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.
Principal Issues: Can a limited partner deduct, in the limited partner's taxation year in which the partnership ceases to exist, the portion of the limited partner's share of the partnership loss for its final fiscal period that is in excess of that limited partner's at-risk amount in respect of the partnership at the end of that fiscal period?
Position: No.
Reasons: Wording of 96(2.1) and 111(1)(e).
XXXXXXXXXX
2013-047771
January 6, 2014
Dear XXXXXXXXXX:
Subject: Limited partnership losses and dissolution
This is in response to your email of February 7, 2013, concerning the deductibility of partnership losses by a limited partner. We apologize for the delay in responding.
In your email, you describe a situation where a limited partnership is selling off capital assets in the year it ceases operations. You state that this sale of assets resulted in a terminal loss which generated a loss for the partnership in the same amount for its fiscal period. In addition, you state that the limited partner's share of the partnership loss is greater than the at-risk amount of the limited partner at the end of the fiscal period. Specifically, you wonder whether a limited partner can deduct, in the limited partner's taxation year in which the partnership ceases to exist, the portion of the limited partner's share of the partnership loss for its final fiscal period that is in excess of that limited partner's at-risk amount in respect of the partnership at the end of that fiscal period.
This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.
Our Comments
In general, a limited partner may deduct the limited partner's share of a partnership loss for a fiscal period of the partnership ending in the limited partner's taxation year to the extent permitted by the rules in subsection 96(2.1) of the Act which provide a limit based on the limited partner's at-risk amount in respect of the partnership (as determined under subsection 96(2.2) of the Act) at the end of the fiscal period. The portion that cannot be deducted because of the operation of subsection 96(2.1) is deemed by that subsection to be the limited partner's limited partnership loss for the year. Limited partnership losses may be carried forward and claimed in a subsequent year to the extent permitted by the rules in paragraph 111(1)(e) of the Act.
In general, paragraph 111(1)(e) allows a limited partner to claim, in a particular taxation year, the limited partner's limited partnership losses in respect of a partnership from prior years. In the situation described, since the limited partner's limited partnership loss arose in the particular taxation year, no deduction is available under paragraph 111(1)(e) in that particular taxation year for that limited partnership loss. Further, limited partnership losses can only be claimed in a taxation year to the extent that the at-risk amount in respect of the partnership at the end of the last fiscal period of the partnership ending in the taxation year exceeds certain amounts. Thus, if the limited partnership has ceased to exist, no amount may be claimed in a subsequent year under paragraph 111(1)(e) for any unused limited partnership losses in respect of that partnership. Furthermore, in the situation described, if the limited partnership has ceased to exist, the limited partner's at-risk amount in respect of that partnership can no longer be increased and thus no amount could be claimed in any event due to the limitation provided under that provision.
Please note that paragraph 98(1)(a) of the Act generally provides that, for income tax purposes, the partnership is deemed not to have ceased to exist and a partner is deemed not to have ceased to be a partner until such time as all the partnership property and any property substituted therefor has been distributed to the persons entitled by law to receive it. Nevertheless, unless an election is made under subsection 99(2) of the Act, subsection 99(1) of the Act provides that a fiscal period of a partnership is considered to end immediately before the time that is immediately before the time the partnership ceased to exist. Subsequently, on the distribution of the partnership property there will be another fiscal period end. In general, where an individual was a member of a partnership that actually ceased to exist and if all the remaining conditions of subsection 99(2) are met, the individual may elect, for the purposes of computing the individual's income, to consider the partnership's fiscal period to end immediately before the time when the fiscal period of the partnership would have ended if the partnership had not ceased to exist.
In conclusion, in the situation described, since the limited partner's share of the partnership loss for the fiscal period is greater than the limited partner's at-risk amount in respect of the partnership at the end of the fiscal period, the limited partner may only deduct a portion of the loss due to the limitation provided under subsection 96(2.1). Further, where the limited partnership has ceased to exist (unless subsection 98(1) applies) and it is the final fiscal period of the partnership, no amount may be claimed in a subsequent year under paragraph 111(1)(e) for any unused limited partnership losses in respect of that partnership.
We trust the above comments will be of assistance.
Yours truly,
Chrys Tzortzis, CPA, CA
For Director
Partnerships Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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