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: 1. Whether paragraph 96(2.2)(c) allows a limited partnership to make loans to a limited partner? 2. If not, how would the ITA and the provincial laws work together?
Position: 1. No. 2. Validity of loans determined based on the laws of the Province of Ontario.
Reasons: 1. and 2, sections 8.1 and 8.2 of the Interpretation Act, case law and previous positions.
December 16, 2019
XXXXXXXXXX - International and Large HEADQUARTERS
Business Case Manager Income Tax Rulings
and XXXXXXXXXX – Large Case File Auditor Directorate
R. Gagnon
2019-081610
Loans from Limited Partnerships to a Limited Partner
We are writing in response to your December 31, 2016 memorandum (initially sent to the Legislative Application Section of the Large Business Audit Division and transferred to the Income Tax Rulings Directorate (“ITRD”) at the request of Leslie Bafia, Manager of the Legislative Application Section) and your email dated October 16, 2019. In response to our October 10, 2019 email, XXXXXXXXXX stated that your questions are whether paragraph 96(2.2)(c) of the Income Tax Act (herein, the “ITA”) allows a limited partnership to make loans to a limited partner (if so, then the laws of the Province of Ontario or the Province of Quebec would be irrelevant as the ITA would take precedence and applies to the whole country) and if not, how would the ITA and the provincial laws work together. Your questions relates to the specific factual situations described below.
Unless otherwise stated, every legislative reference herein is a reference to the relevant provision of the ITA.
XXXXXXXXXX
Paragraph 96(2.2)(c) reads as follows:
(c) all amounts each of which is an amount owing at that time to the partnership, or to a person or partnership not dealing at arm’s length with the partnership, by the taxpayer or by a person or partnership not dealing at arm’s length with the taxpayer, other than any amount deducted under subparagraph 53(2)(c)(i.3) in computing the adjusted cost base, or under section 143.2 in computing the cost, to the taxpayer of the taxpayer’s partnership interest at that time, [Underlined emphasis added.]
Subsection 96(2.2) is part of the at-risk rules that limit the amount of losses that can be allocated to a limited partner in a partnership to the limited partner’s “at-risk amount.” The “at-risk amount” of a taxpayer, in respect of a partnership of which the taxpayer is a limited partner, has the meaning assigned by subsection 96(2.2). The purpose of paragraph 96(2.2)(c) is to reduce the at-risk amount by all amounts each of which is an amount owing at that time to the partnership, or to a person or partnership not dealing at arm’s length with the partnership, by the taxpayer or by a person or partnership not dealing at arm’s length with the taxpayer (other than certain amounts specified in paragraph 96(2.2)(c)).
Paragraph 96(2.2)(c) is not a provision of the ITA that would allow, in and by itself, a limited partnership to make loans to a limited partner. In other words, a loan from a limited partnership to a limited partner cannot be valid solely because of paragraph 96(2.2)(c). The reference in paragraph 96(2.2)(c) to “all amounts each of which is an amount owing at that time to the partnership… by the taxpayer” suggests that the legislator believed that at least in certain jurisdictions, there could be a debtor and creditor relationship between a limited partner (debtor) and a limited partnership (creditor). For instance, subsection 60(1) of the Partnership Act of the Province of British Columbia specifically provides that a limited partner may borrow money from a limited partnership.
In order to better understand the interaction between the ITA, the common law and provincial laws, it is relevant to examine certain provisions of the federal Interpretation Act.
Subsections 2(1) (Definitions) and 3(1) (Application), and sections 8.1 (Duality of legal traditions and application of provincial law) and 8.2 (Terminology) of the federal Interpretation Act provides:
Definitions
2(1) In this Act,
Act means an Act of Parliament;
…
enactment means an Act or regulation or any portion of an Act or regulation;
Application
3(1) Every provision of this Act applies, unless a contrary intention appears, to every enactment, whether enacted before or after the commencement of this Act.
Rules of Construction
Property and Civil Rights
Duality of legal traditions and application of provincial law
8.1 Both the common law and the civil law are equally authoritative and recognized sources of the law of property and civil rights in Canada and, unless otherwise provided by law, if in interpreting an enactment it is necessary to refer to a province’s rules, principles or concepts forming part of the law of property and civil rights, reference must be made to the rules, principles and concepts in force in the province at the time the enactment is being applied. [Underlined emphasis added.]
Terminology
8.2 Unless otherwise provided by law, when an enactment contains both civil law and common law terminology, or terminology that has a different meaning in the civil law and the common law, the civil law terminology or meaning is to be adopted in the Province of Quebec and the common law terminology or meaning is to be adopted in the other provinces.
Sections 8.1 and 8.2 above were added to the Interpretation Act in 2001 with the Federal Law-Civil Law Harmonization Act, No.1. The recitals contained in the preamble to this legislation include the following:
Preamble
WHEREAS all Canadians are entitled to access to federal legislation in keeping with the common law and civil law traditions;
WHEREAS the civil law tradition of the Province of Quebec, which finds its principal expression in the Civil Code of Québec, reflects the unique character of Quebec society;
WHEREAS the harmonious interaction of federal legislation and provincial legislation is essential and lies in an interpretation of federal legislation that is compatible with the common law or civil law traditions, as the case may be; [Underlined emphasis added.]
WHEREAS the provincial law, in relation to property and civil rights, is the law that completes federal legislation when applied in a province, unless otherwise provided by law; [Underlined emphasis added.]
WHEREAS the objective of the Government of Canada is to facilitate access to federal legislation that takes into account the common law and civil law traditions, in its English and French versions; AND [Underlined emphasis added.]
WHEREAS the Government of Canada has established a harmonization program of federal legislation with the civil law of the Province of Quebec to ensure that each language version takes into account the common law and civil law traditions;
Section 8.1 of the Interpretation Act recognizes the equal status of common law and civil law as sources of the law of property and civil rights in Canada (Canadian bijuralism), and affirms the principle of the complementarity of federal law and provincial law as the appropriate approach to the interpretation of federal legislation. The principle of complementary applies only “if in interpreting an enactment it is necessary to refer to a province’s rules, principles or concepts forming part of the law of property and civil rights” (i.e. private law), and it does not apply where “otherwise provided by law”. Where federal legislation disregards the private law of the applicable province, relying on other legal concepts or independent rules enacted in a federal act, a relationship of dissociation exists between federal law and the province’s private law.
The ITA provides the standard example of a federal public law act that is superposed on to private law relations. When a provision of federal law draws on a private law concept without defining it or imparting to it a specific meaning, it is necessary to have recourse to the private law in force in the particular province (see The harmonization of Federal Tax Legislation, 2001, by Marc Cuerrier, then General Counsel Civil Code Section, Department of Justice).
In the decision 9101-2310 Québec Inc., 2013 DTC 5172 (FCA), the FCA stated in paragraph 44:
[44] A brief comment on the role of provincial law in the application of the Act is also appropriate. It is settled law that unless Parliament provides otherwise, the private law of the provinces plays a suppletive role (see section 8.1 of the Interpretation Act, R.S.C., 1985, c. I-21), so that a transfer of the ownership of property for the purposes of the Act takes place where ownership has changed under the civil law of Quebec or the common law of each of the other provinces of Canada depending on where the cause of action arises. [Underlined emphasis added.]
For instance, the concept of partnership is not defined in the ITA and it is necessary to have recourse to the private law of the provinces to determine, in a particular situation, if a partnership has been formed (see Income Tax Folio S4-F16-C1, What is a Partnership?).
In the decision Glen French et al, 2016 DTC 5035 (FCA), the FCA stated in paragraph 43:
[43] Finally, the Tax Court judge found that a quest for uniformity in the application of federal legislation is not, in and of itself, a sufficient reason for disregarding the applicable private law. I agree. The objective of sections 8.1 and 8.2 of the Interpretation Act is to recognize the role of the civil law and the common law in the application of federal legislation which necessarily entails the possibility of diverging results. [Underlined emphasis added.]
Partnership law in Canada is a matter of provincial jurisdiction and each of Canada’s provinces other than the Province of Quebec (which was the jurisdiction examined in document 2016-0637341E5) is governed by the common law and provincial laws (including the Partnerships Act and Limited Partnerships Act in the Province of Ontario).
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.
In the situations described above, the issue as to whether the payments made by the limited partnerships to XXXXXXXXXX that were treated as loans by the parties can be considered to be bona fide loans for the application of paragraph 96(2.2)(c) and subparagraph 53(2)(c)(v) (rather than distributions) should be determined based on the laws of the Province of Ontario.
Document 2016-0637341E5 was in respect of a hypothetical situation subject to the civil law of the Province of Québec, including the application of the Quebec Civil Code. ITRD had doubts that it is possible under the civil law for the limited partnership to make loans to the trust in the situation described in the letter. The document said that if it is not possible under the civil law for the limited partnership to make the loan, then there is no loan under the civil law, and the payments by the limited partnership would be treated as distributions of partnership profits for the application of subparagraph 53(2)(c)(v) in the situation described in the letter. ITRD did not confirm the income tax treatment (i.e. application of subparagraph 53(2)(c)(v)) in the particular situation described in the letter. The comments in the first three paragraphs of the response to question 1 were not meant to apply to limited partnerships subject to the laws of the Province of Ontario. The technical interpretation did not state that a loan by a partnership to a partner is never a bona fide loan and always a distribution under subparagraph 53(2)(c)(v).
We trust that these comments will be of assistance to you.
Yours truly,
Urszula Chalupa, LL.B, M. Fisc.
for Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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