CRA provides further confirmation of the inefficiency under the at-risk rules of a two-tier LP structure

CRA has an established administrative policy that in a two-tier LP structure (or a GP on LP structure), limited partnership losses of the bottom LP (i.e., its losses allocated to the top LP in excess of the relevant at-risk amount) effectively get vaporized: (1) even if the bottom LP subsequently earns income, the top LP will not be able to use its limited partnership loss because it is not a taxpayer for loss-utilization purposes; and (2) the partners of the top LP do not have a limited partnership loss in respect of the bottom LP because their indirect share of that LP's loss did not qualify as a limited partnership loss in their hands.  See, for example, 14 May 2004 T.I. 2004-0062801E5 and 2 May 1994 T.I. 5-940777.

CRA has now indicated that this problem is not resolved if the ultimate partners were direct partners of the bottom LP when the losses were incurred; and they subsequently rolled their interests into the top LP with the the bottom LP then becoming profitable.  In this situation they still cannot utilize their limited partnership losses as a deduction from the bottom-tier income that is allocated to them because they have no "at-risk amount" in respect of the bottom LP (whose definition requires that they be a direct limited partner of that partnership.)

Neal Armstrong.  Summary of 31 May 2012 T.I. 2012-0436521E5 under s. 111(1)(e).