31 May 2012 External T.I. 2012-0436521E5 - Ltd ptnp losses in stacked ptnsp

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: Whether the limited partnership losses of a partner in respect of a particular partnership can be claimed where the limited partner transferred his interest in the particular partnership to another partnership in return for an interest in that other partnership such that the income of the particular partnership now flows through the other partnership before being received by the limited partner.

Position: No.

Reasons: Subsection 102(2) applies for purposes of subsection 96(2.2) of the Act so that the other partnership would calculate an at-risk amount and would include the particular partnership's income in such calculation.

XXXXXXXXXX
				2012-043652
				J. Gibbons, CGA
May 31, 2012

Dear XXXXXXXXXX:

Re: Limited Partnership Losses

This is in reply to your email dated February 10, 2012, concerning the application of “limited partnership losses” under paragraph 111(1)(e) of the Income Tax Act (the “Act”) in the case of tiered partnerships. In particular, your question relates to whether the rules in subsection 102(2) of the Act would apply to the application of limited partnership losses under paragraph 111(1)(e) in the hypothetical situation outlined below:

Facts

1. In Year 1, two partners, “C” and “D,” form a limited partnership (“CD”) by contributing $100 each.

2. CD incurs a loss of $500 in Year 1.

3. Since each partner’s at-risk amount of $100 in respect of CD is less than the $250 loss allocated to each of them, the excess amount of $150 becomes a limited partnership loss pursuant to subsection 96(2.1) of the Act.

4. At the beginning of Year 2, C and D transfer their partnership interests in CD to another limited partnership (the “Master”) pursuant to subsection 97(2) of the Act in exchange for limited partnership interests in Master.

5. At the end of Year 2, Master is allocated income of $500 from CD (“CD Income”) which it in turn allocates this amount equally between C and D.

In your view, the income of $250 allocated to C and D by Master should allow C and D to claim their Year 1 limited partnership losses in respect of CD. In other words, you believe that the CD income received by Master would retain its source as CD income in the hands of C and D.

Our comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Also, where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. Nonetheless, we are prepared to offer the following general comments.

In your email, you referred to interpretation letter #2004-006280 (the “2004 letter”), which dealt with a similar situation except that in that case the losses were incurred by the “bottom” partnership, and the question was whether those bottom partnership losses would be considered limited partnership losses of the partners of the” top” or “member” partnership.” In the 2004 letter, we concluded that subsection 96(2.1) of the Act applies to partnerships who are themselves members of a limited partnership by virtue of subsection 102(2) of the Act, and, as a result, a member partnership, like any other member of a limited partnership, would calculate limited partnership losses pursuant to subsection 96(2.1) of the Act. However, we also stated that limited partnership losses of a member partnership could not be used by the member partnership because a partnership is not a taxpayer for purposes of paragraph 111(1)(e) of the Act and furthermore that subsection 96(1) of the Act would not allow the transfer of this limited partnership loss by the member partnership to its members. In other words, limited partnership losses of a member partnership would be effectively lost.

Unlike the 2004 letter, in the present case, there is no need to consider the flow through or transfer of limited partnership losses from a member partnership, since C’s and D’s limited partnership losses in respect of CD relate to Year 1 when C and D were still members of CD. Thus, the position in the 2004 letter that the Act does not allow a flow through or transfer of limited partnership losses of a member partnership to its members does not apply to your situation. Instead, the question is whether income reported by a bottom partnership can be taken into account when determining whether the members of the top partnership (i.e., C and D in your example), can claim their prior year limited partnership losses in respect of that bottom partnership (i.e., CD in your example) pursuant to paragraph 111(1)(e) of the Act.

Under paragraph 111(1)(e) of the Act, a limited partnership loss cannot be claimed by a partner unless the partner’s at-risk amount in respect of that partnership (within the meaning assigned by subsection 96(2.2) of the Act) at the end of the last fiscal period of the partnership ending in the year exceeds certain other amounts. Accordingly, since a partnership that is itself a member of a partnership is subject to subsection 96(2.2) of the Act by virtue of subsection 102(2) of the Act, a member partnership (i.e., Master in your example) would be required to calculate an at-risk amount in respect of its interest in a partnership (CD in your example). This principle is also implicitly set out in the 2004 letter.

Based on the foregoing, CD Income from Year 2 would be added to Master’s at-risk amount in respect of its interest in CD pursuant to paragraph 96(2.2)(b) of the Act and would have no effect on C’s and D’s ability to claim its Year 1 limited partnership losses in respect of CD in Year 2.

We trust these comments will be of assistance.

Yours truly,

G. Moore
for Director
Business and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch