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: What are the CRA’s current views on situations where loans are received by a limited partner from a limited partnership that have a purpose of avoiding a gain that could be realized under subsection 40(3.1)?
Position: See below.
Reasons: See below.
2022 CTF Annual Conference
CRA Round Table
Question 1: Loans Made by Limited Partnerships to Limited Partners
In technical interpretation 2016-0637341E5 (dated June 27, 2016), the CRA stated that the scope of subparagraph 53(2)(c)(v) of the Act (footnote 1) is very broad and could in theory (depending on all relevant facts) apply to the amount of the loans made by a limited partnership to a limited partner in a situation as described in the letter.
The situation described in technical interpretation 2016-0637341E5 involved loans arguably made by a limited partnership to a limited partner in lieu of the payment of distributions of the limited partner’s share of the partnership profits.
What are the CRA’s current views on situations where loans are received by a limited partner from a limited partnership that have a purpose of avoiding a gain that could be realized under subsection 40(3.1)?
CRA Response
Depending on the facts and circumstances, money or property received by a limited partner as a loan from a limited partnership may or may not be viewed as received “on account or in lieu of payment of, or in satisfaction of” a distribution of the limited partner’s share of the partnership profits or partnership capital for purposes of the application of subparagraph 53(2)(c)(v).
The CRA will generally not attempt to include a loan received (in lieu of payment of, or in satisfaction of a distribution of the taxpayer’s share of the partnership profits or capital) by a limited partner from a limited partnership under subparagraph 53(2)(c)(v) if all of the following conditions are met:
1. The loan is not made in lieu of payment of, or in satisfaction of, a return of contributions of capital of the limited partner.
2. The aggregate of all such loans received by the limited partner in respect of a partnership’s fiscal period does not exceed the total of the “ limited partner’s share of the partnership adjusted net income” (footnote 2) for such period and the limited partner’s adjusted cost base (“ACB”) at the end of the fiscal period (ACB determined before the application of subparagraph 53(2)(c)(v) to the loans); or if there is an excess, the excess is an immaterial amount.
3. Shortly after the end of the fiscal period, the limited partnership makes a distribution payable to the limited partner, which is equal to the aggregate amount of the loans received by the limited partner in the fiscal period, and the distribution is used to fully settle such loans (in cash, or by set-off or compensation).
4. The loan (made in lieu of the payments of distributions in cash) is made primarily for the purpose of avoiding a deemed gain under subsection 40(3.1) that would be realized by the limited partner at the end of the fiscal period of the partnership and that would solely be due to the timing difference between the addition in and the deduction from the calculation of the ACB of the partnership interest held by the limited partner of, respectively:
(a) the limited partner’s share of the partnership adjusted net income for such fiscal period, and
(b) the distributions to the limited partner in respect of that period pursuant to subparagraph 53(2)(c)(v) if no portion of such distributions was made by way of loans.
5. The partnership interest is not a tax shelter (footnote 3) or the partnership, or the transactions involving or related to the partnership, are not part of a broader series of transactions that includes an avoidance transaction (within the meaning of subsection 245(3)) to which subsection 245(2) should apply.
Where any of the above conditions is not met, the CRA may consider the whole amount received as a loan to be received “on account or in lieu of payment of, or in satisfaction of” a distribution of the limited partner’s share of the partnership profits or partnership capital for purposes of the application of subparagraph 53(2)(c)(v), but without another reduction of ACB under this provision for the distribution made by the partnership to repay the loan, or may consider the application of the general anti-avoidance rule (“GAAR”).
Robert Gagnon
2022-094978
November 29, 2022
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 Income Tax Act, RSC 1985, c. 1 (5th Supp.), as amended.
2 The “partner’s share of the partnership adjusted net income” means in general for the partner, the total of all amounts as determined under subparagraph 53(1)(e)(i) for the fiscal period minus the total of all amounts as determined under subparagraph 53(2)(c)(i) for the fiscal period.
3 Tax shelter means the “tax shelter investment” as defined in subsection 143.2(1).
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