23 November 1988 Ruling 56721 F - Limited Partnership At-Risk Rules

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.

     5-6721     C.R. Bowen     (613) 957-2094

November 23, 1988

Dear Sirs:

We are writing in reply to your letters of October 4 and 5, 1988, wherein you requested our comments in respect of the application of the limited partnership-at-risk rules in paragraphs 96(2.2)(c) and 96(2.4)(a) of the Income Tax Act (the "Act").

Paragraph 96(2.2)(c)

You asked us to consider corporate structures outlined in Schedules A to C of dour letter of October 4 and requested our interpretation as to ether those debts would reduce the limited partner's at-risk amount under paragraph 96(2.2)(c) of the Act. While we are able to provide confirmation of the income tax effects of specific fact situations without knowing all of the relevant facts, we can offer the following general comments.

The intent of the at-risk rules is to limit the maximum share of the business and property loss of a partnership that may be recognized by a limited partner to the amount invested by the partner which is actually exposed to the risks inherent in operating the partnership. The amount owing by the limited partner in respect of his purchase price or capital contribution to the partnership forms part of the adjusted cost base of his partnership interest and is initially included in the at-risk calculation under paragraph 96(2.2)(a) of the Act. However, where this debt owing arises in circumstances outlined in paragraph 96(2.2)(c) of the Act, this debt must be subtracted from the figure previously included in be at-risk calculation in order to arrive at the at-risk amount of the limited partner.

However, it is our opinion that paragraph 96(2.2)(c) of the act generally does not apply to amounts owing by a limited partner or a person with whom the limited partner does not deal at arm's length to a partnership or to a person or partnership with whom the partnership does not deal at arm's length to the extent that such amounts arose as a result of legitimate commercial transactions which are unrelated to the limited partner's acquisition of his interest in the partnership and the terms of payment conform to normal commercial arrangements comparable to those between parties dealing at arm's length. In other words, the at-risk rules relate solely to taxpayers who are limited partners and only address their role as investors in the partnership.

Paragraph 96(2.4)(a)

Subsection 96(2.4) of the Act provides the rules for determining whether a partner is a limited partner for the purpose of the at-risk rules. A partner is deemed to be a limited partner if, at that time or within three years after that time, by operation of any law which governs the partnership arrangement, the liability of the taxpayer in his capacity as a member of the partnership is limited. This provision was intended to relate to the concept of a statutory limited partner. Although the partnership acts of most of the common law provinces provide that an incoming partner is not liable for the debts which the partnership incurred before he became a member of the partnership, it is the Department's view that paragraph 96(2.6)(a) of the Act would not normally apply in this situation. Even, though the incoming partner liability may be restricted with respect to debts which arose before he became a member of the partnership, the general partner would still have unlimited liability with respect to activities carried out by the partnership after he became a member.

Paragraph 96(2.4)(b)

A general partner may be deemed to be a limited partner by virtue of paragraph 96(2.4)(b) of the Act if, at the time or within three years of the time, the partner or a person with whom the partner does not deal at arm's length is entitled to receive an amount or benefit that would be described in paragraph 96(2.2)(d) of the Act, if it were read without reference to subparagraphs (ii) and (vi). It is our opinion that where a general partnership agreement provides limited authority for a particular general partner to act on behalf of the general partnership and that partner indemnifies the other general partners against any debts and obligations incurred as a result of acting outside such authority, that contractual indemnity of the other general partners would not normally result in the general partners being deemed limited partners under paragraph 96(2.4)(b) of the Act. However, for a specific situation, such a determination could only be made after a review of all of the relevant facts.

Arm's Length

The Department' s position concerning the relationship between partners and the partnership is indicated in paragraph 15 of Interpretation Bulletin IT-419, and is as follows:

In situations where one partner is in a position to control a partnership, either through ownership of a controlling interest or through a mandate vested in him by his partners, the Department considers such person not to deal at arm's length with that partnership. However, when a partner is not in a position to control a partnership in which he has an interest, and that partner has little or no say in directing the operations of the partnership, the Department is prepared to recognize that the partner may deal at arm's length with the partnership.

Accordingly, we agree that a general partner who controls the operations of a partnership will generally not deal at arm's length with the partnership. However, we are unable to confirm that a limited partner will always deal at arm's length with the limited partnership of which he is a member. Such a determination would require a review of all of the facts of a specific situation.

These comments represent our opinion of the law as it applies generally. As indicated in paragraph 24 of Information Circular 70-6R dated December 18, 1978 this opinion is not a ruling and accordingly is not binding on Revenue Canada, Taxation.

We trust the foregoing comments will be of assistance to you.

Your truly,

R. Albertfor DirectorSmall business and General DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch