CRA indicates that loan advances to a limited partner may give rise to negative ACB gains

Rather than making current distributions of its cash flow to a limited partner, those sums are lent by the LP to the limited partner – then at the beginning of the following year the LP effects a distribution of the applicable share of the previous year’s profits to the limited partner by issuing a demand note to the limited partner and pays that note by way of set-off against the loans owing by the limited partner. Does this approach avoid negative ACB gains under s. 40(3.1)?

CRA referred to the “general principle of civil law to the effect that a person cannot make a contract with itself,” so as to suggest that a partnership loan to a partner may not be valid. (See also s. 12 of the Limited Partnerships Act (Ontario) which overrides a potential common law concern (see e.g., Rye), by specifying that “a limited partner may loan money to and transact other business with the limited partnership,” but does not specifically validate a loan going the other way.) CRA went on to state:

Should it not be possible for a limited partnership to make loans to the limited partner…the amounts styled as loans…would be treated by the CRA as amounts received in lieu of or in full or partial payment of the distribution of the taxpayer’s share of the limited partnership profits under subparagraph 53(2)(c)(v).

CRA also stated:

[T]he Courts…have given a very wide scope to the terms "on account of" and "in lieu of"…which are also used in subparagraph 53(2)(c)(v).

Neal Armstrong. Summaries of 27 June 2016 External T.I. 2016-0637341E5 Tr under s. 53(2)(c)(v) and s. 40(3.13).