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: At-Risk Rules
We are writing in reply to one of your letters dated March 21, wherein you requested our comments regarding the application of "at-risk rules" in subsections 96(2.2) and 96(2.4) of the Income Tax Act (the "Act") to the hypothetical situations described below.
We apologize for the delay in responding to your letter.
Our understanding of the facts given to illustrate the issues is as follows:
Your Questions
1. A general partnership borrows funds from an arm's length party (i.e. a Canadian chartered bank) (the "Band") on a limited recourse basis. The general partnership provides security to the Bank in the form of a fixed and floating charge debenture on the assets which are acquired with the funds of the bank loan. The loan specifically states that the partners are not liable for any deficiency the Bank may suffer if the secured assets in the partnership prove to have insufficient value to satisfy the loan.
Will the general partners be considered limited partners as defined in paragraph 96(2.4)(b) of the Act by virtue of the limited recourse financing being considered a benefit to the partners under paragraph 96(2.2)(d) of the Act? It is your understanding that this question was posed in the "CBA/CICA Joint Committee Submission March 1989 Tax Reform Cleanup" question L-5 and you requested a copy of our Department's response.
2. If the partnership in the above situation were a limited partnership, would the limited recourse financing obtained by it affect the limited partner's at-risk amount by virtue of paragraph 96(2.2)(d) of the Act?
Our Comments
While we are unable to provide confirmation of the income tax effects of the particular situations described in your letter, we can offer the following general comments related to limited recourse financing obtained by a general partnership and a limited partnership.
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 general partner's acquisition of the partnership interest. Consequently, a general partner of such a partnership will not be considered to be a limited partner by virtue of paragraph 96(2.4)(b) of the Act. However, it is not possible to state that the 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. Further to your request for a copy of our Department's response to question L-5, we suggest that you contact the Department of Finance as it is our understanding that they were responsible for releasing all of the responses to the questions submitted by the CBA/CICA Joint Committee.
2. 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 limited partnership obtaining non-recourse or limited recourse financing that arose as a result of legitimate commercial transactions unrelated to a limited partner's acquisition of the partnership interest. However, it is not possible to state that the paragraph would never apply to such financing arranged by a limited partnership, as such a decision could only be rendered based on the facts of a particular case.
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 these comments will be of assistance.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
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