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.
5-930183
XXXXXXXXXX Benoit Mandeville
(613) 957-8953
Attention: XXXXXXXXXX
June 2, 1993
Dear Sirs:
Re: Technical Interpretation - Limited recourse loan and at-risk amount
This is in reply to your letters dated January 15, 1993 and April 20, 1993, wherein you request a technical interpretation on subsection 96(2.2) of the Income Tax Act (the "Act") in two particular fact situations.
The situations that you describe in your letters appear to be real situations. As mentioned in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, as amended by Special Release dated September 30, 1992, it is not the practice of this Department to provide opinions with respect to proposed transactions other than in the form of advance income tax rulings. On the other hand, the tax consequences of completed transactions are best determined by our District Offices in the course of tax audits. This Directorate is therefore not in a position to give a definitive response to your inquiry. However, we are prepared to offer you the following general comments which may be of some assistance but may not be appropriate in a given fact situation.
Response to your first question
The at-risk rules are relevant for a partner in a general partnership when he is considered a limited partner by virtue of one or more of the paragraphs (a) to (d) of subsection 96(2.4) of the Act. For example, it will be the case under paragraph 96(2.4)(b) of the Act if the partner or a person with whom the partner does not deal at arm's length is entitled to receive an amount or obtain a benefit that would be described in paragraph 96(2.2)(d) of the Act if it were read without reference to subparagraphs 96(2.2)(d)(ii) and (vi) of the Act. It is our opinion that a partner of a general partnership could be, by virtue of paragraph 96(2.4)(d) of the Act, in a given fact situation, a limited partner for the purpose of the at-risk rules where the partnership is party to a non-recourse or a limited recourse loan which is related to its partners' acquisition of partnership interests.
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 only by reason of the non- recourse or limited recourse loan. 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 determination could only be rendered based on the facts of a particular case.
Response to your second question
The Department indicated its position on limited recourse financing obtained by a limited partner on page 53:11 in the 1988 Conference Report of the Canadian Tax Foundation:
Where a limited partner has financed all or a portion of the purchase price of his partnership interest with limited recourse borrowings, the department considers that the limited recourse borrowings constitute an amount or benefit that has been granted for the purpose of reducing a loss that the taxpayer may sustain by virtue of his being a member of the partnership or by virtue of holding or disposing of his partnership interest. Therefore, such limited recourse borrowings will reduce the limited partner's at-risk amount.
The amount of reduction under paragraph 96(2.2)(d) of the Act at any particular time to a limited partner's at-risk amount as a result of a limited recourse borrowings obtained by the partner will be the amount of the limited recourse borrowings outstanding at that time.
Response to your third question
The circumstances involving non-recourse or limited recourse financing at the partnership level in which Revenue Canada will consider such financing to be related to the acquisition of a partnership interest will depend on each specific situation and no general guidelines are currently available.
The preceding comments are based on the Act and the Regulations as of the date hereof without taking into account any future amendments thereto, whether currently proposed or not. Futhermore, 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.
We trust that these comments will be of assistance to you.
Yours truly,
for Director Manufacturing Industries, Partnerships and Trusts Division Rulings Directorate Legislative and Intergovernmental Affairs Branch
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