REASONS
FOR ORDER
Paris J.
[1]
The Respondent has applied under paragraph
58(1)(a)of the Tax Court of Canada Rules (General Procedure) for
a determination of the following two questions:
(a) In a two-tiered partnership structure,
where the top-tier partnership has no at‑risk amount in respect of the
lower-tier partnership at the end of a particular fiscal period, do business
losses incurred by the lower-tier partnership in the particular fiscal period
retain their character as business losses of the top-tier partnership, thus
available to be allocated to the partners of the top-tier partnership as
business losses (which would then be subject to the application of the at-risk
rules in the hands of the partners of the top-tier partnership)?
(b) If the answer to question (a) above is
no, does a limited partnership loss that the top-tier partnership has in the
lower-tier partnership flow through to the partners of the top-tier partnership
such that they have a limited partnership loss?
[2]
The questions were set down by the Court for
determination following a previous hearing.
[3]
The questions involve the interpretation
of subsection 96(2.1) of the Income Tax Act (“Act”)
and its application to a tiered partnership structure.
In a tiered partnership, some or all of the interests in one partnership (the “bottom-tier partnership”) are held by
another partnership (the “top-tier partnership”).
[4]
In this case, the
Appellants were limited partners in the top-tier limited partnership which, in
turn, was a limited partner in a number of bottom-tier limited partnerships.
Facts
[5]
The facts upon which the Court has been asked to
make the determination are set out in a Statement of Agreed Facts filed by the
parties. Those facts are as follows:
During the period 1996 to 2009, the
Appellants were limited partners of the Monarch Entertainment 1994 Master
Limited Partnership (the "MLP").
During the period 1996 to 2009, the MLP was
a limited partner in 31 so-called production services limited partnerships (the
"PSLPs").
The MLP and each PSLP had a fiscal period
ending December 31 each year.
Each PSLP incurred annual business losses
from 1996 to 2009.
Pursuant to the relevant PSLP partnership
agreements, 99.999% of the loss of each of the PSLPs was allocated to the MLP
at the end of each fiscal period of the PSLPs.
Pursuant to the MLP partnership agreement,
99.999% of the loss of the MLP was allocated to the Appellants and other
limited partners of the MLP at the end of each fiscal period of the MLP.
At the end of each of the PSLPs’ fiscal
periods from 1996 to 2008, the at-risk amount of the MLP in each of the PSLPs
was nil.
At the end of each of the MLP’s fiscal
periods from 1996 to 2008, the at-risk amount of the Appellants in the MLP was
nil.
At the end of 2009, the Appellants' at-risk
amounts in the MLP were increased by an allocation of capital gains from the
MLP to each of them as partners in the MLP.
In their respective tax returns for the 2009
taxation year, each of the Appellants claimed, as a deduction in computing
taxable income, accumulated limited partnership losses of prior years in
respect of the MLP.
Background
[6]
Subsection 96(1) of the Act sets out the
general rules for the computation of the income of a partner from a
partnership. A partnership is not a separate legal entity, but subsection 96(1)
requires that income of a partner from a partnership be computed as if the
partnership were a separate person and as if each partnership activity,
including the ownership of property, were carried on by the partnership as a
separate person. A computation is then made of each taxable capital gain and
allowable capital loss from the disposition of property and of each income and
loss of the partnership from each of its sources of income for each taxation
year of the partnership. Each income and loss is then allocated among the
partners to the extent of each partner’s interest in the partnership. The
original source of income from each partnership activity is preserved in the
hands of the partners.
[7]
The relevant portions of subsection 96(1) read
as follows:
96. (1) Where a
taxpayer is a member of a partnership, the taxpayer’s income, non-capital loss,
net capital loss, restricted farm loss and farm loss, if any, for a taxation
year, or the taxpayer’s taxable income earned in Canada for a taxation year, as
the case may be, shall be computed as if
(a) the partnership were a
separate person resident in Canada;
(b) the taxation year of the
partnership were its fiscal period;
(c)
each partnership activity (including the ownership of property) were carried on
by the partnership as a separate person, and a computation were made of the
amount of
(i) each taxable
capital gain and allowable capital loss of the partnership from the disposition
of property, and
(ii)
each income and loss of the partnership from each other source or from sources
in a particular place,
for each taxation year of the partnership;
…
(f) the amount of the income
of the partnership for a taxation year from any source or from sources in a
particular place were the income of the taxpayer from that source or from
sources in that particular place, as the case may be, for the taxation year of
the taxpayer in which the partnership’s taxation year ends, to the extent of
the taxpayer’s share thereof; and
(g) the amount, if any, by
which
(i)
the loss of the partnership for a taxation year from any source or sources in a
particular place,
exceeds
(ii)
in the case of a specified member (within the meaning of the definition
“specified member” in subsection 248(1) if that definition were read without
reference to paragraph (b) thereof) of the partnership in the year, the amount,
if any, deducted by the partnership by virtue of section 37 in calculating its
income for the taxation year from that source or sources in the particular
place, as the case may be, and
(iii) in any other case, nil
were the loss of the taxpayer from that source or from sources in
that particular place, as the case may be, for the taxation year of the
taxpayer in which the partnership’s taxation year ends, to the extent of the
taxpayer’s share thereof.
[8]
Tiered partnerships are contemplated by subsection
102(2) of the Act, which provides that, for the purposes of subdivision
j of Division B of Part I of the Act (relating to 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.”
[9]
Subsection 102(2) reads:
(2) In this subdivision, 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.
[10]
In Devon Canada Corporation v. The Queen,
2013 TCC 415, Hogan J. described the flow through and recognition of income in
a tiered partnership structure:
45 In a tiered partnership, the source and location of
income is preserved through each level of partnerships until the income is
ultimately recognized by, and taxed in the hands of, the corporate or
individual partners. This is supported by subsection 102(2) which provides
that, in the context of computing the income of partnerships, "a reference
to ... 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.
46 In Fredette v. The Queen, [2001 DTC
621] this Court confirmed that income retains its source and its
character in a tiered partnership structure. Since an interest in a partnership
is not itself a source of income, the source and characterization of the income
from each partnership activity must be preserved through all of the tiers, each
partnership acting as a flow through, until the income is ultimately taxed in
the hands of the corporate or individual partner. In this regard, Justice
Archambault of this Court noted [at page 633]:
... In other
words, the partner's source of income is the same as the partnership's. In
addition, elsewhere in the Act there is no provision creating the
fiction that the income of a partner is earned from an "interest in a
partnership". It must therefore be concluded that the partner derives his
income from the activities of the partnership itself, not from the property
(the interest in the partnership) and that the interest expenses incurred by
that partner to finance his contribution were incurred to obtain that business
income ... .
[11]
Subsection 96(2.1) is part of the at-risk rules
found in the Act. Those rules restrict the deductibility of a limited
partner’s losses from a limited partnership. Generally speaking, subsection
96(2.1) provides that, notwithstanding subsection 96(1), any loss of the
limited partner will be deductible only to the extent of the partner’s at-risk
amount at the end of the partnership’s fiscal period. To the extent that the
loss is not deductible to the limited partner in the taxation year in which it
is incurred, it is deemed to be a limited partnership loss, and can be carried
forward and deducted to the extent of the limited partner’s at-risk amount at
the end of any future taxation year.
[12]
Subsection 96(2.1) reads as follows:
(2.1) Notwithstanding subsection 96(1),
where a taxpayer is, at any time in a taxation year, a limited partner of a
partnership, the amount, if any, by which
(a) the total of all amounts
each of which is the taxpayer’s share of the amount of any loss of the
partnership, determined in accordance with subsection 96(1), for a fiscal
period of the partnership ending in the taxation year from a business (other
than a farming business) or from property
exceeds
(b) the amount, if any, by
which
(i) the taxpayer’s at-risk amount in respect of the
partnership at the end of the fiscal period
exceeds the total of
(ii) the amount required by subsection 127(8) in
respect of the partnership to be added in computing the investment tax credit
of the taxpayer for the taxation year,
(iii) the taxpayer’s share of any losses of the
partnership for the fiscal period from a farming business, and
(iv) the taxpayer’s share of
(A) the foreign resource pool expenses, if any,
incurred by the partnership in the fiscal period,
(B) the Canadian exploration expense, if any, incurred
by the partnership in the fiscal period,
(C) the Canadian development expense, if any, incurred
by the partnership in the fiscal period, and
(D) the Canadian oil and gas property expense, if any,
incurred by the partnership in the fiscal period,
shall
(c) not be deducted in
computing the taxpayer’s income for the year,
(d) not be included in
computing the taxpayer’s non-capital loss for the year, and
(e) be deemed to be the taxpayer’s
limited partnership loss in respect of the partnership for the year.
First Question
[13]
The first question to be determined is whether,
for tax purposes, there is a flow-through of a business loss from the
bottom-tier limited partnership to the limited partners of the top-tier limited
partnership where the top-tier limited partnership has no at-risk amount in
respect of the bottom-tier limited partnership in the year.
Respondent’s Position
[14]
The Respondent maintains that since the top-tier
limited partnership has no at-risk amount, the top-tier partnership’s share of the
business loss of the bottom‑tier limited partnership is deemed to be a
limited partnership loss of the top-tier partnership pursuant to paragraph
96(2.1)(e) and ceases to be a business loss. Therefore, according to the
Respondent’s interpretation of subsection 96(2.1), the business loss of the
bottom-tier limited partnership cannot be taken into account when determining
the top-tier partnership’s business loss under paragraph 96(1)(g) and there
is no business loss in the hands of each of the partners of the top-tier
partnership. The deemed limited partnership loss would not flow up to the
partners of the top-tier partnership either, because there is no provision for
allocating the top-tier partnership’s limited partnership loss to the partners
of the top-tier partnership.
[15]
The Respondent says that the only reasonable
interpretation of paragraph 96 (2.1)(c) is that, to the extent a limited
partnership’s loss from business is not deductible in computing the top-tier
partnership’s income, the top-tier partnership no longer has a loss from
business. The Respondent says that by providing in paragraph 96(2.1)(c) that the business loss
computed under paragraph 96(1)(g) is not deductible can only result in
there being no business loss for the partner, and that the business loss ceases
to exist to the extent of the excess over the partner’s at-risk amount and that
there is no loss to flow up to the partners of the top-tier partnership. The Respondent maintains that the phrase “shall not be deducted in computing the
taxpayer’s income for the year” in paragraph 96(2.1)(c) is unambiguous in this regard. The
Respondent says that since the business loss is not deductible to the partner
in computing income and is deemed to be a limited partnership loss, there is no
business loss.
[16]
The Respondent also says that, unlike paragraphs
96(2.1)(d) and (e), which relate to the calculation of taxable
income and therefore do not apply to a partner that is a partnership, paragraph
96(2.1)(c) is clearly applicable to a top-tier partnership because it
deals with computing the income of a member of a partnership in the same manner
that paragraph 96(1)(g) provides for the calculation of a partnership’s
loss from business.
[17]
The Respondent says that subsection 96(2.1)
modifies the computation of the top-tier partnership’s loss from business by
deeming the loss to be a limited partnership loss in paragraph 96(2.1)(e).
The fact that the deeming provision may create an unfair result in a particular
case is not grounds for disregarding or overriding the clear wording of the
provision.
[18]
The Respondent asserts that the wording of
subsection 96(2.1) and in particular the wording of paragraphs 96(2.1)(c)
and (e), is clear and unequivocal and that the ordinary meaning of the
words used in those provisions should play a dominant role in its
interpretation.
Appellants’ Position
[19]
The Appellants say that the at-risk rules in the
Act apply only for the purpose of determining tax liability of a limited
partner and therefore can only apply to a partner that is a taxpayer. Since a
partnership is not a separate legal person, it is incapable of having a tax
liability and the at-risk rules are not relevant and cannot apply to it.
[20]
Counsel says that subsection 102(2), which makes
the general rules for computing partnership income applicable to tiered
partnerships, is only operative for the purposes of Subdivision j of Division B
of Part I of the Act. Subdivision j comprises sections 96 to 103 dealing
with partnerships and their members but does not include the rules for the
computation of income or taxable income, which are found in section 3 and Division
C of the Act, respectively.
[21]
The Appellants maintain, therefore, that the
rules in paragraphs 96(2.1)(c), (d) and (e) cannot apply
to a top-tier partnership that is a limited partner of a bottom-tier limited
partnership and that a business loss of the bottom-tier limited partnership
retains its character as a business loss and can be allocated to the partners
of the top-tier partnership.
[22]
According to the Appellants, the scheme of the Act
directs a taxpayer that is a partner of a top-tier partnership to compute his
income or loss from the top‑tier partnership by computing the top-tier
partnership’s share of the income or loss of the bottom-tier partnership
without reference to the at-risk rules, and then by computing his share of the
income or loss of the top-tier partnership.
[23]
Since a person who is a partner of a top-tier
partnership has potential liability for tax, he must apply the at-risk rules in
respect of his share of the losses of the top-tier partnership (which include
those of the bottom-tier partnership) for the purposes of computing taxable
income and tax payable.
[24]
The Appellants argue that a textual, contextual
and purposive analysis of 96(2.1) leads to this conclusion.
