CRA rules that a loan from a limited partnership to an indirect limited partner is a loan rather than a distribution

In order that “Parent,” a taxable Canadian corporation, can borrow on more favourable terms than if it did so directly:

• Parent will set up a bankruptcy-remote great-grandchild subsidiary limited partnership {“XX LP”) held through two intermediate stacked partnerships;
• through a series of transactions, Parent will transfer a business to XX LP on a rollover basis;
• XX LP will receive the loan from third-party lenders on commercial terms, including security on essentially all its assets; and
• XX LP will lend the proceeds on an unsecured basis to Parent at the same interest rate plus a nominal spread, with a right to defer interest payments, and with a matching maturity date.

CRA ruled inter alia that the proceeds of the loan to Parent will not be considered to be received by Parent on account of, in lieu of payment of, or in satisfaction of a distribution by XX LP or any of the intermediate partnerships for purposes of s. 53(2)(c)(v); and also provided a GAAR ruling.

The ruling letter referenced a legal opinion to the taxpayer that under the provincial partnership law [see, e.g., s. 12 of the Ontario Limited Partnerships Act), a limited partnership could make a loan to a limited partner. The CRA summary indicated that such loan is a loan under provincial law and that it is not an amount in lieu of a distribution because XX LP is a newly formed partnership with no income or capital prior to the proposed transactions.

Neal Armstrong. Summary of 2023 Ruling 2022-0938261R3 under s. 53(2)(c)(v).