

[O]PA LLPs are also full-shield LLPs [fn 107: Section 10(2) of the OPA] and the CRA has to date treated these LLPs as partnerships for Canadian tax purposes.

It is not clear why the CRA chose to make the issue of limited liability the decisive point in treating LLLPs and LLPs as corporations for the purposes of the Act, particularly in light of the fact that there are no other meaningful distinctions between these entities and Canadian partnerships, except for separate legal existence…

[A] partner of an LLP may waive protection from liability under DRUPA to the extent that is provided in the partnership agreement [fn 108: Section 15-306€ of DRUPA.] The protection from liability may also be waived when partners expressly accept personal liability for some or all partnership obligations by agreeing to guarantees with respect to specific liabilities of the partnership. The CRA has not stated whether LLLPs or LLPs whose partners have executed these guarantees or waivers (with the corresponding effects on their liability) ought to be treated as partnerships for Canadian tax purposes.

[T]he wording in partial-shield jurisdictions departs somewhat from the full-shield language contained in section 15-306(c) of DRUPA by specifically stating that the liability shield severs the link between the partner and the partnership only with respect to obligations of the partnership arising in connection with negligent acts….

The CRA has not yet stated whether it will treat partial-shield US LLPs as partnerships for Canadian tax purposes.

[A] general partner of and LLLP (like a partner of a full-shield LLP) remains liable for its tortious actions….

Thus, if a general partner of an LLLP is culpable of tortious conduct toward third parties in the execution of its duties as the manager of the LLLP's business, the general partner is not protected by the LLLP shield. In other words, it should not be assumed that a general partner of an LLLP is shielded from all possible claims arising in connection with the management of an LLLP. In our view, the weight given to the LLLP shield (which, as noted, is in substance the LLP shield) by the CRA should therefore be tempered accordingly. …

[T]he liability shield afforded to LLLPs and LLPs arises by filing the documents required for the entity to be treated as an LLLP or LLP and paying the applicable fees. The failure to file any required annual filings or to pay the applicable annual fees may result in the loss of the limited liability shield. [fn 111: Section 15-1003(c) and (d) of DRUPA.] By contrast, corporate limited liability is intrinsic to a corporation…

Scottish partnership tests (p. 24:32)

[I]n Dollar Land (Cumbernauld) Ltd. v. CIN Properties Ltd. [fn 115: 1996 SLT 186.] the Scottish Outer House listed five factors as hallmarks of a partnership relationship:

1) mutual agency,

2) participation in profits,

3) sharing of losses,

4) common capital, and

5) the basic non-assignability of the partnership relation.

Again, joint liability for debts and obligations was not listed as an essential attribute of a partnership. Each of the foregoing five attributes are common to LLLPs and LLPs, however.

Michael N. Kandev, Sandra Slaats, "Recent Developments in the Foreign Affiliate Area", 2015 Annual CTF Conference paper

CRA position on partnerships under the Delaware Revised Uniform Partnership Act (p. 31:5)

Effectively, the CRA concluded [in] ITTN No. 20, June 14, 2001, see also 2004-0104691E5] that the existence of a separate-legal-entity clause in Delaware partnership legislation would not, in itself, prevent a business association from being considered a partnership for Canadian tax purposes. However, subsequent comments by the CRA indicated that it still considers the proper characterization of partnerships formed under DRUPA to be an open question. [f.n. 23: … 2006-021645117] Effectively taxpayers have since been faced with a "don’t ask, don’t tell" situation.

Commercial law character of Florida LLPs and LLLPs (pp. 31:8-31:11)

Florida's partnership laws are contained in chapter 620 of title XXXVI "Business Organisations". ...

Section 620.1104 of the Florida statute states that a limited partnership is an entity distinct from its partners and that it has a perpetual duration. ...

[A]lthough the term "entity" as it is used in the Act denotes a level of individuality and separate existence, it is a more diffuse concept than it is in the US legislation and does not go as far as being a synonym for "legal person." ...

What distinguishes LLLPs is the provision of section 620.1404(3), which states that an obligation of a limited partnership incurred while the limited partnership is a LLLP, whether arising in contract, tort, or otherwise, is solely the obligation of the limited partnership. ...

[W]hat ultimately matters is that a Florida LLLP is formed, exists, and is dissolved by a virtue of the contractual arrangements between two or more persons instead of being a legal person formed and dissolved only by state action. In this regard, section 620.1110 is significant: it provides that, subject to certain specific exceptions, the limited partnership's partnership agreement governs relations among the partners and between the partners and the partnership. ...

Both the formation and dissolution provisions show that the existence of a limited partnership, including an LLLP, is fundamentally a contractual matter, not a function of a governmental act.

Joel Nitikman, "Is an LLP a Corporation for Canadian Tax Purposes? A Reply to the CRA", Tax Topics (Wolters Kluwer), No. 2313, July 7, 2016, p.1.

Partnership and corporation based on contract and statute, respectively (p. 4)

There is a fundamental aspect of corporations that partnerships do not share: the former are created, operated, and dissolved as dictated by statute….

In contrast, a partnership, even an LLLP, while it may acquire certain characteristics from a statute, is at its heart and soul created, operated, and dissolved by a contract between or among its partners.

Legal personality not a touchstone (p. 4)

[A] Scottish partnership is transparent for UK tax purposes even though it has separate legal personality and confers limited liability on its members…[citing Anson and Memec].

[T]he UK and Scottish Law Reform Commissions concluded that a partnership that had separate legal personality should not, solely for that reason, be classified as a corporation at law…. [f.n. 15... 32, footnote 11; 36, footnote 26; 55, paragraphs 5.38-5.39.]

Hallmarks of partnership (p. 6)

Under some foreign partnership acts, the partners of a partnership may register it to become an LP, LLP, or LLLP. Some such acts provide that such partnerships are separate legal entities, that all of their members have limited liability, and that the partnership's assets are owned by the partnership and not by its members. Nevertheless, provided a partnership's governing partnership act does not deem the partnership to be a corporation, the partnership (including an LP, LLP, and LLLP) will not be treated as a corporation for Canadian tax purposes and will continue to be treated as a partnership, provided it has all the following characteristics:

(a) it has at least two members;

(b) its members are carrying on business with a view to profit; and

(c) there is in force a contractual agreement, express or implied, in writing orally, or by conduct, between or among its members to carry on the business with a view to profit.

As an LLLP has these three fundamental characteristics and a corporation does not, I suggest that a Canadian court would find that an LLLP is a partnership rather than a corporation, regardless of the facts that both have separate legal personalities and that their members have limited liability.

Allan Lanthier, "Limited Liability Partnerships", Canadian Tax Highlights, Vol. 24, No. 6, June 2016, p. 10.

Partial v. full shield LLPs (p. 10)

[A]n LLP may be a partial shield or a full shield. In a partial-shield jurisdiction, a partner is protected from partnership obligations that arise from the negligence… of another partner, but…not…[those] that arise in the ordinary course… .

Effect of new policy on minority LLP partner (p. 10)

Assume that Ms. A, a resident "of Canada, has a one-third interest in a US LLP that carries on business in the United States.

Ms. A is still taxable in the United States on her share of the US LLP's annual income, but her ability to claim credit or deductions for this tax in Canada (under subsections 20(11), 20(12), and 126(1)) is subject to a number of restrictions. She is now also subject to Canadian tax, but only in those years that the US LLP makes distributions to her and only in the amount of those distributions. Ms. A may thus be non-compliant with her Canadian tax-filing requirements for prior years.

Ms. A may cause the US LLP to convert to a US general partnership…or to a US limited partnership that is not an LLLP. …

Ms. A's fellow partners must agree to the conversion, and they may have little incentive to do so.

Consequences of conversion (p. 10)

The Canadian tax consequences arising from such a conversion are not clear. If conversion occurs no later than 2018, in compliance with the CRA's administrative grace period, a deemed FMV disposition and distribution of the US LLP's business for Canadian tax purposes is unlikely, as is a deemed FMV cancellation of Ms. A's partnership interest.

[A] conversion that occurs after the expiration ot the grace period may be challenged by the CRA as an FMV transaction, because the CRA views it as a conversion from a US corporation to a US partnership.

Roy A. Berg, "CRA Classifies US LLLPs and LLPs as Corporations", Canadian Tax Highlights, Vol. 24, No. 6, June 2016, p. 9

LLLPs and LLPs similar to LPs except for GP limited liability (p. 9)

Statutes of 26 US states allow for the formation of LLLPs, and nearly all have statutes that allow for the formation of LLPs; generally, each of these entities is a form of limited partnership (LP). LLLP and LLP characteristics basically reflect those of an LP, except that the general LLLP or LLP partner also has limited liability exposure: the liability of a general partner and of a limited partner involved in the business's control is limited to the amount of the partner's capital investment in the partnership – unless the liability resulted from the partner's malfeasance. A Florida LP can become an LLLP simply be filing a short form and paying a small fee. …

An LLLP and LLP offer liability protection similar to that of a traditional limited partnership that uses a shell corporation to hold a nominal general partnership interest.

Use of U.S. statutory rectification (p. 9)

The transitional relief offered by the CRA appears to allow a taxpayer to convert an LLLP or LLP to an LP (or general partnership) by using the appropriate US statutory rectification procedure. Taxpayers will be relieved that they are not forced into the sanctioning procedures set out in Canadian Forest.

Justice Marshall Rothstein, "An Overview of the Supreme Court of Canada", Bulletin for International Taxation (IBFD), January/February 2016, p. 20.

Characterization of foreign entities (p. 25)

This endorsement of a foreign court's definition of a taxation law concept contrasts with Canadian courts' use of domestic law to characterize certain foreign arrangements and relationships, which can lead to significant tax consequences. In 2001, in Backman v. Canada, a Canadian taxpayer was seeking to deduct certain losses of a partnership recognized under the law of the state of Texas, in the United States. While the Federal Court of Appeal looked at whether the taxpayer satisfied the definition of a partnership under Canadian law after having determined that Texas law was insufficiently proven, the Supreme Court did not look at whether foreign law had been sufficiently proven under Texas law. Instead, the Court wrote that if a partnership wants to deduct losses under Canadian law, it must satisfy the elements of a partnership under Canadian law. This precedent limits to a certain extent the use of foreign law in Canadian tax cases.

Kenneth Snider, "US Limited Liability Partnerships – DRUPA Revisited", International Tax (Wolters Kluwer CCH), Number 77, August 2014, p. 4.

Two-step approach for determining whether an LLLP is a partnership (p. 6)

…CRA [in 2014-0523041C6, declining to conclude that an LLLP is a partnership] restated the following two-step approach for determining the characterization of an entity for Canadian tax purposes:

  • (1) Examine the characteristics of the foreign business association under foreign commercial law and any other relevant documents, such as the partnership agreement or other contracts; and
  • (2) Compare these characteristics with those of recognized categories of business associations under Canadian commercial law in order to classify the foreign business association under one of those categories.
LLLP is LP (p. 5)

It is emphasized that an LLLP is a form of a limited partnership, which is reflected in the requirements to qualify as an LLLP….

Liability shield (p. 6)

An obligation of a partnership arising out of or related to circumstances or events occurring while the partnership is a limited liability partnership or incurred while the partnership is a limited liability partnership, whether arising in contract, tort, or otherwise, is solely the obligation of the partnership. A partner is not personally liable,…

[I]n summary, if a limited partner of a limited partnership participated in the control of the business of the limited partnership as contemplated by section 17-303, the limited partner would lose limited liability. Registration of the limited partnership as an LLLP provides liability protection for such a limited partner….

LLLP accords with common law partnership concept (p. 7)

[T]here is no apparent reason an LLLP would not meet the requirements of a common law partnership. The LLLP is another variation of a limited partnership and a partnership. The definition of a "partnership" under DRUPA is essentially the same as in Canadian common law (see section 15-202). The liability shield provisions should not, in and of itself, preclude satisfying the requirements of a partnership under Canadian common law….

CRA has accepted limited partnership formed under DRULPA…to be partnerships…[as well as] limited liability partnerships created under provincial law.

Michelle Moriartey, "The Thin Blue Line Between Expressions of Interest and True Partnerships", Tax Topics, 19 March, 2009, No. 1932, p. 1: Discussion of Blue Line Hockey Acquisitionco, Inc. v. Orca Bay Hockey Limited Partnership, 2009 BCCA 34

Roderick I’Anson Banks, "Chapter 5: Rules for Ascertaining the Existence of a Partnership", Lindley & Banks on Partnership, (Sweet & Maxwell, 19th Ed.) 2010

Distinction between employee and partner/fixed distribution entitlement (5-20)

[I]gnoring for the present section 2(3)(b) [the same as Partnerships Act (Ont.), s.3.3(b)], it was frequently held prior to the 1890 Act that employees who were remunerated by reference to the profits of a business were not partners therein, at least where it appeared from the agreement that no partnership was intended. Indeed, the comparative popularity of this device may, in some measure, have contributed to the gradual introduction and recognition of the concept of "salaried" partnership, which in general involves an employee being held out as a partner and remunerated by a fixed salary and/or a share of profits, but denied many of the rights and duties normally associated with partnership, e.g. an obligation to contribute capital and to share losses and a right to participate fully in the management of the firm. A significant feature in such cases will often be that, on a true analysis, the salary is payable irrespective of the profitability of the firm, so that the element of risk participation is lacking, although this has recently been held not per se to be inconsistent with the existence of a partnership. [fn 84: M. Young Legal Associates v. Zahid [2006] 1 W.L.R. 2562 (CA); Hodson v. Hodson [2010] P.N.L.R. 8 (CA). ...] Equally, there are, inevitably, instances in which persons described as salaried partners are to be regarded as partners in the true sense, particularly when their salary is dependent on the firm's profitability [fn 85: As in Marsh v. Stacey (1963) 107 S J. 512, where a "junior" partner was entitled to "be paid a fixed salary of £1,200 as a first charge on the profits" but in one year the profits were not sufficient to pay that sum to him. The Court of Appeal held that he was not entitled to have the deficiency made good by the other partner.] and they have capital at risk in the firm. [fn 86: See Reid v. Hollinshead (1825) 4 B. & C. 867; Ex p. Chuck (1832) 8 Bing. 469; Gilpin v. Enderby (1824) 5 B. & A. 954. In such a case, an express term in the agreement negativing any implication of partnership may be ineffective vis-a-vis third parties, such as HMRC: see Fenston v. Johnstone (1940) 23 T.C. 29, where there was held to be a partnership and not merely remuneration for management services. The managing partner put up no capital and contributed no assets, but he was to share in profits and losses arising in the development or sale of certain land….] Latterly, such persons have tended to be designated as "fixed share" partners to emphasise the difference in their status, [fn 87: Although not strictly necessary as a matter of law, there has, in recent years, been a tendency to provide that fixed share partners should contribute a small sum of capital and be entitled to a minimal share of residual profits and losses, in order to ensure that partnership status and, thus, the benefits of self-employed (formerly Schedule D) taxation are achieved….] although the change of nomenclature is of no real significance.

Jessica Fabbro, "What is an LLC?", CCH Tax Topics, No. 2067, 20 October 2011, p.1: discussion of HMRC v. Anson, [2011] UKUT B21 (TCC) (reversing the finding in Swift v. HMRCI, [2010] UKFTT 88 (TC) that a US LLC was closer to a Scottish partnership than a UK company).

Jessica Fabbro, "Oh Say Can You (LL)C? A Case Comment on Boliden Westmin Ltd. v. British Columbia", CCH Tax Topics, No. 1836, 17 May 2007, p. 1: discussion of finding in that case that a Nevada LLC most closely resembled a corporation.

Bill Maclagan, "Partnerships: An Update", 2005 Conference Report, c. 37.

John R. Owen, "Foreign Entity Classification and the Character of Foreign Distributions", 2005 Conference Report, c. 20: Contrast between the characteristics of a corporation and a partnership in Canadian law.

Barry Horne, "Meaning of Partnership - and Update on the Necessary Ingredients", Resource Sector Taxation, Vol. III, No. 2, p. 186.

Paul Tamaki, "The Use of Partnerships in Tax-Motivated Transactions", Business Vehicles, Vol. VII, No. 3, 2001, p. 352.

Jack Bernstein, "Transparencies - A Canadian Perspective", Tax Notes International, Vol. 22, No. 13, 26 March 2001, p. 1569.

Jack Bernstein, "Multi-National Corporate Joint Ventures and Partnerships", Tax Profile, Vol. 6, No. 13, January 2001, p. 145.

Patrick Marley, "Characterization of Delaware Partnerships", Canadian Current Tax, Vol. 10, No. 8, May 2000, p. 65.

Alex Easson, "Taxation of Partnerships in Canada", Bolton for International Fiscal Documentation, Vol. 54, No. 4, April 2000, p. 157.

Wolfe D. Goodman, "American Family Limited Partnerships as an Estate Planning Tool?", Goodman on Estate Planning, Vol. VI, No. 3, 1997, p. 447: "In the 1970s Revenue Canada expressed the view that managing investments does not amount to carrying on a business, which is, of course, an essential element in the definition of a partnership. It based this view in part on two Exchequer Court decisions ... ."

Bernstein, "Is a Partnership a Separate Entity?", Tax Profile, Vol. 5, No. 9, May 1997, p. 99.

Joel A. Nitikman, "Understanding the Nature of Limited Partnerships", Business Vehicles, Vol. III, No. 1, 1996, p. 117.

Knowlton, "Real Estate Investment by Canadian Pension Funds", 1995 Corporate Management Tax Conference Report, c. 12: Includes a discussion of the two-tier structure.

Yaksich, "Essential Partnership Law and Related Issues Affecting the Use of Partnerships in Tax Planning", 1994 Corporate Management Tax Conference Report, c. 9.

Silver, "Vehicles for Acquiring and Holding Real Estate", 1989 Corporate Management Tax Conference Report, pp. 4:4-4:7: Discussion of distinction between partnership and co-ownership arrangement.

McKee, "The Distinction Between Joint Ventures and Partnerships", Canadian Current Tax, May 1985, p. C89: Cited in Woodlin Developments Ltd. v. MNR, 86 DTC 1116 (TCC) and in Laxton v. The Queen, 89 DTC 5327 (FCA).

Birnie, "Partnership, Syndicate and Joint Venture: What's the Difference?", 1981 Conference Report, p. 182.

Kellough, "The Business of Defining a Partnership under the Income Tax Act", 1974 Canadian Tax Journal, p. 190.

Subsection 96(1) - General Rules

Paragraph 96(1)(a)

Cases

Canada v. Robinson, 98 DTC 6232 (FCA)

Eighteen doctors practising as a partnership acquired new premises to carry on the medical practice as tenants-in-common, and sought to deduct their share of a tenant inducement payment made by the partnership to the individuals in their capacity of landlord of the partnership.

After noting (at p. 6234) that "in strict legal theory the true tenants under a lease entered into be a partnership are the individual partners existing as of the date of the lease", Robertson J.A. concluded (at p. 6236) "that the agreement to pay the tenant inducement payment of $1.2 million was of no legal consequence and that it cannot be considered an outlay or expense made for the purpose of gaining or producing income". He previously noted (at p. 6236) that had the co-tenancy consisted of 18 persons of which only five were members of the partnership, "then arguably a different legal result might have been reached on the basis that the element of 'bargain' was present".

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Incurring of Expense payments made from co-owners to partnership of same individuals were non-deductible 157

Norco Development Ltd. v. The Queen, 85 DTC 5213, [1985] 1 CTC 130 (FCTD)

The taxpayer was an equal partner with two associated corporations in a partnership (Noort Developments) which was engaged in an active business. Noort Developments paid deductible interest to an associated corporation (Noort Bros. Construction Ltd.), which treated such interest as Canadian investment income, on the basis that "subsection 129(6) applies only to amounts paid or payable to a corporation by another corporation so that it cannot possibly apply to the interest payments received by Noort Bros. Construction Ltd. from the partnership, Noort Devlopments (p. 5216)."

In finding that s. 129(6) so applied (so that the taxpayer was not entitled to the small business deduction as the active business income of the group was correspondingly increased), McNair J stated (at pp. 5217-8):

...the partnership, Noort Developments, is not a legal entity. Section 96 of the Act provides rules for the computation of partnership income. The partnership is envisaged as a separate person solely for the purpose of measuring the flow of income to the individual partners, which is then taxed in their hands.. It is the partners and not the firm itself which are the alleged subject of taxation.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 129 - Subsection 129(6) s. 129(6) applied to interest paid by active business partnership to related partner 184

See Also

Samarkand Film Partnership No. 3 & Ors v Revenue and Customs, [2017] EWCA Civ 77

rent received qua landlord rather than partner

In rejecting an argument that the determination of whether a partnership carried on a trade should take into account financing activities at the partner level, Arden LJ stated (at para. 72):

[T]he distinction between partnership activities and the affairs of individual partners is clearly recognised both in the authorities and in the legislation. ...[I]n Heastie v Veitch [1934] 1 KB 535...the issue was whether, in computing the profits of a partnership, a deduction was available in relation to the payment of rent to one of the partners who owned the premises from which the firm operated. ...This court held...that this test was satisfied, even though the rent was paid to one of the partners, because the payment was made to him in his capacity of landlord of the premises, not in his capacity of partner... .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 96 whether partnership exists while only preliminary partners 199
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Business non-trading business 363

MacKinlay v. Arthur Young McClelland Moores & Co., [1989] BTC 587 (HL)

Lord Oliver rejected a finding of the Court of Appeal that a firm of accountants could be regarded as a "notionally distinct entity" in order to assess the purpose of expenditures incurred by it in reimbursing the relocation expenses of its partners. "Partners are partners, however numerous; and mere numbers cannot in itself justify an attribution of a 'collective purpose' unjustified in the case of a small partnership."

Administrative Policy

29 January 2018 External T.I. 2017-0702731E5 - Patronage dividends and partnerships

partnership rather than member was taxpayer for patronage dividend purposes

Can a cooperative corporation, that is a member of a limited partnership, deduct patronage dividends computed on the basis of sales made by the partnership to its customers who are members of the cooperative corporation? In responding negatively, CRA indicated that this approach would be contrary to “customer” being defined in s. 135(4) as a customer of the “taxpayer,” which under the s. 96(1) assumptions was to be treated as the partnership rather than its member.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 135 - Subsection 135(4) - Customer a partnership is not fiscally transparent for patronage dividend purposes 112

19 November 2013 External T.I. 2011-0414201E5 F - Coop, ristournes, société de personne

customers of LP rather than of members

A coop holds an interest in a limited partnership whose members also are members of the coop. For purposes of s. 135, are the customers of the coop the LP or the customers of the LP? CRA stated (TaxInterpretations translation):

Subsection 135(1) provides a deduction in the computation of the income of a taxpayer for a taxation year when it pays an amount as "an allocation in proportion to patronage" ... ("Patronage Dividend"). ...

Paragraph 96(1)(a) provides that the amount of income, non-capital loss or net capital loss of a partner of a partnership is computed as if the partnership were a separate person resident in Canada. Given that subsections 135(1) and (2) envisage the deduction of a payment of a Patronage Dividend in the computation of the income of a partner, paragraph 96(1)(a) applies for the purposes of subsection 135(1) and (2). Consequently, when a Coop deals with an LP of which it is a partner ... the customer of the Coop is the LP and not the customers of the LP.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 135 - Subsection 135(1) a Coop dealing with an LP of which it is a partner has the LP as its customer, and not the LP customers 164

8 July 2013 External T.I. 2012-0458601E5 F - T1134 and inactive FA

partnership not a person for s. 233.4 purposes

Before indicating that, where a foreign affiliate is the general partner of a partnership, the $25,000 of gross receipts provided for in the definition of inactive FA in Form T1134 is calculated based on the gross revenue of the partnership rather than on the amount allocated by the partnership to the FA, CRA first stated:

[S]ubsection 96(1) does not deem a partnership to be a separate taxpayer from the partners for the purposes of the provisions of section 233.4.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 233.4 - Subsection 233.4(4) inactive FA gross receipts of $25,000 includes all partnership gross revenue 162

Tax Professionals Mini Round Table - Vancouver - Q. 10 (March 1993 Access Letter, p. 103)

Where one of the two equal partners of a partnership leases a building to the partnership, the partnership will be entitled to treat the full amount (as opposed to 50%) paid by it to that partner as a partnershp expense; leasehold improvements will be treated in a similar manner.

Articles

Thompson, "The Partnership as a Separate Person: Opportunities and Pitfalls", 1984 Corporate Management Tax Conference, c. 5.

Paragraph 96(1)(c)

Cases

Deptuck v. Canada, 2003 DTC 5273, 2003 FCA 177

S.69(1)(a) applied to reduce the capital cost to a partnership of depreciable property purchased by it to the property's fair market value rather than the higher purchase price given that the same individual controlled both the vendor and the general partner of the partnership (as well as being the sole initial limited partner at the time of the purchase). Noël J.A. stated (at p. 5276) that:

"A partnership must be regarded as a separate person for the purpose of computing income with the result that the rules prescribed in Division B (Computation of Income), including paragraph 69(1)(a), apply to a partnership as if it were a person."

Paragraph 96(1)(e.1)

Administrative Policy

89 C.R. - Q.38

Expenditures on scientific research and development incurred by a partnership must be claimed by the partnership. S.96(1)(d) excludes the partnership's s. 37 deductions from the amount of loss allocated to the limited partners.

Paragraph 96(1)(f)

Cases

Crestglen Investments Ltd. v. MNR, 93 DTC 462 (TCC)

partner could not also be an employee

In the course of finding that a corporation, that provided the management services of an officer and specified shareholder ("Cipora") to two rental-property partnerships of which Cipora was also a partner, did not carry on a personal services business, Hamlyn J stated (at p. 466):

[A] partner cannot be an employee of a partnership that is capable of entering into a contract of employment with the partnership and as a consequence an incorporated employee could not become an employee of a partnership [of which] the incorporated employee was a partner.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 125 - Subsection 125(7) - Personal Services Business an individual partner could not also have been an employee - also her remuneration was at risk 197

Symes v. The Queen, 89 DTC 5243 (FCTD), rev'd 91 DTC 5397 (FCA)

rev'd on other grounds 91 DTC 5397 (FCA)

In finding that a partner of a law firm was permitted to deduct the salary of her nanny on her personal return, rather than on the partnership's financial statements, Cullen J. stated "in partnership situations, it does not matter where one claims an expense, as long as it is a proper deduction."

The Queen v. Boorman, 77 DTC 5338, [1977] CTC 464 (FCTD)

A partnership agreement among practising surgeons was found, in light of all the surrounding circumstances, including the fact that a newly-admitted partner effectively was not required to make a capital contribution to the partnership, to provide that payments to a departing partner were of income. Such payments, accordingly, were income to the departing partner rather than the remaining partners.

See Also

594710 British Columbia Ltd. v. The Queen, 2016 TCC 288

LP profits can be allocated to purchasing partner at year end

Income account treatment of the profits realized by a condo-project limited partnership (HLP) was avoided through the corporate partners (the Partnercos) of HLP paying safe income dividends (out of the realized but unallocated condo profits) to their respective Holdco shareholders, followed by a sale by the Holdcos of the Partnercos to a public company (Nuinsco) with substantial resource pools. The income of the LP for the year in which the condo sales had occurred was allocated to Nuinsco following the winding up into it of the Partnercos.

Rossiter CJ rejected CRA’s GAAR challenge, which was based on GAAR being applied to the Partnercos' avoidance of an allocation to them of the condo profits, then to the Holdcos' avoidance of the application to them of s. 160 respecting what should have been Partnerco tax liabilities. He found that, at the Partnerco level, there was no abuse of s. 111(5), which dealt with loss trading, not profit trading. Nor was there an abuse of the partnership income allocation provisions of ss. 103 and 96 – it was totally conventional that close to 100% of the income of the LP was allocated to the corporation (Nuinsco) which was the limited partner at the partnership (HLP) year end.

In this regard, he stated (at paras. 99, 109):

In this case, the allocation scheme in the HLP partnership agreement had not changed since the creation of the partnership. … There is no indication that this scheme was chosen for tax purposes or that it was unreasonable. …

[N]othing in the partnership regime prevents a partnership agreement from basing its allocation of income on the membership at its fiscal year-end. …

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 160 - Subsection 160(1) indirect transfer of property to taxpayer did not entail departure from FMV 442
Tax Topics - Income Tax Act - Section 245 - Subsection 245(2) GAAR reassessment must reflect the abuse 305
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) GAAR did not apply to the sale to a lossco of partner corps with pending condo sale profit allocations 626

Witt v. The Queen, 2008 DTC 4322, 2008 TCC 407

A convertible hedging strategy involving the taxpayer and his corporation ("RIW"), which previous jurisprudence entailing similar arrangements characterized as being a partnership, entailed the taxpayer shorting shares in corporations and RIW going long convertible preferred shares of those corporations. The taxpayer and RIW agreed that profit or loss from the hedge transactions ("hedge pool transactions") would be divided equally; whereas "cash flow pool" payments such as dividends or interest, made or received by a partner would be for that partner's account alone. As a result of one of the subject corporations ("TWC") announcing a spin-off of a subsidiary ("TWA"), the taxpayer sold short further shares of TWC (in order to bring the hedging arrangements back into balance to reflect the fact that the conversion ratio for the convertible preferred shares held by RIW was increased in order to take into account the diluted effect of the distribution of the TWA shares); and the proceeds of these additional short sales were used to purchase shares of TWA to cover the short position in the TWA common shares of the taxpayer. Bowie J. found that the outlay to purchase the TWA shares was made in order to keep the hedge in balance rather than to pass on income through to the lender of the TWC shares, so that such amount should be taken into account in computing the hedge pool profit or loss rather than the cash flow pool.

Bowie J. also stated (at para. 4):

"Partners are, of course, free to agree to divide the fruits of their endeavours in any way that commends itself to them. In this case there was no written partnership agreement, and no evidence of an oral agreement that would conflict with this additional fact."

Locations of other summaries Wordcount
Tax Topics - General Concepts - Evidence 41

XCO Investments Ltd. v. The Queen, 2005 DTC 1731, 2005 TCC 655

Before concluding that the method of income allocation between the taxpayers and another partner of a partnership was unreasonable under s. 103(1), Bowman C.J. indicated that, in the absence of s. 103(1), it would have been permissible for the third party to share only in the income attributable to a specific rental property of the partnership:

"I can see no legal impediment to limiting one partner's participation in the Partnership's income and property to one part of the Partnership's business. Partners are free to create unorthodox means of dividing the profits and assets of the Partnership without invalidating these provisions."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 103 - Subsection 103(1) 126
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) GAAR could be applied to unreasonable partnership allocation 174

Blais v. The Queen, 2005 TCC 417 (Informal Procedure)

partnership cannot a partner qua employee

In finding that a Quebec general partnership between a husband and wife could not deduct "salary" of $27,600 paid to the husband, Bédard J stated (at para. 30):

Thus, with no legal personality separate from its partners, a general partnership cannot hire one of its partners as an employee, given that a person may not employ himself.

Card v. The Queen, 2000 DTC 1976 (TCC)

After the taxpayer withdrew from his law firm effective the end of its fiscal year the firm allocated income to him for that year based on his share of income of the partnership before excluding therefrom the value of work-in-progress at the end of the fiscal year. In filing his return the taxpayer deducted from this amount an amount in respect of work in progress in light of a determination of the firm that it would not allocate any work in progress to him. Instead, the firm allocated a substantial amount of work in progress to a partner who never docketed time.

Beaubier TCJ found (at p. 1981) that "the Income Tax Act requires that the partnership's allocation is the one which must be assessed upon".

Major v. Brodie & Anor, [1998] BTC 141 (Ch. D)

The taxpayers used borrowed money to make a contribution of capital to a partnership (Skeldon Estates) which was a member of a second partnership (Murdoch) which carried on a farming business utilizing farms owned by Skeldon Estate and the second partner of Murdoch.

The Inspector of Taxes failed in a submission that the taxpayers were not eligible for an interest deduction under s. 362(1) of the Income Incorporations Taxes Act 1988 on the ground that the borrowed money contributed to Skeldon Estate was not "used wholly for the purposes of the trade ... carried on by the partnership [i.e., Skeldon Estate]" but, rather, was used for the purposes of the trade carried on by Murdoch. Park J. held (at p. 152) that as "a trade carried on by a partnership is a trade carried on by its members and by each of them" and the borrowed money was "used wholly for the purposes of the trade carried on by W. Murdoch & Son", it followed "that the money [was] thereby used wholly for the purposes of the trade carried on by the partners in W. Murdoch & Son." He went on to indicate (at p. 153) that under English law, where A and B are the partners in partnership X, and X and another person (C) form another partnership, partnership Y, A and B are considered to be partners in partnership Y in their capacity as members of partnership X.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 102 - Subsection 102(2) top tier partners are lower tier partnership members 234
Tax Topics - Income Tax Act - Section 253.1 top tier partners are lower tier partnership members 234
Tax Topics - Statutory Interpretation - Provincial Law 91

Roy v. The Queen, 97 DTC 494 (TCC)

A partnership was dissolved by operation of law partway through its fiscal year as a result of the taxpayer and another partner selling their interest in the partnership to the remaining partner. There was income for that year as a result of the billing of work-in-progress. The sale agreement was silent as to how income of the partnership for that year should be allocated to the partners, although the partnership agreement described in general terms the sharing of profits by each of the partners.

In finding it was appropriate that all of the income of the partnership for that fiscal year should be allocated to the remaining partner, Archambault TCJ. noted that all of the book loss had been allocated for accounting purposes to that partner and that the two selling partners had transferred all of their rights to the remaining partner including the rights to partnership revenue.

Central Supply Company (1972) Ltd. v. The Queen, 95 DTC 434 (TCC)

membership for one day at year end respected

The corporate taxpayers, were found to have become members of a partnership (that had incurred CEE) for one day at the end of the partnership's taxation year given that they had complied with all the formal requirements of the Partnership Act (Alberta) before becoming limited partners, and given that the existence of the partnership was not at issue. Bell TCJ. asked (p. 445):

"How can a person be said to be unable to become a member of an extant partnership when that person did everything required by the very legislation by virtue of which it was created, in order to become a member?"

MacKinlay v. Arthur Young McClelland Moores & Co., [1989] BTC 587 (HL)

'salary" to partner is part of profits division

Lord Oliver stated (p. 589) that "if, with the agreement of his partners, [a partner] pays himself a 'salary', this merely means that he receives an additional part of the profits before they fall to be divided between the partners in the appropriate proportions. But the 'salary' remains part of the profits."

Rye v. Rye, [1962] A.C. 496 (HL)

contract between a partner and partnership is invalid

The appellant and his brother, who were the two partners of a law firm, moved the office of the partnership to premises owned by them as equal tenants in common. In order to adjust for the fact that their partnership interests were not also equal, they commenced to charge the partnership "rent" for the use of their premises.

S. 72(3) of the Law and Property Act 1925 (similar to s. 41 of the Conveyancing and Law of Property Act (Ontario)) provided that "a person may convey land to or vest land in himself." It was accepted that "the singular ‘person' must include the plural so that two persons may…convey land to, or vest lands in themselves" (p. 505, per Viscount Simonds).

Lord Denning stated (at p. 513) that at common law one or two persons could not covenant with himself or themselves and "neither could one person covenant with himself and others jointly." He then went on to find (at p. 514) that s. 72(3) did not alter this result so that two persons "cannot grant a tenancy to themselves."

Administrative Policy

21 June 2017 External T.I. 2016-0678361E5 F - Capital Dividend Account

a negative ACB gain retains its character when allocated

The addition to a private corporation’s capital dividend account does not include any portion of a “negative ACB” gain under s. 40(3.1).

A taxpayer unsuccessfully submitted that a negative ACB gain realized by an upper-tier LP on its units in a lower-tier LP should not be treated, when allocated to the upper-tier LP’s partners, as a s. 40(3.1) gain for CDA purposes. CRA stated that a partnership’s income, when allocated to its partners, “will generally retain its nature and characteristics.”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account - Paragraph (a) - Subparagraph (a)(i) - Clause (a)(i)A) negative ACB gain realized by a partnership is subject to the exclusion for s. 40(3.1) gains when allocated to a partner 218

11 October 2013 Roundtable, 2013-0495891C6 F - Partnership's capital gains allocation - CGE

capital gains from CGD-eligible property are separately allocated to partner

Where a partnership has realized only $150,000 in capital gains from the disposition of capital property eligible for the capital gains deduction and $200,000 in capital losses, can 50% of each of these amounts be allocated separately to a 50% partner who personally realized $200,000 in capital gains that were not eligible for the CGD so that the net result to him would be a capital gain of $150,000 eligible for the CGD? In responding affirmatively, CRA stated:

For the purposes of section 3, the amount of a partnership's income from each source is the taxpayer's income from that source by virtue of paragraph 96(1)(f).

