Green – Tax Court of Canada finds that limited partnership losses flow through a 2-tier LP structure

Paris J found that the business losses of a limited partnership allocated to an upper-tier partnership in excess of its at-risk amount continue to be business losses in its hands, so that such losses can, in turn be allocated to the partners in the upper-tier partnership – so that, if the at-risk amount rules apply, it is only to restrict the losses that are allocated to the partners in the upper-tier partnership. This runs contrary to CRA positions (2012-0436521E5, 2004-0107981E5, 2004-0062801E5 and 5-94077) that business losses generated in a lower-tier limited partnership effectively can be extinguished.

Paris J thought that the Crown was reading too much into s. 96(2.1)(c), which provides that a business loss in excess of the at-risk amount “shall not be deducted in computing the taxpayer’s income for the year.” The upper-tier partnership (like other partnerships) only computes income for purposes of allocating it to its partners and is not itself a taxpayer for computing income under s. 3, so that s. 96(2.1)(c) does not apply to deny the recognition of business losses in the hands of the upper tier partnership for such computation purposes. Conversely, s. 96(2.1)(e), which deems the excess business loss to be a limited partnership loss, is intended to operate only at the level of a taxpayer who is required to compute income and taxable income, i.e., only at the level of the partners in the upper-tier partnership.

Neal Armstrong. Summary of Green v. The Queen, 2016 TCC 10, under s. 96(2.1).