16 October 1992 Income Tax Severed Letter 9227555 - Partnerships and Section 80

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.

922755
24(1) M. Cooke
(613) 957-8972

Attention: 19(1)

October 16, 1992

Dear Sirs: Re: Application of Section 80 to Debts of a Limited Partnership and Guarantees From Limited Partners

This is in reply to your letter of September 21, 1992, in which you requested a technical interpretation with respect to the application of section 80 of the Income Tax Act (the "Act"), under three variations of a similar fact situation, in the context of a limited partnership where guarantees have been provided by the limited partners.

General Partnerships

Your Position/Comments

In the case of a general partnership as outlined in your letter, you would like the Department to confirm, that,

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notwithstanding the fact that a general partner is jointly liable for all the debts and liabilities of the partnership incurred while the partner was a member of the partnership, (under Section 10 of the Partnership Act (Ontario)), the application of section 80 should be at the partnership level in all cases.

The Department's Position

Our general comments as to the application of section 80 as it applies to partnerships can be found in Question 14 of the 1988 Canadian Tax Foundation Conference Report ("CR") Roundtable, Question 9 of the 1989 Corporate Management Tax Conference ("CMC") Roundtable and paragraph 17 of IT-138R.

Question 14 of the 1988 CR states in part, "...Generally, section 80 will apply to the partners only where they have obligations to pay amounts and these obligations are subsequently settled for amounts less than their principal amount." It is a question of law for the purpose of section 80 as to whether a debt or other obligation owed by a partnership is considered a debt or obligation owed by the respective partners.

Situation One: Limited Partnership With Guarantees-Payment Made Directly By Partnership

Your Position

In the first situation you have presented, you have assumed that each partner of a limited partnership will provide a guarantee directly to the bank which will establish a debtor/creditor relationship between the bank and the limited partners, contingent only upon default on the obligation by the partnership. Upon default the bank settles the debt with the partnership and releases the limited partners under the guarantees.

Your view is that section 80 should be applied in same manor as discussed above for general partnerships and further, that section 80 will not be applied separately to the limited partners in connection with their release under the guarantees by the bank.

The Department's Position

As we fail to see a liablity of the partners, we cannot offer any comments.

However, we don't understand why in the case of default a bank would unconditionally release a guarantor without first

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making a demand under the guarantee agreement. If the purpose of releasing the limited partners under the guarantees were to avoid the application of section 80, section 245 may be applicable.

Our response to situations two and three are the same as for situation one.

Application Of Paragraph 80(1)(d)

Your Position

You state that if it was determined that section 80 applied at the partner level (rather than at the partnership level), paragraph 80(1)(d) would apply to prevent the application of section 80 if money borrowed to satisfy the guarantee was not deductible. Further, you indicate that since interest on money borrowed to satisfy a guarantee where no guarantee fee is charged, is by law, not deductible, except for the deduction based on the Department's administrative practice as outlined in IT-445, the provisions of paragraph 80(1)(d) should apply to prevent the application of section 80 because the administrative position of interest deductibility should not override the law.

The Department's Position

We do not agree with your comments in your letter that the deductibility of interest expense incurred on money borrowed to honour guarantee payments is deductible only due to the Department's administrative concessions and not under the provisions of the Act. It remains a question of fact as to whether a guarantee was given by a limited partner for no consideration as the partner could have given the guarantee as part of the consideration given by him in exchange for his interest in the partnership.

Further, in the December 20, 1991, draft legislation on interest deductibility, proposed subsection 20(3.2), if enacted, will apply retroactively and essentially codify the administrative positions outlined in IT-445.

Finally, notwithstanding all the above, depending on the facts and circumstances of each particular case, it is possible that either section 245 or subsection 246(1) may have application.

We trust you find our comments of use.

Yours truly,

Section Chief
Leasing & Financing Section
Financial Industries Division
Rulings Directorate

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