Thus, the amount of the taxable capital gain or allowable capital loss resulting from the disposition of each property by the partnership would, in its turn, constitute the taxable capital gain or allowable capital loss of the member for the purposes of paragraph 3(b), and would be taken into account in computing the deductible amount in computing taxable income by virtue of section 110.6.

19 March 2013 Internal T.I. 2010-0385931I7 - Taxable Canadian property and Partnerships

partnership TCP gain but not TCP status attributed to partners

Where a partnership disposed of a 25% shareholding in a public real estate company which was taxable Canadia propery to it, a non-resident partner was thereby deemed to have realized a pro rata portion of the taxable capital gain realized by the partnership from the disposition - but the pre-July 11, 2013 definition of “taxable Canadian property” in s. 248(1) did not deem the partnership property to be taxable Canadian property to the non-resident partner. Accordingly, the partner was not subject to tax on such taxable capital gain.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 116 - Subsection 116(1) partnership look-through 266
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Taxable Canadian Property - Paragraph (e) TCP rules not applying to foreign partners of partnership 266

29 February 2016 External T.I. 2015-0613961E5 - Patronage dividends - partnership income

flow-thrugh of LP income for s. 135 purposes

CRA indicated that in the determination of the “income of the taxpayer for the year” for purposes of applying the definition in s. 135(4) of "income of the taxpayer attributable to business done with members" to a cooperative (the taxpayer):

a taxpayer’s share of partnership income from a Canadian limited partnership is required to be included in computing its income for the year for purposes of [that] definition… .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 135 - Subsection 135(4) - Income of the Taxpayer Attributable to Business Done With Members flow-through of partnership income to cooperative 221

2014 Ruling 2013-0516071R3 - Reorganization

transfer of profitable LP to Lossco followed by allocation of previously-earned profits of LP to Lossco

CRA ruled on a transaction in which (to simplify somewhat) the units of an LP (LP1) which already has earned profits for the year will be transferred to the Lossco before the fiscal year end of LP1 – so that most of those LP1 profits will be allocated to Lossco. The partnership agreement for LP1 will be amended "to clarify that it allocates its income for income tax purposes only to those partners that are partners at the end of its fiscal period."

See summary under s. 111(1)(a).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 111 - Subsection 111(1) - Paragraph 111(1)(a) transfer of already-earned profits to Lossco by transfer of LP units with income allocation at LP year end 278
Tax Topics - Income Tax Act - Section 34.2 - Subsection 34.2(14) transfer by Profitco of profitable LP to Lossco which is affiliated by virtue of common NR indirect parent 92

25 April 2013 Internal T.I. 2013-0478511I7 F - Distribution à un commanditaire

allocated capital gains retained their character unless re services performed by partner in course of separate business

A limited partnership engaged principally in identifying and acquiring commercial real estate realized a capital gain from the disposition of real estate and distributed the gains to its partners including the taxpayer, who was a limited partner. In response to an inquiry as to whether the capital gains retained their character as such when allocated to the taxpayer (the "Limited Partner"), CRA stated (TaxInterpretations translation):

Since the partner is deemed to itself realize its share of the partnership income, it thereby benefits from all the associated advantages tied to the character of the income generated, which retains its characteristics at the level of the partner. Since the partnership serves only as a conduit for its partners, the income which is allocated to the latter retains its character. ….

If, in the case described, there in fact is an allocation of capital gains of the SEC to its partners, we believe it would be difficult to maintain that they do not retain their character in the hands of the latter, including the Limited Partner. ...

Respecting the possibility of recharacterizing the distribution as a fee, the Directorate stated:

…[W]e would be prepared to allow a deduction in computing the income of a partnership for fees paid to a partner if the fees are paid in consideration for services provided to the partnership by the partner acting other than in its capacity as a partner (i.e., the services are not related to the ownership of the partnership interest). That is, the services are provided by the partner in the course of carrying on a business separate from the business carried on by the partnership.

Thus, if the partnership agreement and all other relevant facts are such that it can be concluded that the amounts paid by SEC to the Limited Partner are in return for services rendered, it would be possible at that time to consider the inclusion of such amounts in computing the partner's business income pursuant to subsection 9(1) to the extent that the services are provided by the Limited Partner in the course of carrying on a business that is separate from the business operated by the SEC. Otherwise, the fair market value of any service contribution by the Limited Partner would be added to the ACB of its partnership interest.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Real Estate real estate capital gains flowed through to limited partner retained character 216
Tax Topics - Excise Tax Act - Section 272.1 - Subsection 272.1(1) distinction between return on partnership investment and services rendered by partner in the course of a separate business 279
Tax Topics - Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(e) - Subparagraph 53(1)(e)(iv) services rendered by limited partner to LP gave rise to ACB increase if no s. 9 income inclusion for fee income 127

12 March 2012 External T.I. 2011-0431171E5 F - Répartitions des revenus et pertes entre associés

In response to a question as to whether a partnership may allocate gains and losses among its members on the basis of potential consequences to them e.g. where limited partners each receive a distinct interest to which income is allocated on the basis of capital cost allowance calculated on the basis of the undepreciated capital cost related to each type of partnership interest CRA indicated that disproportionate allocations are contrary to the rules in s. 96(1), which contemplates that partnership income or loss (including CCA deductions) is calculated at the partnership level, with only the results thereof allocated under s. 96(1)(f) or (g).

Income Tax Technical News, No. 30, 21 May 2004

general partner cannot contract on its own account with partnership

Remuneration received by a partner for work performed in the course of the partnership business is properly treated as a distribution of income or a draw against capital (given that an agreement between a partnership to employ a partner would be an attempt by the particular partner to enter into a contract of employment with himself or herself) and would not be deductible in computing partnership income . However, CRA also stated (FN 9):

It is important to note that the prohibition against entering into a contract with oneself may be overridden by statute. For example, section 60 of the Partnership Act (Alberta), section 60 of the Partnership Act (Saskatchewan) and section 13 of the Limited Partnership Act (Nova Scotia) authorize a limited partner to loan money to and transact other business with the limited partnership. See also paragraph 12(2)(b) of the Limited Partnership Act (Ontario) which authorizes a limited partner to act as a contractor for the limited partnership.

27 August 1997 T.I. 972281

"Notwithstanding the Robinson Trust appeal, it is still Revenue Canada's general view that limited partners would be regarded as carrying on an active business provided the partnership itself is carrying on an active business."

31 March 1994 External T.I. 5-94064 -

Where a corporation ("A") has successored pools that relate solely to Property A, and unsuccessored pools relating to to other property additions and exploration and development expenses incurred subsequent to the relevant acquisition of control, and A then contributes Property A and all its other non-producing property to a partnership, s. 96(1)(f) would apply so that A's share of the income from the partnership would retain its character as income attributable to production from Property A for the purposes of ss.66.7(3)(b)(i)(C), 66.7(4)(b)(i)(A)(II) and 66.7(5)(b)(i)(A)(II).

91 C.R. - Q.2

A partner's share of production income retains its character as such for purposes of the s. 66.7 successor rules.

85 C.R. - Q.46

The partner's share of income in bona fide situations will be determined in accordance with the partnership agreement notwithstanding that he was not a partner throughout the fiscal period.

81 CR - Q.23

A partner who is a member of a partnership that carries on an active business is carrying on that active business and is using the partnership assets in that business. [C.R.: 248(1) - "small business corporation"]

Articles

Bourgeois, "Some Tax Considerations in Real Estate Development and Construction: Soft Costs, Capitalization, Inventory Write-Downs and Characterization of Partnership Income", 1995 Corporate Management Tax Conference Report, c. 4.

Includes discussion of whether the characterization of income derived from real estate is affected by the holding of the real estate by a partnership.

Paragraph 96(1)(g)

Cases

Brown v. Canada, 2003 DTC 5298, 2003 FCA 192 (FCA)

In finding that an acquisition of property by a partnership of which the taxpayer subsequently became a member was subject to paragraph 69(1)(a) of the Act, with the result that the capital cost of the acquired property was reduced, Rothstein J.A. stated (at p. 5302) that:

"Any matter relevant to the computation of partnership loss, including the effect of any acquisition or disposition of property, must be determined as if the partnership is a separate person ... . The question is not whether an individual who decided to become a member of the partnership that was acquiring property made his decision to enter the partnership independently."

Chutka v. Canada, 2001 DTC 5093 (FCA)

A sale of equipment by a corporation to a partnership whose general partner was wholly-owned by the same individual who owned the vendor corporation was found to be a non-arm's length transaction, with the result that s. 69(1)(a) applied to reduce the capital cost of the equipment to the purchasing partnership to the equipments fair market value. Linden J.A. found (at p. 5098) that "the fiction of a partnership as an entity separate from the partners is temporary and does not extend to colour the true legal nature of transactions at the time they are entered into by a partnership" and that both the vendor corporation and the general partner were persons and taxpayers within the meaning of the Act and were related persons, so that s. 251 deemed the transaction to occur not at arm's length.

The Queen v. Signum Communications Inc., 91 DTC 5360 (FCA)

A limited partner, whose capital invested was $2500, was entitled to deduct a partnership loss of $111,870 which was allocated to it. After quoting Reed v. Young, [1986] BTC 430, MacGuigan J. noted that the Court was particularly concerned that the limitation of a taxpayer's loss to the amount "at risk" "could lead to the unfortunate result that a limited partner might end up being taxed over a number of years at more than he earned, no loss carry-forward being available".

See Also

Mazurkewich v. The Queen, 2007 DTC 1496, 2007 TCC 517 (Informal Procedure)

In allocating the losses incurred by a partnership comprising two men and their wives, the accountant allocated notional wages to the two wives, on the basis that they spent more time on the operations than their husbands, with the result that most of the partnership losses were allocated to the husbands rather than the wives. In rejecting this allocation method, Bowman C.J. noted that nothing was in fact paid to the wives, and this method resulted in an allocation of loss that was not in accordance with the partnership agreement, which contemplated allocation of profits and losses in accordance with the four equal partnership interests. Bowman C.J. also stated (at para. 14) that "generally I should have thought it open to question whether salary or wages paid by a partnership to a partner could be deducted as a business expense of the partnership".

Jannock Ltd. v. The Queen, 96 DTC 1500 (TCC)

The taxpayer was able to deduct the losses allocated to it as a result of its acquisition of substantially all the interests in a partnership principally owned by Canadian pension funds, following which the partnership sold its assets to a newly-formed partnership indirectly owned by the same pension funds.

Archbold v. The Queen, [1995] 1 CTC 2872 (TCC)

After the Minister had disallowed the deduction by a husband/wife partnership of "commissions" paid to the wife equal to 10% of all sales, Lamarre Proulx TCJ. referred the assessment back to the Minister for reassessment on the basis that the payments were deductible as salary.

McComb v. MNR, 93 DTC 471 (TCC)

By virtue of his failure to rescind his subscription to a limited partnership after becoming aware that the offering memorandum contained a material mis-statement, the taxpayer became liable under s. 74 of the Partnership Act (B.C.) as a general partner. Accordingly, the taxpayer was able to deduct his share of certain losses of the partnership notwithstanding that, in light of their awareness of the misrepresentation, the general partners (through a trustee) refused to cash the cheque or realize upon the promissory note provided by the taxpayer in connection with his subscription.

Ward v. The Queen, 88 DTC 6212, [1988] 1 CTC 336 (FCTD)

Reed v. Young was followed in finding that no "at risk" principle applied to the determination of the quantum of expenses incurred by members of a real estate joint venture.

Reed v. Young, [1986] BTC 242 (HL)

The loss of a limited partner of a partnership in the business of producing films was the portion of the total partnership loss allocated to her by the partnership agreement, and was not limited to the amount of her capital contribution. "The assessment of tax on individual partners is by reference to their respective shares as set out in the partnership deed and has no necessary relation to what may ultimately turn out to be the proportions in fact in which the partner is called upon to contribute to payment of the firm's debts."

Administrative Policy

Income Tax Technical News, No. 30, 21 May 2004

Although there is no impediment to the creation of partnership interests that carry different entitlements to share in the income or other attributes of the partnership, the sharing of these tax attributes is subject to section 103.

13 February 2003 Internal T.I. 2002-017691 -

"Although it is not possible for a partner to be allocated an amount of income or loss greater than the income or loss realized by a partnership, we are of the view that, if the taxpayers relied on IT-138R to their detriment, the TSO has the discretion to accept the taxpayers' filing position for the taxation year in question."

