CRA comments indicate that a loan from an Ontario partnership to a general partner will be treated as a distribution

CRA indicated that whether a payment made by a limited partnership to a limited partner that was styled as a loan was to be treated as a loan for purposes of ss. 96(2.2)(c) and 53(2)(c)(v) (rather than as a distribution) was to be determined based on the laws of Ontario.

Regarding the common law, the Directorate stated (adverting to the Rye v. Rye/ Klein line of cases):

It is well established at common law that a man cannot contract with himself and that a partner cannot contract with a partnership of which he is a member. Therefore, it is necessary to determine whether a limited partnership can make a loan to a limited partner pursuant to statutory law, thereby overriding such long-standing common law rule.

CRA had earlier referred to s. 60(1) of the Partnership Act (B.C.), which provides that “A limited partner may lend money to, borrow money from and transact business with the limited partnership,” and noted that such a loan therefore can be valid.

Although, on its analysis, this was the very provision at issue, it curiously did not go on to refer to s. 12 of the Limited Partnerships Act (Ontario), which provides a truncated (but likely not maimed) version of s. 60(l) of the B.C. Act: “A limited partner may loan money to and transact other business with the limited partnership … ” (i.e., s. 12 does not specifically refer to limited partner borrowings). However, CRA indicated that the doubts expressed in 2016-0637341E5 as to whether it was possible under the civil law for a limited partnership to make loans to a limited partner were not meant to apply to Ontario limited partnerships.

The above comments suggest that CRA Headquarters would characterize a loan made to a general partner by a partnership governed by the laws of a common law province, such as Ontario, as instead being a distribution.

Neal Armstrong. Summary of 16 December 2019 Internal T.I. 2019-0816101I7 under s. 96(2.2)(c) and Statutory Interpretation – Interpretation Act, s. 8.1.