Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Use of limited partnership losses in a tiered partnership situation
Position: Allocation of losses of bottom partnership unavailable to members of top partnership
Reasons: ss.102(2) deems the top partnership to be a taxpayer only for purposes of division j and therefore any loss of bottom tier could not be a carry-forward loss of top tier
2004-006280
XXXXXXXXXX Lena Holloway, CA
613-957-2104
May 14, 2004
Dear XXXXXXXXXX:
Re: Limited Partnership Loss Carryovers and Tiered Partnerships
This is in response to your letter of February 17, 2004 concerning the deductibility of limited partnership losses in a multi-tiered partnership arrangement. In particular, you note that the application of subsection 96(2.1) and paragraph 111(1)(e) of the Income Tax Act (the "Act") in a multi-tiered partnership structure leads to an anomalous result. Accordingly, you have asked that the Canada Revenue Agency ("CRA") consider alternatives for specific relief that would result in a more equitable application of these provisions. The subject of your concern can best be illustrated by the example presented in your letter and reproduced below.
The following assumptions were used in this example:
? At the beginning of Year 1, Mr. A and Mr. B form a limited partnership and each contributes $100 to the partnership. The limited partnership commences to carry on an active business in Canada.
? During Year 1, the limited partnership borrows $300 and uses the proceeds of the loan, together with the $200 contributed by Mr. A and Mr. B, in the business operations of the partnership.
? In Year 1, the limited partnership realizes a loss of $500 and allocates a loss of $250 to each of Mr. A and Mr. B.
? In Year 2, the limited partnership earns income of $500 and allocates income of $250 to each of Mr. A and Mr. B.
? At the beginning of Year 3, the limited partnership ceases operations, repays the $300 loan and distributes the remaining $200 to Mr. A and Mr. B. The partnership is then dissolved.
No Multi-tiered Partnership Structure
The income tax implications to each of Mr. A and Mr. B as a result of the above hypothetical example are as follows:
Year 1
? The $250 loss allocated from the limited partnership to each of Mr. A and Mr. B exceeds their at-risk amount (created as a result of their initial capital contribution) by $150.
? Each of Mr. A and Mr. B can deduct a loss of $100 for tax purposes. The excess of the loss allocated by the limited partnership over the amount of the deductible loss (equal to $150 for each of Mr. A and Mr. B) is a limited partnership loss pursuant to paragraph 96(2.1)(e).
Year 2
? The $250 of income allocated from the limited partnership to each of Mr. A and Mr. B is included in their income for tax purposes.
? The at-risk amount for each of Mr. A and Mr. B in respect of the limited partnership at the end of the year pursuant to subsection 96(2.2) is $250 ($100 original contribution, less the $100 deductible loss allocated from Year 1, plus the $250 income allocation for the year).
? Each of Mr. A and Mr. B may claim a deduction for their limited partnership loss of $150 (the loss amount in excess of the at-risk amount in Year 1) pursuant to paragraph 111(1)(e).
Year 3
? The $100 distribution by the limited partnership to each of Mr. A and Mr. B reduces their adjusted cost base of their partnership interest to nil resulting in no gain or loss for income tax purposes.
Multi-tiered Partnership Structure
The next example provided in your letter presents the same numerical assumptions made above. The only difference in the example below is that Mr. A and Mr. B first form a partnership (each contributing $100 to the partnership, referred to as the AB Partnership), which in turn contributes $200 to the limited partnership. The income tax implications to each of Mr. A and Mr. B as a result of this example is as follows:
Year 1
? The $500 loss allocated by the limited partnership to the AB Partnership exceeds the $200 at-risk amount in the limited partnership. The $300 excess amount is denied as a loss to the AB Partnership by virtue of subsection 96(2.1) of the Act. Paragraph 96(2.1)(e) deems the $300 excess amount to be a limited partnership loss of the AB Partnership.
? The AB Partnership allocates the $200 remaining loss equally between Mr. A and Mr. B.
? Each of Mr. A and Mr. B can claim a loss of $100 for income tax purposes.
Year 2
? The $500 income allocated by the limited partnership to the AB Partnership is included in income of the AB Partnership. The AB Partnership allocates $250 of income to each of Mr. A and Mr. B.
? Mr. A and Mr. B each include in income the $250 allocated by the AB Partnership.
? Mr. A and Mr. B have no limited partnership loss with respect to the limited partnership.
Year 3
? The $200 distribution by the limited partnership to the AB Partnership reduces the adjusted cost base of the partnership interest. Because the limited partnership loss has not been deducted by the AB Partnership, the remaining ACB of its partnership interest in the limited partnership is $300.
? The AB Partnership realizes a capital loss of $300 on the dissolution of the limited partnership, which is allocated equally between Mr. A and Mr. B.
The result of this example is that although each of Mr. A and Mr. B are neutral economically with respect to cash flow of the partnership, they have each realized $150 of income which will be subject to tax while being unable to offset the income against losses suffered from the same business. The capital loss realized by Mr. A and Mr. B is not available to reduce business income. In your opinion, the interjection of a partnership between Mr. A and Mr. B, and the limited partnership has resulted in an inequitable result for income tax purposes. It is also your view that the effect of the interaction between subsection 96(2.1) and paragraph 111(1)(e) of the Act to a multi-tier partnership structure violates the fundamental principle of Canadian income taxation that taxpayers be allowed to offset income against losses from the same business within a certain time period.
We have reviewed the examples outlined above, and we agree with your analysis of the tax implications. Subsection 102(2) of the Act states that, for purposes of sections 96 to 103 dealing with partnerships and their members, "a reference to a person or a taxpayer who is a member of a particular partnership shall include a reference to another partnership that is a member of the particular partnership." Therefore, subsection 96(2.1) of the Act applies to partnerships who are themselves members of a limited partnership. As a result, the losses allocated by a limited partnership to each of its members, including another partnership, will be deductible by each member, to a maximum of each member's (including the member partnership's) at-risk amount The excess of the loss over the member's at-risk amount is deemed to be a member's limited partnership loss by virtue of paragraph 96(2.1)(e) of the Act. However, this limited partnership loss cannot be used by the member partnership because a partnership is not a taxpayer for purposes of paragraph 111(1)(e) of the Act. Also, subsection 96(1) of the Act does not allow the transfer of a limited partnership loss to its members.
While we recognize that the tax results with respect to the deductibility of limited partnership losses are different for partnerships that are themselves members of a limited partnership than for partners who are individuals or corporations, the provisions in the Act clearly lead to this conclusion. As you are aware, the role of the Canada Revenue Agency is to administer and enforce the Act as passed by Parliament. Tax policy and amendments to the Act are the responsibility of the Department of Finance.
We trust that our comments will be of assistance
Yours truly,
Wayne Antle, CGA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
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