23 May 2002 Internal T.I. 2002-013279 -

The two partners of a farming partnership were a husband who worked full-time on the farm receiving a "salary" of $20,000 per annum and his wife who earned $30,000 per annum of off-farm employment income in respect of which she worked 10 hours a day. The partnership loss was $30,000, not $50,000, which would be split on a 50-50 basis before taking into account that under s. 103(1.1) an equal division was not reasonable unless the wife was providing disproportionate capital to the partnership. "Where an amount has been distributed to a partner in any form, the amount can only be paid as the partner's share of the partnership's income or as a withdrawal from the partnership's capital, and not as a deductible business expense ... . Accordingly, where a distribution made to a partner exceeds the partner's share of the allocable partnership income, the excess would be considered to be a withdrawal from capital".

15 May 2002 External T.I. 2001-0103605 F - Prêt par un Associé à une Société

Is the interest on a loan made to a partnership by a partner deductible under s. 20(1)(c)? CRA responsed (TaxInterpretations translation):

The question as to whether one of the partners of a partnership has made a loan or contribution to the partnership is a question of fact which cannot be resolved without an examination of all the relevant facts, and the applicable non-tax law (the Quebec Civil Code, common law, etc.). To the extent that there is a valid loan made by a partner of a partnership and the conditions contemplated in paragraph 20(1)(c) are satisfied, the interest on the loan is deductible in the calculation of the income of the partnership and does not constitue a distribution of profits of the partnership.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) validity of partner loan 123

6 March 1991 Memorandum (Tax Window, No. 1, p. 11, ¶1135)

Discussion of a Canadian resident becoming a partner in a non-resident partnership that owns depreciable property whose historical cost exceeds their fair market value at the time he became a partner, with the result that the Canadian resident will be allocated a loss as a result of the relatively high CCA claims at the partnership level.

11 September 1990 T.I. (Tax Window, Prelim. No. 1, p. 20, ¶1008)

If a partnership expends amounts on research and development that are not described in s. 37 but which are deductible under s. 9, they will not be subject to the restrictions in s. 96(1)(g).

89 C.R. - Q.38

RC is appealing the decision in Signum and is continuing to reassess based on the positions set out in paragraph 20 of IT-138R.

Subsection 96(1.8)

Administrative Policy

5 October 2018 APFF Roundtable Q. 12, 2018-0768831C6 F - Tax on Split Income and Partnership

having non-contributing children in a family portfolio investment partnership subject to potential challenge under ss. 74.1 and 96(1.8)

CRA confirmed that the tax on split income is inapplicable to a family partnership that invested in the stock market where the children had not contributed anything to the partnership or participated in the trading decisions or other management decisions, given the exclusions from “split income” for dividends on shares listed on designated stock exchanges and for taxable capital gains realized on such shares. However, CRA went on to indicate that given such lack of contribution of the children, it would review the application of inter alia ss. 103(1). 103(1.1), 74.1 and 96(1.8).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 120.4 - Subsection 120.4(1) - Split Income - Paragraph (a) - Subparagraph (a)(i) family partnership investing in designated stock exchange shares not subject to TOSI rules 132
Tax Topics - Income Tax Act - 101-110 - Section 103 - Subsection 103(1.1) having non-contributing children as members of a family stock market partnership is subject to challenge under s. 103 81

Subsection 96(1.01) - Income allocation to former member

Administrative Policy

9 October 2015 APFF Roundtable Q. 16, 2015-0595801C6 F - At-risk amount

life is tough in the big city

CRA noted that there is no similar ACB-adjustment relief to that in s. 96(1.01)(b)(ii) where there is a disposition of substantially all (e.g., of 99%) of the partnership interest partway through the year.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 96 - Subsection 96(2.2) - Paragraph 96(2.2)(a) a part disposition of a partnership interest results in an anomalous pro rata reduction in the partner’s at-risk amount for the year of disposition 131

14 June 2012 External T.I. 2012-0433281E5 - Partnership requesting a change to FPE

no income cut-off required when partner leaves

After noting that although under s. 249.1(7) a change in fiscal year end is required to be approved by the Minister, "a change to the fiscal period of a partnership is no longer necessary to address the problems associated with a disposition of partnership interests in the middle of a fiscal period," CRA noted:

Proposed paragraph 96(1.01)(a) does not require that partnership income or loss be calculated immediately after a member leaves the partnership. Rather, the income or loss allocation, including that of the former member, continues to be calculated after the end of the partnership's fiscal period. Further, proposed new paragraph 96(1.01)(b) clarifies that an income or loss allocation for the stub period during which a taxpayer was a member is included in the calculation of the adjusted cost base of the partnership interest at the time the former member disposes of the interest or a residual interest.

4 April 2007 External T.I. 2006-0214411E5 - ACB of partnership

income is allocated to the departing partner for the partnership year of departure but with ACB adjustment made at time of disposition

Mr. X acquired a 1/3 interest in a calendar year professional partnership from two existing arm’s length partners on January 1, 2004, for $200,000, and then transferred his partnership interest under s. 85(1) to a newly-incorporated professional corporation on June 1, 2006. Do ss. 96(1.01) and 53(1)(e)(i) apply to the income earned from January 1, 2006, to May 31, 2006? CRA responded:

If the partnership agreement provides for an allocation of income or loss in the year a partner withdraws, the income would be allocated, for purposes of section 96, in respect of that year to that partner as outlined by the agreement. …

Proposed paragraph 96(1.01)(a) does not require that partnership income or loss be calculated immediately after a member leaves the partnership. The income or loss allocation, including that of the former member, continues to be calculated after the end of the partnership's fiscal period.

Proposed paragraph 96(1.01)(b) clarifies that the income or loss allocation for the final and/or partial period is included in the calculation of the ACB of the partnership interest under subparagraph 53(1)(e)(i). … Since adjustments to the ACB of a partnership interest related to the income allocation are normally made on the first day of the following fiscal period, this subparagraph mandates that the ACB be adjusted at the time the former member disposes of the interest. As a result, the partial and/or final period income is included in the ACB of the partnership interest prior to the section 85 rollover into the corporation.

Subsection 96(1.1) - Allocation of share of income to retiring partner

Cases

The Queen v. Lachance, 94 DTC 6360 (FCA)

At the time of his retirement from a professional partnership carrying on business in nine provinces, the taxpayer received a payment of approximately $110,000 to which s. 96(1.1) applied. In finding that such income was deemed by virtue of s. 96(1)(f) to have been earned in the nine provinces, rather than solely in the taxpayer's province of residence (Quebec), Hugessen J.A. noted that it was not necessary for s. 96(1.1) to state that it applied for purposes of the abatement under s. 120(4) given that s. 96(1.1) applied for purposes of s. 96(1):

"The deeming provision in subsection 96(1.1) does not need to go further than subsection 96(1), because the latter subsection determines how a taxpayer to whom it applies must compute his or her income, and that computation is, in turn, necessarily reflected in the computation of the taxpayer's taxable income and tax." (p. 6364)

Dacen v. The Queen, 89 DTC 5297 (FCTD)

taxpayer not bound by subsequent determination by remaining partners to increase the amount allocated to him

An agreement which the taxpayer entered into with a firm of chartered accountants with respect to his withdrawal from the firm, which was effective one month before the date of the agreement, included an Appendix which showed his share of partnership income for the fiscal year of the partnership ending after the time of the withdrawal as $38,652, which he later included in his return in respect of that year. The firm later prepared unaudited financial statements showing his share of income for tax purposes of the firm for that period of $52,487 (a figure which apparently did not reflect a deduction for closing work in progress) and the Minister reassessed on the basis that this amount represented the taxpayer's share of the income for tax purposes of the firm.

After noting (at p. 5303) the statement in Delesalle that s. 96 "is not intended to permit the continuing partners to change the original agreemen for the allocation of a share of the income or loss of the partnership," Muldoon J. held that the taxpayer's share of the income for purposes of the Act of the firm was $38,652

Delesalle v. The Queen, 85 DTC 5613, [1986] 1 CTC 58 (FCTD)

departing partner required to agree to the s. 96(1.1) allocation

Before turning to s. 96(1.1), McNair J stated (at p. 5619) that the issue before him was whether the taxpayer's withdrAwal as a partner from a firm of architects "was accomplished on the basis of an allocation of income, including his interest in the unbilled work in progress, or rather was a purchase or buyng back of his partnership interest which included as part thereof his interest in the partnership's work in progress," and concluded that the payment made to the taxpayer was a withdrawal of capital.

In then turning to s. 96(1.1), he rejected the proposition that the remaining partners could make a subsequent agreement to allocate income under s. 96(1.1) to the departed partner, stating (at p. 5621) that s. 96(1.1) applies:

to the situation where the members of a partnership have agreed to allocate a share of the income or loss of the partnership to a taxpayer who has ceased to be a member of the partnership but who is nevertheless deemed to be a continuing member thereof solely for the purpose of the allocation of such income or loss as initially agreed by all the partners. The wording of clause 96(1.1)(a)(ii)(B) is not intended to permit the continuing partners to change the original agreement for the allocation of a share of the income or loss of the partnership to the retiring partner but rather is meant to cover the continuation of another partnership from the predecessor firm whereby the current members thereof can accede to the agreement for allocation so long as one or more of them were members of the former partnership.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Partnership Interests partnership interest buyback not distribution 60
Tax Topics - Statutory Interpretation - Absurdities 35

Laferrière v. The Queen, [1985] 2 CTC 190 (FCTD), aff'd 94 DTC 6423 (FCA)

S.96(1.1) was not applicable to the appellant's share of a partnership's work-in-progress, sold by him as part of the sale of his partnership interest to the two senior partners of the firm. The sale agreement was not among all the partners of the firm, and there was no agreement that the appellant had the right to receive, after his departure, the revenues that would be earned when the work-in-progress was billed. The work-in-progress, when it was realized, accordingly constituted income in the hands of the purchasers rather than the appellant.

It was indicated, obiter, that the Slan decision (81 DTC 794, [1981] CTC 2880) was ill-founded to the extent that it decided that the agreement of the quitting partner was not required in order for s. 96(1.1) to apply "it is inconceivable that the Act ... permits partners ... to minimize their own taxes while maximizing the imposition on one who has departed from the partnership" [rough translation].

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Partnership Interests partnership interest sale by non-capital partner 37

Administrative Policy

9 October 2015 APFF Roundtable Q. 17, 2015-0595811C6 F - Application of 96(1.1)

income allocated under s. 96(1.1) can have specific sourcing, e.g., as dividend income

CRA declined to comment specifically on a scenario in which a Canadian professional partnership, which holds a 70% interest in a corporation carrying on a business ("Opco"), agrees with a retiring partner under s. 96(1.1) that he will preserve a right to a share of the dividends that may eventually be paid by Opco to the partnership. However, CRA noted that "the presumptions in subsection 96(1), in particular, those respecting the nature of items of income, should apply respecting the part of the income shared by each partner of the partnership, including the departing partner."

CRA also noted that the departing partner generally could claim a capital loss if the only amounts he would thereafter receive from the partnership would be a share of Opco dividends determined in accordance with the s. 96(1.1) agreement, if he happened to have a positive adjusted cost base for his partnership interest after taking into account all his partnership distributions.

10 September 2014 External T.I. 2014-0522551E5 - Income for retired partner

retroactive effect of agreement to require s. 34.1(1) inclusion

The "Retired Partner" retired from a partnership of individuals (the Partnership – which had an off-calendar fiscal period ending January 31 pursuant to an election under s. 249.1(4)) at the end of its January 31, 2014 fiscal period. In January 2015 (i.e. before the end of the fiscal period ending January 31, 2015), all of the partners, including the Retired Partner, enter into an agreement (the "Retirement Agreement") to allocate a share of the income of the Partnership to the Retired Partner starting with the fiscal period ending January 31, 2015. Would the Retired Partner be required to report additional income under s. 34.1(1) representing 11 months of income for the period to December 31, 2014 – or could such income be deferred?

After noting that under s. "96(1.6), a retired member is deemed to carry on the business of the partnership in Canada at any time that the retired member is deemed to be a member of the partnership pursuant to paragraph 96(1.1)(a)," CRA stated:

[A] taxpayer who at any time ceased to be a member of the partnership is deemed [by s. 96(1.1)] to be a member of the partnership provided that the members have entered into an agreement to allocate a share of the income or loss of the partnership. Since the time referred to in paragraph 96(1.1)(a) is the time that the retired member ceased to be a member, it is our view that a retired member would be subject to this provision starting at that time even if the agreement referred to in that provision is entered into after that time. …[Accordingly] subsection 34.1(1)… would apply to the Retired Partner in the 2014 taxation year… .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 34.1 - Subsection 34.1(1) retroactive effect of s. 96(1.1) agreement to require s. 34.1(1) inclusion 262

29 April 2003 External T.I. 2003-00646 -

Allocations made to the spouse of a retired partner pursuant to s. 96(1.1) would, depending on the circumstances, also be included in the income of the retired partner under s. 56(2) or (4). S.248(28) would not prevent this result.

