20 March 2026 Internal T.I. 2025-1061521I7 - PARTNERSHIP LOSSES - MANDATORY VS DISCRETIONARY

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: Is it mandatory for a taxpayer who is a partner of a partnership to include a loss allocated from the partnership in computing the partner's income for the year, or is claiming the loss discretionary?

Position: It is mandatory.

Reasons: Required by paragraphs 3(d) and 96(1)(g).

Mr. Gordon MacGibbon					Steven Pannozzi
International and Large Business Case Manager	Senior Rulings Officer
XXXXXXXXXX			                     	Income Tax Rulings Directorate
Canada Revenue Agency					

2025-106512

March 20, 2026

Re: Partnership Losses

Dear Mr. MacGibbon:

This is in reply to your inquiry dated April 17, 2025, wherein you requested our views on whether a business loss incurred by a partnership and allocated to a taxpayer that is a member of the partnership is required to be included in the computation of net income for the year by the taxpayer, or whether the taxpayer has the discretion to not include such a loss in that computation under section 3 of the Income Tax Act (“the Act”).

Our Comments

As part of the general rules under subsection 96(1), where a taxpayer is a member of a partnership, the taxpayer’s income for a taxation year is computed as if the partnership were a separate person resident in Canada, the taxation year of the partnership were its fiscal period, each partnership activity (including the ownership of property) were carried on by the partnership as a separate person and a computation were made of the amount of each income and loss of the partnership from each source (or from sources in a particular place) and the amount of the income or loss of the partnership from each source (or from sources in a particular place), subject to the application of subparagraph 96(1)(g)(ii), were the income or loss of the taxpayer from that source (or from sources in that particular place) for the taxpayer’s taxation year in which the partnership’s taxation year ends, to the extent of the taxpayer’s share thereof. Therefore, where a partnership has a loss from a business and a share of that loss is allocated to a taxpayer, the taxpayer has a loss from that same source which must be taken into account under the Act, subject to any applicable limitations, including those that may apply to a limited partner.

In our view, claiming a deduction in computing a loss from a source and including the loss itself from a particular source in the computation of net income for the year are two distinct concepts. The fact that one (i.e. claiming a deduction) may be discretionary does not lead to the conclusion that the other (i.e. including a loss) is also discretionary.

Where taxpayers have discretion in respect of the utilization of a loss, it is expressly provided for under the relevant provisions of the Act, such as subsection 111(1) of the Act, pertaining to losses of other years. This provision explicitly provides taxpayers the choice of utilizing those losses in a prior or subsequent taxation year, within specified limits. Such discretion is not provided for in respect of current-year losses under paragraph 3(d) of the Act.

Paragraph 3(d) of the Act does in fact require losses from each separate source to be included in the computation of income for the year. Paragraph 3(d) refers simply to the “the amount, if any, by which the amount determined under paragraph (c) exceeds the total of all amounts each of which is the taxpayer’s loss for the year from an office, employment, business or property or the taxpayer’s allowable business investment loss for the year”, and paragraph 3(e) provides that “where an amount is determined under paragraph (d) for the year in respect of the taxpayer, the taxpayer’s income for the year is the amount so determined”. In our view, these provisions do not contemplate that a taxpayer may choose to omit a current-year loss from the computation where that loss has otherwise been determined under the Act.

Accordingly, in our view, a taxpayer’s share of the business loss of a partnership is not a discretionary deduction that the taxpayer may choose to claim in computing income for the year. Subject to any applicable statutory limitations, including any limitation that may apply in the case of a limited partner, the taxpayer’s share of the business loss of a partnership must be taken into account in computing the taxpayer’s income for the year under section 3 of the Act.

Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.

We trust our comments will be of assistance.

Yours truly,

Sandro D’Angelo, CPA, CMA
Section Chief
Business Income and Capital Transactions Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch