22 May 1992 Income Tax Severed Letter 9215187 - Limited partnership — loss of former limited partner

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

SUBJECT: LIMITED PARTNERSHIP LOSS OF FORMER LIMITED
PARTNER SECTION: 111(1)(e), 96(2.1)]

DRAFT
1992 CORPORATE MANAGEMENT TAX CONFERENCE

QUESTION

It would be helpful for Revenue Canada to confirm its position on the "limited partnership loss" implications to a partner when his status changes from a "limited partner" to a "general partner" of the same partnership. It would seem that the change to general partner status could result in the new general partner being denied access to any unused limited partnership loss that he accumulated as a limited partner. This would result in such losses never being used which raises a policy concern since the general partner is now fully "at risk" for the partnership's liabilities. The correct policy result should be that the limited partnership losses would become fully deductible by the new general partner. Does Revenue Canada agree?

RESPONSE

Revenue Canada's position on whether or not there is a disposition of the partnership interests of general partners who become limited partners is stated at Question 30, "Revenue Canada Roundtable", 1990 Conference Report, Canadian Tax Foundation. This position would be applicable to limited partners who become general partners.

A taxpayer's limited partnership losses are deductible under paragraph 111(1)(e) of the Income Tax Act (the "Act") to the extent of his "at-risk amount" as defined at subsection 96(2.2). Since subsection 96(2.2) only applies to limited partners, deductions under paragraph 111(1)(e) would not be available to a general partner who was formerly a limited partner. This interpretation is consistent with the Department of Finance's Technical Notes accompanying paragraph 111(1)(e).

Policy concerns regarding provisions of the Act should be brought to the attention of the Department of Finance. We have informed the Department of Finance about the policy concern stated in the above question.

Prepared by: John Chan
ISSUE SHEET
John Chan
7-921518
May 22, 1992

Change of Status from Limited Partner to General Partner

The issue in this question is whether a limited partner's limited partnership loss determined under subsection 96(2.1) can be deducted under paragraph 111(1)(e) in taxation years of the partner after he ceases to be a limited partner and becomes a general partner of the same partnership.

Paragraph 111(1)(e) permits a taxpayer to deduct his limited partnership losses to the extent of his at-risk amount within the meaning of this term at subsection 96(2.2). This definition however only applies to limited partners. Thus, only limited partners can deduct limited partnership losses.

Consequently, upon cessation of the partner's status as a limited partner, he can no longer avail himself of a deduction under paragraph 111(1)(e). This would be the same result if the partner sold his limited partnership interest, thereby ceasing to be a limited partner.

The above interpretation was also arrived at by Edward A. Heakes at page 8:17 of the article entitled "The Current At-Risk Rules", 1989 Corporate Management Tax Conference Report and by Robert A. Brown at pages 15 and 16 of the article entitled "Limited Partnership At-Risk Rules", 1989 Petroleum Tax Conference. It is also consistent with the Finance's 1986 Technical Notes accompanying paragraph 111(1)(e).

Whether or not there is a disposition of the limited partner's interest in the partnership in exchange for his general partnership interest was dealt with in Q.30, 1990 CTF Roundtable. Therein, it is stated that, generally, the Department considers that there is not a disposition where all that has changed is the degree or amount of the partner's potential liability. This position is supported by a legal opinion dated December 21, 1987.

Regarding the policy result, the response to the question is that policy concerns should be directed to the Department of Finance.