26 February 2003 External T.I. 2002-017833 -

In light of s. 102(2), s. 96(1.1) may apply to a retiring member of a partnership that is itself a partnership.

26 July 1991 T.I. (Tax Window, No. 7, p. 10, ¶1375)

S.96(1.1) does not deem a retired partner to be a member of the partnership for purposes of the definition of "specified member" in s. 248(1). Accordingly, income allocated to a retired partner pursuant to s. 96(1.1) is not "investment income" for CNIL purposes.

16 November 1990 T.I. (Tax Window, Prelim. No. 2, p. 8, ¶1052)

Where the partnership agreement provides for an income allocation to the retiring partner in the year of death equal to the life insurance proceeds received by the partnership, s. 96(1.1) will apply to the allocation to the deceased partner's estate notwithstanding the tax-free receipt of the life insurance proceeds to the remaining partners and the increase in the ACB of the partnership interest.

86 C.R. - Q.53

The retirement agreement determines whether s. 96(1.1) or s. 98.1 applies, and the period over which a retired partner is to receive payment is not a factor.

84 C.R. - Q.26

S.96(1.1) can't be applied to allocate the income of a proprietor to his former partner.

84 C.R. - Q.27

Since the former partner is not actively engaged in business, income allocated to him pursuant to s. 96(1.1 is not included in earned income as defined in s. 146(1)(c)(ii).

IT-278R "Death of a Partner or a Retired Partner"

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 98.1 - Subsection 98.1(1) 0

IT-242 "Retired Partners" under "Income Interest"

IT-338R "Partnership Interests - Effects on Adjusted Cost Base Resulting from the Admission or Retirement of a Partner"

Articles

Ken S. Skingle, V. Daniel Jankovic, "Can a Partner Enter into a Contract with a Partnership of Which the Partner Is a Member?", Tax for the Owner-Manager, Volume 13, Number 4, October 2013, p. 8

Issue (p. 8)

As a matter of law, can a partner (A Co) enter into a valid and enforceable contract with a partnership (ABLP) of which A Co is a member? …

Common law rule (p. 8)

In The Law of Contract in Canada (6th ed.), G.H.L. Fridman summarizes the common-law position (at 139):

At common law it was not possible for a person to contract with himself. This meant that … A and B could not contract with B and C. Any attempt to make such a contract resulted in a legal nullity …

Rule under Law of Property Act (Alberta) (p. 8)

…Section 10(1) of the Law of Property Act (Alberta) provides that a contract is valid and enforceable in accordance with its terms notwithstanding that in or by the contract, inter alia, one of the parties (in our example, A Co) enters into an agreement with that party and some other person (A Co and its partner in their capacity as partners of ABLP). By virtue of section 10(3) of the Law of Property Act, section 10 applies to a "contract" that provides for the "conveyance of an interest in real or personal property".

Result: valid partner loan (p. 8)

In Alberta, therefore, A Co can enter into a valid and enforceable contract with ABLP if the contract provides for the conveyance of an interest in real or personal property (for example, if A Co transfers property or loans money to ABLP….

Crawford, "Funding of Retired Partners' Cash Requirements", 1992 Conference Report, C. 34

Crawford, "Tax and Capital Considerations in Refunding Retired Partners' Income and other Cash Requirements", 1991 Conference Report, c. 34.

Subsection 96(1.6) - Members of partnership deemed to be carrying on business in Canada

Subsection 96(2.1) - Limited partnership losses

Cases

Canada v. Green, 2017 FCA 107

business losses of lower-tier LPs flowed through upper-tier partnership

The taxpayers were members of a limited partnership Monarch Entertainment 1994 Master Limited Partnership (‘MLP”) which, in turn, was the 99.999% limited partner of 31 lower-tier limited partnerships (the “PSLPs”) in which it had a nil at-risk amount and which incurred annual business losses from 1996 to 2009. In their returns for 2009, at the end of which their at-risk amounts were increased from nil by the amount of capital gains allocated to them by MLP, the taxpayers claimed accumulated limited partnership losses. The Crown considered that the PSLP business losses were deemed to be limited partnership losses of MLP – which meant that they were effectively trapped in MLP given that s. 111 (and, thus, the ability to deduct limited partnership losses under s. 111(1)(e)) was only available to a taxpayer and not to a partnership.

In confirming the finding of Paris J that the PSLP business losses flowed through MLP into the hands of MLP’s partners, who therefore could apply those losses against their 2009 at-risk amount, Webb JA stated (at paras 18, 22, 28-29):

The purpose of section 96 is to ensure that any income or loss realized by the partnership is allocated to its partners and that the source of that income or loss is maintained to allow the members of that partnership to identify the source of income or loss for the purposes of section 3 of the ITA. ...

[T]he instructions in…paragraphs 96(2.1)(c) and (d)…are only intended to apply to taxpayers who are required to compute these amounts under sections 3 and 111, respectively. Since partnerships are not taxpayers for the purposes of sections 3 and 111, these sections do not apply to partnerships. ...

…It does not seem to me that Parliament would have intended to apply the restriction on limited partnership losses to partners (MLP) as members of another limited partnership (PSLP) but deny such partnerships (MLP) the benefit of the deduction in the future if the limited partnership (PSLP) should earn income resulting in an increase in the at-risk amount of the partnership (MLP) in the limited partnership (PSLP). Therefore, in my view, paragraph 96(2.1)(e) of the ITA would also not apply to a partnership that is a member of a limited partnership.

Since the computation of income for a partnership that is a member of another partnership will cause problems when that top-tier partnership attempts to allocate its income on a source basis to its partners, in my view, Parliament did not intend for a partnership that is a member of another partnership to compute income. Rather, Parliament intended for the sources of income (or loss) to be kept separate and retain their identity as income (or loss) from a particular source as they are allocated from one partnership to another partnership and then to the partners of that second partnership (and so on as the case may be). This would mean that losses from a business incurred by a particular PSLP would still be losses from a business in MLP and then allocated by MLP to its partners as losses from that business.

The Crown’s concern “that the at-risk rules could be avoided entirely if the top-tier partnership (MLP) were a general partnership” (para. 31) did not outweigh other considerations.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 111 - Subsection 111(1) - Paragraph 111(1)(e) upper-tier LP not required to compute income and therefore not subject to s. 111(1)(e) 113
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) partnerships not taxpayers for ss. 3 and 111 purposes 39
Tax Topics - Income Tax Act - 101-110 - Section 102 - Subsection 102(2) ITA recognizes 2-tier partnerships 66

See Also

Green v. The Queen, 2016 DTC 1018 [at 2629], 2016 TCC 10

limited partnership losses flow through a 2-tier LP structure

The taxpayers were members of a limited partnership (‘MLP”) which, in turn, was the 99.999% limited partner of 31 lower-tier limited partnerships (the “PSLPs”) in which it had a nil at-risk amount and which incurred annual business losses from 1996 to 2009. In their returns for 2009, at the end of which their at-risk amounts were increased from nil by the amount of capital gains allocated to them by MLP, the taxpayers claimed accumulated limited partnership losses.

Paris J responded affirmatively to the following question posed under Rule 58(1)(a):

In a two-tiered partnership structure, where the top-tier partnership has no at risk amount in respect of the lower-tier partnership at the end of a particular fiscal period, do business losses incurred by the lower-tier partnership in the particular fiscal period retain their character as business losses of the top-tier partnership, thus available to be allocated to the partners of the top-tier partnership as business losses (which would then be subject to the application of the at-risk rules in the hands of the partners of the top-tier partnership)?

Conversely, he rejected the Crown position (at para. 14) that “since the top-tier limited partnership has no at-risk amount, the top-tier partnership’s share of the business loss of the bottom‑tier limited partnership is deemed to be a limited partnership loss of the top-tier partnership pursuant to paragraph 96(2.1)(e) and ceases to be a business loss…[so that] the business loss of the bottom-tier limited partnership cannot be taken into account when determining the top-tier partnership’s business loss.” Before agreeing that section 3

“is not relevant to the determination of income at the partnership level since partnership income or loss is allocated to partners on a source by source basis…[and instead] is relevant to the computation of income at the partner level”

he stated (at para. 33)

the prohibition found in paragraph 96(2.1)(c) against deducting the excess “in computing the taxpayer’s income for the year” can only apply to a limited partner that is a taxpayer and not to a limited partner that is a partnership since a partnership is not required to compute section 3 income under the Act.

He then stated (at paras. 36-37)

…[T]he deeming provision in paragraph 96(2.1)(e) does not state that the deeming of the excess of the business or property losses of a limited partner over his at-risk amount causes those losses to cease to be business or property losses.

… [T]he context of the deeming provision suggests that it is intended to operate at the level of computation of income and taxable income, as do paragraphs 96(2.1)(c) and (d), and only after the taxpayer has computed his or her or its income or loss from business and property. Since a partnership is not a taxpayer and does not compute income or taxable income, the deeming provision in paragraph 96(2.1)(e) can have no application to it.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 111 - Subsection 111(1) - Paragraph 111(1)(e) limited partnership losses flow through a 2-tier LP structure 71

Administrative Policy

22 September 2017 External T.I. 2016-0632881E5 - Regulation 808

partner in upper-tier LP was member of lower-tier LP

CRA found that a non-resident corporate member of a Holding partnership holding, in turn, an interest in an “opco” partnership carrying on a Canadian business would be considered for purposes of Reg. 808(4) to be a “member” of the opco partnership, so that its investment allowance for branch tax purposes would include its proportionate share (through the holding partnership) in the relevant Canadian assets of the opco partnership.

Whether a limited partner of an upper-tier LP is a limited partner of a lower-tier LP for s. 96(2.1) purposes was not discussed.

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 808 - Subsection 808(4) - Paragraph 808(4)(b) member of upper-tier partnership is a member of a lower-tier partnership for investment allowance purposes 295

6 January 2014 External T.I. 2013-0477711E5 - Limited partnership losses and dissolution

partnership termination

A sale of assets by a limited partnership before a cessation of its operations resulted in a terminal loss. CRA indicated that since the limited partner's share of the partnership loss for the fiscal period is greater than the limited partner's at-risk amount in respect of the partnership at the end of the fiscal period,

the limited partner may only deduct a portion of the loss due to the limitation provided under subsection 96(2.1). Further, where the limited partnership has ceased to exist (unless subsection 98(1) applies) and it is the final fiscal period of the partnership, no amount may be claimed in a subsequent year under paragraph 111(1)(e) for any unused limited partnership losses in respect of that partnership.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 99 - Subsection 99(1) 2 taxation years if deferred distribution 135

September 1991 Memorandum (Tax Window, No. 10, p. 12, ¶1478)

The statutory at-risk amount rules apply only to partnerships.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 96 8

87 C.R. - Q.6

Advance income tax rulings will not be provided where one of the main reasons for the arrangement can reasonably be considered to be to circumvent the at-risk rules.

86 C.R. - Q.3

Expenses incurred in the issuance of units in a partnership exclusively engaged in farming aren't subject to the restriction.

Paragraph 96(2.1)(f)

Articles

Joint Committee, "July 27, 2018 Legislative Proposals", 10 September 2018 Submission

Alternatives to proposal of denying excess lower-tier losses (pp. 8-10)

There will be no ability to carryover unutilized limited partnership losses. A loss of a lower-tier partnership that exceeds an upper-tier partnership’s amount at risk in that lower-tier partnership is denied forever.

An alternative approach would be to permit an election when a subsequent “release event” occurs (being anything that increases the amount at risk in the lower tier partnership), in which event the previously denied loss would be allocated to the electing ultimate partners to the extent of the amount now at risk in the lower-tier partnership (assuming no intervening changes in partnership interests).

A further alternative would entail inter alia allocating lower-tier losses to the partners of the upper-tier partnership.

