27 July 1993 External T.I. 9309805 F - At Risk Amount - Partnership General

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.

XXXXXXXXXX

Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Paragraph 96(2.2)(c) of the Income Tax Act

This is in reply to your letter dated March 31, 1993 wherein you requested our opinion on the application of the above-mentioned paragraph of the Income Tax Act (the "Act") in a particular fact situation.

The particular circumstances outlined in your letter appear to be real transactions involving specific taxpayers. 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.

Paragraph 102(b) of the Act provides that in sections 96 to 103 of the Act dealing with partnerships and their members, a reference to a person or a taxpayer who is a member of a particular partnership shall include a reference to another partnership that is a member of the particular partnership. Accordingly, the rules relating to partnerships, such as the at-risk rules, are applicable to a member of a partnership which is itself a partnership. Furthermore, subsection 96(2) of the Act provides that the rules contained in sections 96 to 103 of the Act, such as the at-risk rules, shall be read and construed as if each of the assumptions in paragraphs 96(1)(a) to (g) were made. Paragraph 96(1)(a) of the Act states namely that the income of partners shall be computed as if the partnership was a separate person resident in Canada.

Thus, it seems clear to us that, in the fact situation outlined in your letter, Partnership B should be considered a separate "person" for the purpose of the calculation of Partnership A's at-risk amount in Partnership B. Consequently, a literal interpretation of paragraph 96(2.2)(c) of the Act should lead us to the conclusion that the at-risk amount of Partnership A in Partnership B should be reduced by the amount owed by Partnership B to Corporation C if these two partnerships are not dealing at arm's length. However, it is the Department's opinion that paragraph 96(2.2)(c) of the Act should generally not apply to reduce the at-risk amount of Partnership A in Partnership B, if the amount owed by Partnership B to Corporation C arose as a result of legitimate commercial transactions that are unrelated to the Partnership A's acquisition of its interest in the Partnership B, and to the extent that the terms of payment conform with normal commercial arrangements comparable to those between parties dealing at arm's length.

In your letter you concluded that paragraph 96(2.2)(c) of the Act does not apply in the fact situation described therein for the above two reasons:

1)     paragraph 96(2.2)(c) of the Act deals specifically with a person or partnership for purposes of determining who is owed the money while the provision deals only with a "person" for purposes of determining who actually owes the funds.

2)     paragraph 96(2.2)(c) of the Act should not apply because this paragraph is not relevant in the computation of the partnership's income or any other of the calculations required by subsection 96(1), but rather, it is a computation which affects a limited partner's ability to deduct losses of the partnership.

Your conclusion seems to ignore paragraph 96(2) of the Act specifically stating that for the application of sections 96 to 103 of the Act, such as paragraph 96(2.2)(c) of the Act, the assumption in paragraph 96(1)(a) of the Act, i.e. a partnership should be considered to be a separate person, should apply.

In the first part of paragraph 96(2.2)(c) of the Act, the word "partnership" is used because that paragraph is intended to cover indebtedness by a limited partner to the partnership (the "first partnership") in which he is a partner or to a person or a partnership (the "second partnership") with whom the first partnership does not deal at arm's length. It was necessary to add the expression "or a partnership" because the assumptions provided in paragraph 96(1)(a) and subsection 96(2) of the Act might not have been applicable to the second partnership. However, the expression "person" in the second part of paragraph 96(2.2)(c) of the Act covers the partnership in which the taxpayer is a limited partner because of the application of subsection 96(2) of the Act.

The preceding comments are based on the Act as of the date hereof without taking into account any future amendments thereto, whether currently proposed or not. Furthermore, 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, as amended by Special Release dated September 30, 1992, this opinion is not a ruling and accordingly, it is not binding on Revenue Canada.

We trust these comments will be of assistance to you.

Yours truly,

for Director Manufacturing Industries, Partnerships and Trusts DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch