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.
Dear Sirs:
Re: Subsections 95(2.2) and 96(2.4)
We are writing in reply to your letter of December 20, 1990, wherein you requested our comments regarding the application of subsections 96(2.2) and 96(2.4) of the Income Tax Act (the "Act") to the hypothetical situation described below. We apologize for the delay in responding to your letter.
Our understanding of the facts given to illustrate the issue is as follows:
1. A general partnership, consisting of two partners dealing at arm's length, is formed for the purpose of acquiring specific assets and using those assets in its business.
2. The partnership borrows funds on a limited recourse basis on commercial terms from an arm's length bank or other financial institution. The lender's only recourse is against the assets acquired by the partnership with the borrowed funds. This security is acceptable based on the reputation of the general partners and the value of the assets.
3. The partners are dealing at arm's length with the third party vendor which sold the assets to the partnership. The vendor of the assets is also dealing at arm's length with the financial institution.
Your Questions
1. Will the general partners be considered limited partners by virtue of paragraph 96(2.4)(b) of the Act for the purposes of the "at-risk rules" in subsection 96(2.2) of the Act?
2. Will the general partners be considered limited partners by virtue of paragraph 96(2.4)(b) of the Act in the situation where limited recourse financing is obtained directly by each partner (under the same terms as outlined above), the funds are forwarded to the partnership as capital contributions and the general partnership then purchases the assets?
Our Comments
While we are unable to provide confirmation of the income tax effects of the particular situation described in your letter, we can offer the following general comments related to a general partnership and its general partners obtaining limited recourse financing.
1. It is our opinion that paragraph 96(2.2)(d) of the Act generally will not apply with respect to the benefit that may arise by virtue of a general partnership obtaining non-recourse or limited recourse financing that arose as a result of legitimate commercial transactions unrelated to a partner's acquisition of the partnership interest. Consequently, the general partners of that partnership would not be considered limited partners by virtue of paragraph 96(2.4)(b) of the Act. However, it is not possible to state that paragraph 96(2.2)(d) of the Act would never apply to such financing arranged by a general partnership, as such a decision could only be rendered based on the facts of a particular case.
2. In accordance with our position enunciated on page 53:11 of the 1988 Conference Report - Canadian Tax Foundation with respect to limited partners, it is our opinion that where a general partner has obtained limited recourse borrowings from a financial institution and the proceeds are used as a capital contribution to a general partnership or to purchase a partnership interest in a general partnership, those borrowings constitute an amount or benefit referred to in paragraph 96(2.2)(d) of the Act. Therefore, the general partners will be considered to be limited partners by virtue of paragraph 96(2.4)(b) of the Act.
These comments represent our opinion of the law as it applies generally. As indicated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, this opinion is not a ruling and accordingly, it is not binding on Revenue Canada, Taxation.
We trust that these comments will be of assistance.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
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