Subsection 96(2.2) - At-risk amount

Administrative Policy

21 November 2017 CTF Roundtable Q. 10, 2017-0724291C6 - Tax Shelters

no rulings on at risk rules’ application to tax shelter LPs

In indicating that it “will generally not issue an advance income tax ruling … with respect to a limited partnership financing arrangement involving the application of the at-risk rules in the context of a tax shelter, as defined in subsection 237.1(1),” CRA stated:

Although the CRA does not verify the representations of fact at the time of the Ruling, they should be capable of verification at that time. The CRA is concerned that in these arrangements there are crucial aspects, such as arm's length issues, impact of future events, or other significant questions of fact, about which there is a level of uncertainty which does not lend itself to the provision, in advance, of a binding commitment by the CRA to view the tax consequences in a particular manner.

Paragraph 96(2.2)(a)

Administrative Policy

9 October 2015 APFF Roundtable Q. 16, 2015-0595801C6 F - At-risk amount

a part disposition of a partnership interest results in an anomalous pro rata reduction in the partner’s at-risk amount for the year of disposition

If a taxpayer disposes of all of its limited partnership interest partway through the partnership year but is allocated a partnership loss for that year, its full partnership ACB before the disposition can be taken into account (by virtue of s. 96(1.01)) in computing its at-risk amount at the end of that year, so that it would typically be able to deduct that loss against its other sources of income.

In contrast, if it instead disposes of most but not all of its partnership interest, there will be an immediate pro rata reduction in the ACB of its partnership interest, so that its at-risk amount at the end of the partnership year, and the deductible amount of the loss, will be correspondingly reduced. CRA notes that "no legislative provision alters this result."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 96 - Subsection 96(1.01) life is tough in the big city 34

Paragraph 96(2.2)(c)

Administrative Policy

2002 Ruling 2002-015616 -

The principal amount of promissory notes issued by limited partners to a partnership as part of the purchase price for their limited partnership interests in the partnership would reduce their at risk amount, but the at-risk amount would be restored upon the immediate assignment of the notes to a third party in payment of an obligation of the partnership to the third party.

88 C.R. - "'At Risk'" - "Statutory 'At-Risk' Rules"

S.96(2.2)(c) does not apply to amounts owing which arose as a result of legitimate commercial transactions which are unrelated to the limited partner's acquisition of his interest in the partnership and the terms of payment conform to normal commercial arrangements comparable to those between parties dealing at arm's length.

Paragraph 96(2.2)(d)

Cases

Brown v. Canada, 2003 DTC 5298, 2003 FCA 192 (FCA)

Although the at-risk amount of the taxpayer at the end of the year in which he became a partner was reduced as a result of a partnership amendment agreement being made less than two years later by virtue of which he was entitled to retract his partnership interest for 80% of his subscription price, his at-risk amount was not reduced by a right of the partnership to receive common shares of the person from whom it had purchased its principal asset given the absence of evidence on the value of such shares. Rothstein J.A. stated (at p. 5307):

"While paragraph 96(2.2)(d) is worded broadly, it seems to me that, where, according to the evidence, the amount of the benefit referred to is not ascertained or ascertainable, paragraph 96(2.2)(d) cannot apply."

See Also

Caron v. The Queen, 2003 DTC 1444, 2003 TCC 794 (Informal Procedure)

Mortgage debt, that was charged on real estate legally owned by a corporate subsidiary of a limited partnership of which the taxpayers were limited partners, was purportedly assumed by the limited partners. In finding that the amount of the assumed mortgage did not form part of the taxpayers' at-risk amount, Lamarre Proulx, J. indicated that it was not clear under the Mortgage Assumption Agreement that such an assumption had in fact occurred and that, in any event, the security given by the subsidiary was a benefit within the meaning of s. 96(2.2)(d).

Caron v. The Queen, 2003 DTC 1444, 2003 TCC 794 (Informal Procedure)

The limited partners of a partnership received a benefit described in s. 96(2.2)(d) when a corporation owned by the limited partnership guaranteed mortgage indebtedness owing on land that was beneficially the partnership property.

McCoy v. The Queen, 2003 DTC 660, 2003 TCC 332

A partnership purchased securities trading software from a vendor corporation pursuant to an acquisition agreement which contained a representation of the vendor that an 18% return on a stipulated level of capital would be attained from using the software for trading purposes, and that a stipulated minimum of research reports generated by the software would be purchased, in either case for as long as an acquisition note owing by the partnership to vendor remained outstanding. Given that the acquisition note was immediately paid off by the partnership assigning to the vendor promissory notes owing to it by its limited partners, no adjustment to the at risk amount of the partners in light of these clauses was appropriate.

Brown v. The Queen, 2001 DTC 1094 (TCC), aff'd supra 2003 DTC 5298 (FCA)

The agreement for the purchase by a general partnership of software contained a representation by the vendor that in its capacity of distributor of the software it would achieve specified sales levels. As this representation was intended by the parties to constitute a warranty, it represented a benefit under s. 96(2.2)(d) and the taxpayer, who was a partner, was deemed to be a limited partner by s. 96(2.4).

Administrative Policy

10 February 1997 T.I. 962193

A right of a partner to sell his interest to a third party for a pre-determined price, a guarantee to the partnership of a certain level of revenue, or a right of the partnership to sell certain property of the partnership to an arm's length third party for a pre-determined price would reduce the partner's at-risk amount pursuant to s. 96(2.2)(d), with the result that ss.143.2(2) or (6) would not apply to reduce the losses otherwise incurred by the partnership. However, a right of the partnership under a joint venture agreement with a third party to a pre-determined amount of revenue, where the amount of such priority was not guaranteed in any way, would appear not to be subject to either s. 96(2.2) or s. 143.2.

27 June 1995 T.I. 951055 (C.T.O. "Limited Partner Guaranteed Return")

Where prior to the acquisition by limited partners of their units, a film production (in respect of which the partnership is to provide services in consideration for a fee based on gross receipts and net receipts) has been licensed for a fee to a broadcaster, there will be considered to be a benefit under s. 96(2.2)(d) based on the amount of revenue that contingently accrues to the limited partnership as a result of the licence fees.

11 April 1995 T.I. 950865 (C.T.O. "Partnership At-Risk Rules Re Loan")

Prior to the enactment of ss.40(3.1) and (3.2), it had been agreed that excess revenues generated by a limited partnership would be distributed to the limited partners in order to permit them to retire bank loans used to finance their acquisition of the limited partnership interest, rather than being used to pay off bank project financing of the limited partnership. However, in order to avoid a capital gain on a negative ACB arising from such distributions, it was acceptable to agree that such revenues instead would be used to acquire investments, with the investments being legally owned by the bank "in order to provide the bank with some element of security".

Since the agreement to make such investments "is another income source for the partnership and is subject to the normal portfolio risks that occur in entering into any investment arrangement, it would not be viewed as an amount or benefit for the purposes of paragraph 96(2.2)(d) ... ."

2 June 1993 External T.I. 5-930183 -

The amount of reduction under s. 96(2.2)(d) at any particular time to a limited partner's at-risk amount as a result of limited recourse borrowings obtained by the partner will be the amount of the limited recourse borrowings outstanding at that time.

The circumstances involving limited recourse financing at the partnership level in which RC will consider such financing to be related to the acquisition of a partnership interest will depend on each specific situation and no general guidelines are currently available.

Rulings Directorate Discussion and Position Paper on Motion Picture Films and Video Tapes as Tax Shelters, Version 29/3/93 930501 (C.T.O. "Motion Picture Films - C.C.A.")

A letter of credit given by a financial institution to guarantee the payment of a prescribed revenue guarantee or the payment of a put of a film's limited partnership interest for its fair market value will not reduce the at-risk amount.

12 June 1992 Commentary on 1992 CPTS Roundtable Q. 4, 5-921638 -

If the intent is to refund the partners' original investment in a partnership at some convenient time once non-recourse financing received by a partnership is in place, it may (or may not depending on the circumstances) be appropriate for the at-risk rules to apply to limit the partners' access to the accelerated CCA deductions.

12 June 1992 Memorandum (Tax Window, No. 21, p. 11, ¶2021)

S.96(2.2)(d) generally will not apply where a general partnership receives limited recourse financing in respect of legitimate commercial transactions unrelated to a general partner's acquisition of a partnership interest.

92 C.R. - Q.11

If it is clear from all the facts that an arrangement is a joint venture or co-ownership and not a partnership, the at-risk amount rules will not apply.

92 CPTJ - Q.4

Although s. 96(2.2)(d) generally will not apply with respect to a benefit that may arise by virtue of a general partnership obtaining limited recourse financing in relation to legitimate commercial transactions unrelated to a general partner's acquisition of a partnership interest, no general guidelines are currently available.

November 1991 Memorandum (Tax Window, No. 13, p. 18, ¶1583)

A guarantee of a loan made to a partner to finance the acquisition of a partnership interest, including a government guarantee, will render that partner a limited partner pursuant to s. 96(2.4)(b) and reduce her at-risk amount under s. 96(2.2)(d).

September 1991 Memorandum (Tax Window, No. 9, p. 22, ¶1456)

Where there is personal use by a partner of capital property of the partnership, the partner will be deemed to be a limited partner if the partner is entitled to receive an amount or benefit described in s. 96(2.2)(d).

14 August 1991 T.I. 911724

(See also 5-930183.)

Where in order to purchase a partnership unit valued at $100, a partner invests $25 of his own funds and borrows $75 from a Canadian bank under a limited recourse loan, his at-risk amount will be reduced by the amount of the borrowing. However, s. 96(2.2)(d) "generally will not apply with respect to the benefit that may arise by virtue of a general partnership obtaining non-recourse or limited recourse financing that arose as a result of legitimate commercial transactions unrelated to a general partner's acquisition of a partnership interest".

21 June 1991 T.I. 910822

S.96(2.2)(d) will have no application where two partners borrow money from the bank and lend the proceeds at a reasonable rate of interest but on a limited recourse basis to the partnership (with the limited recourse loan being convertible into partnership capital at their option). However, s. 96(2.2)(d) will apply to the amount of any non-recourse or limited recourse debt incurred by a partner to make a contribution of capital to a partnership, or where the partnership guarantees debts of the limited partners (notwithstanding a corresponding obligation of the partner to indemnify the partnership).

S.96(2.2)(d) "generally will not apply to a particular partner's interest in a partnership with respect to the benefit that may arise by virtue of the partnership entering into leasing or rental arrangements with arm's length parties that arose as a result of legitimate commercial transactions unrelated to the partner's acquisition of the partnership interest."

11 June 1991 T.I. 910823

"Paragraph 96(2.2)(d) of the Act generally will not apply with respect to the benefit that may arise by virtue of a limited partnership obtaining non-recourse or limited recourse financing that arose as a result of legitimate commercial transactions unrelated to a limited partner's acquisition of the partnership interest."

15 May 1991 T.I. (Tax Window, No. 3, p. 18, ¶1234)

A revenue guarantee given in respect of printing and advertising expenses incurred by persons who have not incurred the capital cost of the film are not prescribed revenue guarantees.

March 1991 T.I. (C.T.O. Doc. No. 93)

A non-interest bearing loan will reduce the at-risk amount if the loan was negotiated as part of the package of investing in the partnership.

91 CPTJ - Q.6

Government assistance that is universally available will not reduce the at-risk amount.

89 C.M.TC - Q.7

where the partnership guarantees the debts of the limited partners, ss.96(2.2)(d) to (f) generally reduce the at-risk amounts of the partners by the amount of the loan which is subject to the guarantee.

23 November 1988 TI 5-6721

An indemnity by one partner of obligations incurred by the others as a result of the first partner acting outside his authority will not cause the other partners to be deemed to be limited partners under s. 96(2.4)(b).

88 C.R. - "'At Risk'" - "Statutory 'At-Risk' Rules"

Universally available government assistance is not a benefit. Limited recourse borrowings constitute a deductible benefit. Where the purchase price of a limited partner's interest has been financed with limited recourse borrowings, such borrowings will reduce the partner's at-risk amount.

A revenue guarantee which merely guarantees a level of revenues sufficient to offset annual cash operating expenses of the limited partnership will not reduce a limited partner's at-risk amount.

88 C.R. - Q.16

A right to receive a grant from the developer in the event that the limited partner's share of partnership cash flow is insufficient to service his related personal debt may be a benefit described in s. 96(2.2)(d).

88 C.R. - F.Q.19

The flow-through of CEDIP entitlements to partners reduces their at-risk amounts.

88 C.R. - F.Q.20

Where a revenue guarantee exceeds expected expenses, the reduction of the at-risk amount is the amount of the excess over reasonably expected expenses.

86 C.R. - Q.5

There may be a perception of conflict between the policies of the flow-through share rules and the at-risk rules.

Articles

John Tobin, "Infrastructure and P3 Projects", 2017 Conference Report (Canadian Tax Foundation), 10:1-31

Whether non-recourse nature of partnership-level debt is a loss-reducing benefit to a partner (p. 10:12)

[O]ften, debt to Projectco’s partners will be limited in recourse to Projectco’s assets. The issue is whether the limited-recourse features of loans to partners of Projectco are a benefit granted to the partners for the purpose of reducing the impact, in whole or in part, of any loss that such partners may sustain owing to their investment in Projectco….In ATR-51, the CRA acknowledges that indemnities given in the ordinary course that were granted between arm’s-length parties (that is, indemnities for breach of contract) would not be considered as being granted to reduce the partner’s loss, unless they were effectively given to generate a specific revenue or income….

[I]n another technical interpretation, [fn 28: … 9301835] the CRA stated that non-recourse debt obtained by a partnership that arose as a result of legitimate commercial transactions unrelated to a general partner’s acquisition of a partnership interest would not generally be considered to be an amount granted for the purpose of reducing the partner’s loss from being a partner. (In that case, the partner’s equity is still subject to loss, even though the partner’s overall liability might be limited.)…

Regulation 6202.1 appears to be a lower threshold than subsection 96(2.2),…The Court [in JES] stated that an objective test was required because of the phrase “reasonably considered….

Government progress payments (treated as s. 13(7.1) capital cost deductions, being a potential benefit under Reg. 3100(1)(b)) can cause partner to be deemed limited partner under s. 96(2.4)(b) (p. 10:15)

[T]o the extent that Projectco takes the view that the amount of the payments for the construction period reduces the capital cost of a class 14 property (on the basis that subsection 13(7.1) applies), these amounts are considered to be prescribed benefits irrespective of whether they are enjoyed directly or indirectly (that is, through the partnership itself). If, however, they were treated as construction-period revenues, they would not be considered to be prescribed benefits.

However, if the construction-period expenses are capitalized as a class 14 property and the construction payments are treated as a government allowance, the construction payments likely cause Projectco’s general partnership interests to be deemed to be limited partnership interests. In that case, the at-risk amount of the partner applies to reduce the access to deductions. Nonetheless, this result may be beneficial to the partner when the potential application of the tax-shelter rules is taken into account.

Edward A. Heakes, "Limited Partnerships: Still at Risk", 1994 Corporate Management Tax Conference, C. 7.

Subsection 96(2.3) - Idem [At-risk amount]

Administrative Policy

9 March 2012 Internal T.I. 2011-0421491I7 - At-Risk Amount and Paragraph 111(4)(e)

where the adjusted cost base (ACB) of a partnership interest has been stepped up under s. 111(4)(e), s. 96(2.3) will reduce the ACB of the interest for at-risk amount purposes to the previous ACB.

Subsection 96(2.4) - Limited partner

Paragraph 96(2.4)(a)

See Also

Vinet v. Sous-ministre du Revenu du Québec, 2017 QCCQ 3957

managerial actions of an individual limited partner were qua officer of the GP, so that he was a limited partner for tax purposes

The taxpayer was the limited partner of a Quebec limited partnership (“SEC”), which owned and operated multiple farms, and the president of its general partner, as well as being a minority shareholder of the shareholder of the general partner. A loss allocated to him by the SEC was denied on the basis that he was a limited partner, whose definition in s. 613.6(a) of the Taxation Act (Quebec) included (subject to inapplicable exceptions) a taxpayer at a particular time “if, at that time or within three years after that time…by operation of any law governing the partnership arrangement, the liability of the member as a member of the partnership is limited… .”

The taxpayer submitted that he had ceased to be a limited partner by virtue of s. 2244 of the Civil Code - which provided that a limited partner “may not negotiate any business on behalf of the partnership or act as mandatary or agent for the partnership” – on the basis of his involvement in the business of SEC including negotiating with suppliers and making various purchases. In rejecting this submission, Breault JCQ stated (at paras. 85-86, TaxInterpretations translation):

...Mr. Vinet would need to present a more convincing proof to establish that the diverse acts which he presented were in reality effected, not as mandatary, agent or manager of the general partner… but rather directly for the account of the SEC or as agent or mandatary for the latter.

This conclusion cannot be derived from the evidence provided.

Breault JCQ also stated that he shared the conclusion in an article (quoted at para. 87) that:

We are in complete disagreement with the position…that the control exercised by a limited partner or limited partners over the corporate general partner suffices to engage liability of the limited partners by the combined application of articles 317 and 2244 of the C.c.Q. … [I]t is only in the common law provinces that the control of the internal management of a limited partnership gives rise to liability of the limited partners… .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 253.1 involvemement of limited partner in LP business was qua officer of GP 173

Foley v. The Queen, 2003 DTC 1320, 2003 TCC 680

Although the taxpayers were designated as the limited partners of a partnership, each of them was in control of a part of the partnership's business and the two of them together with their father shared control of the whole business of the partnership. Consequently, they were not limited partners, and the at-risk rules did not apply to limit their share of losses of the partnership.

Laplante v. The Queen, 96 DTC 1196 (TCC)

The taxpayer was not a limited partner of a partnership governed by Ontario law given that the partnership had not been registered under the Limited Partnerships Act (Ontario) in the relevant taxation years, and given that the taxpayer exercised such a degree of control in the operations that he could not be considered a limited partner even if the partnership had been so registered.

Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Provincial Law 86

Haughton Graphics Ltd. v. Zivot (1986), 33 BLR 1225 (Ont. S.C.), aff'd (1988), 38 BLR XXXIII (Ont CA), leave to appeal to the S.C.C. denied [1988] 1 SCR XV.

Section 63 of the Partnership Act (Alberta) (which is essentially the same as section 13 of the Limited Partnerships Act (Ontario)) was found to apply to two limited partners of an Alberta partnership because they are also acting as the officers of the partnership's general partner.

Administrative Policy

88 C.R. - F.Q.21

Where a general partnership is converted to a limited partnership, s. 96(2.4)(a) will deem the partners to have been limited partners for the three preceding years.

88 C.R. - "'At Risk'" - "Statutory 'At-Risk' Rules"

Although the partnership acts of most of the common law provinces provide that an incoming partner is not liable for the debts which the partnership incurred before he became a member of the partnership s. 96(2.4)(a) will not normally apply in this situation.

Articles

Heakes, "Limited Partnerships: Still at Risk", 1994 Corporation Management Tax Conference Report, c. 7.

Flannigan, "Limited Partner Liability: A Response", (1992), 71 Can. Bar Rev. 553.

Apps, "Limited Partnerships and the 'Control' Prohibition: Assessing the Liability of Limited Partners", (1991), 70 Can. Bar Rev. 611.

Joel A. Nitikman, "Limited Partnerships: Not So Limited?", Canadian Current Tax, June 1991, p. C65.

Paragraph 96(2.4)(b)

Cases

Docherty v. Canada, 2005 DTC 5199, 2005 FCA 93

In finding that the taxpayers were limited partners by virtue of s. 96(2.4)(b), the Tax Court judge correctly relied on the existence of benefits including provisions whereby the partners were not obliged to pay the bills of a company controlled by one of the partners (a taxpayer) until the partnership generated revenues, and an obligation on that company to contribute the instalment payments owing by the partners for the balance of the subscription price for the units, in the event that revenues of the partnership were inadequate to cover the partners' obligations.

Brown v. Canada, 2003 DTC 5298, 2003 FCA 192 (FCA)

The taxpayer was deemed to be a limited partner by virtue of the fact that within two years of his becoming a general partner, a partnership amending agreement was made which gave the partners the right to retract the partnership units for a cash amount equal to 80% of the original subscription price. Rothstein J.A. stated (at p. 5306):

"If the taxpayer becomes entitled to obtain the benefit within the three years after the taxpayer seeks to deduct partnership losses, the taxpayer will be deemed a limited partner, regardless of whether the benefit itself is obtained immediately or at any time in the future."

See Also

Rouleau c. La Reine, 2007 DTC 1619, 2007 TCC 338 (Informal Procedure)

Archambault J. found that there is an arrangement under which investors in a limited partnership would be able to sell their limited partnership interests for an amount equal to amounts borrowed by them to fund the partnership interest purchases. Accordingly, the taxpayer, who was such an investor, was a limited partner notwithstanding that for personal reasons he did not sign an assignment of his limited partnership interest.

Ouellet c. La Reine, 2004 DTC 2706, 2004 TCC 308 (Informal Procedure)

After finding that an alleged partnership between the taxpayers and others did not exist, Lamarre Proulx J. went on to find that had the partnership existed, the taxpayers would have been limited partners on the basis of the 50% funding of their investment in the partnership by a term loan provided by a person not dealing at arm's length with the partnership and by virtue of options to purchase their partnership interests.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 96 53

Administrative Policy

2 June 1993 External T.I. 5-930183 -

A partner of a general partnership can be a limited partner for purposes of the at-risk amount rules where the partnership is party to a limited recourse loan which is related to its partners' acquisition of partnership interests.

92 C.R. - Q.16

A partner may be deemed to be a limited partner if as a result of his personal use of partnership property he is entitled to receive an amount which is a benefit described in s. 96(2.2)(d).

Paragraph 96(2.4)(d)

Administrative Policy

30 September 1992 T.I. (Tax Window, No. 24, p. 18, ¶2180)

The word "arrangement" is open to very broad interpretation ranging from formal contracts to verbal understandings. S.96(2.4)(d) can apply where a partner disposes of his interest in a general partnership to another person for the sole purpose of limiting its liability, and one of the main reasons for the agreement or other arrangement for the disposition was avoidance of the application of s. 96(2.4)(a), (b) or (c).

Words and Phrases
arrangement

Subsection 96(2.5) - Exempt interest

See Also

Central Supply Company (1972) Ltd. v. The Queen, 95 DTC 343 (TCC)

A partnership that had abandoned its unsuccessful drilling operations and, during the relevant period was carrying out various winding-up activities, was found to be actively carrying on a business for purposes of the test in 96(2.5).

Administrative Policy

21 June 1994 T.I. (C.T.O. "Non-Statutory At-Risk Rules")

As a result of the decision in The Queenv. Signum Communications Inc., 91 DTC 5360 (FCA), a partnership interest that qualifies as an exempt interest will not be subject to the restriction on the deductibility of losses to the partner stated in IT-138R, para. 20 (which no longer represents the Department's position).

9 May 1991 Memorandum (Tax Window, No. 3, p. 21, ¶1253)

The exemption may be applied to any partnership which was actively carrying on business prior to February 26, 1986 irrespective whether the business was carried on inside or outside Canada.

88 C.R. - "'At Risk'" - "Pre-February 26, 1986 Partnerships"

RC will continue to follow its position on the at-risk rules until the Signum Communications case is resolved.

87 C.R. - Q.7

A limited partner's share of partnership losses cannot exceed his equity in the partnership.

86 C.R. - Q.1

The non-statutory at-risk rules apply to exempt interests; no grandfathering opinions are given.

85 C.R. - Q.45

Definition of equity of a limited partner.

84 C.R. - Q.73

A limited partner's share of partnership losses cannot exceed his equity; and his equity generally is the amount that he contributed (or a determinable amount that is unconditional in its term and that is fully expected to be paid to acquire the interest) plus (without duplication) s. 53(1)(e) amounts, and minus s. 53(2)(c) amounts.

Subsection 96(3) - Agreement or election of partnership members

Cases

Schultz v. The Queen, 95 DTC 5657 (FCA)

An s. 39(4) election filed by one of the two taxpayers was not valid because she was found to be in partnership with her husband and, accordingly, she was required to comply with s. 96(3), which had not been done.

Subsection 96(6) - Penalty for late-filed election

Administrative Policy

7 February 1992 T.I. (Tax Window, No. 16, p. 20, ¶1740)

The penalty under s. 96(6)(b) is payable by each member of the former partnership rather than the partnership itself.

Subsection 96(8)

Paragraph 96(8)(c)

Administrative Policy

17 January 2017 Internal T.I. 2016-0647161I7 - Capital gains of a partnership

no reciprocal application to pre-immigration capital gains

Although where a member of a non-resident partnership becomes a Canadian resident in a year, s. 96(8) prevents the recognition for ITA purposes of losses realized by the partnership from dispositions in the year prior to the immigration, there is no symmetrical application for capital gains realized in the year of a property (e.g., U.S. real estate) prior to the immigration, so that the new resident must include his or her share of that gain in income for that year.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 114 a year-end income allocation by a non-resident partnership to an immigrant included offshore capital gains realized pre-immigration 163