Analysis
[25]
In Canada Trustco Mortgage Co. v. The Queen,
[2005] 2 S.C.R. 601, the Supreme Court of Canada set out the approach to be taken
in interpreting tax legislation, as follows:
10 It has been
long established as a matter of statutory interpretation that “the words of an Act
are to be read in their entire context and in their grammatical and ordinary
sense harmoniously with the scheme of the Act, the object of the Act,
and the intention of Parliament”: see 65302 British Columbia Ltd. v. Canada,
[1999 CanLII 639 (SCC)], [1999] 3 S.C.R. 804, at para. 50. The interpretation
of a statutory provision must be made according to a textual, contextual and
purposive analysis to find a meaning that is harmonious with the Act as
a whole. When the words of a provision are precise and unequivocal, the
ordinary meaning of the words plays a dominant role in the interpretive
process. On the other hand, where the words can support more than one
reasonable meaning, the ordinary meaning of the words plays a lesser role. The
relative effects of ordinary meaning, context and purpose on the interpretive
process may vary, but in all cases the court must seek to read the provisions
of an Act as a harmonious whole.
…
12 The provisions
of the Income Tax Act must be interpreted in order to achieve
consistency, predictability and fairness so that taxpayers may manage their
affairs intelligently. As stated at para. 45 of Shell Canada Ltd. v. Canada,
[1999 CanLII 647 (SCC)], [1999] 3 S.C.R. 622:
[A]bsent a specific provision to
the contrary, it is not the courts’ role to prevent
taxpayers from relying on the sophisticated structure of their transactions,
arranged in such a way that the particular provisions of the Act are
met, on the basis that it would be inequitable to those taxpayers who have not
chosen to structure their transactions that way.
[Emphasis
added.]
See also 65302
British Columbia, at para. 51, per Iacobucci J. citing P. W. Hogg and J.
E. Magee, Principles of Canadian Income Tax Law (2nd ed. 1997), at pp.
475-76:
It would introduce intolerable
uncertainty into the Income Tax Act if clear language in a detailed
provision of the Act were to be qualified by unexpressed exceptions
derived from a court’s view of the object and purpose of the provision.
13 The Income
Tax Act remains an instrument dominated by explicit provisions dictating
specific consequences, inviting a largely textual interpretation. …
[26]
In my view, the text, context and purpose of
subsection 96(2.1) all support the Appellants’ position that the business loss
of the bottom-tier partnership is flowed out to the top-tier partnership and to
the partners of the top-tier partnership, and retains its character as a
business loss at each step.
Text
[27]
According to the wording of subsection 96(2.1),
the override to the operation of subsection 96(1) occurs after the losses of a
limited partnership from a business or property have been computed and
allocated to the limited partners in their proportionate share pursuant to
subsection 96(1). This starting point is set out in paragraph 96(2.1)(a),
which requires the computation of a limited partner’s share of “…any loss of the partnership…in accordance
with subsection (1)…from a business … or property.” The relevant portions of subsection 96(2.1) read:
96(2.1) Notwithstanding subsection (1),
where a taxpayer is, at any time in a taxation year, a limited partner of a
partnership, the amount, if any, by which
(a) the total of all amounts
each of which is the taxpayer's share of the amount of any loss of the
partnership, determined in accordance with subsection (1), for a fiscal
period of the partnership ending in the taxation year from a business (other
than a farming business) or from property…
(Emphasis
added)
[28]
It is only after the limited partner’s loss from
business or property has been determined in accordance with subsection 96(1)
that the provisions of paragraphs 96(2.1)(b) to (e) come into
play.
[29]
After a limited partnership’s loss from business
or property is computed, and the limited partner’s share of the loss is
determined, the next step, set out in paragraph 96(2.1)(b), is to
calculate the limited partner’s at-risk amount. Then, to the extent the limited
partner’s loss from a business or property exceeds his at‑risk amount,
paragraphs 96(2.1)(c) and (d) restrict the deductibility of the
excess, providing that it shall “not be deducted in computing the taxpayer’s income for the year” and shall “not be
included in computing the taxpayer’s non-capital loss for the year.”
[30]
As the Appellants point out, there is no wording
in subsection 96(2.1) that deems a limited partner’s loss from business or
property to no longer be a loss from business or property, as the case may be.
Preventing a taxpayer from including the portion of such losses that exceed the
taxpayer’s at-risk amount in computing income and non-capital losses is not the
equivalent of deeming such portion of the losses to no longer exist.
[31]
I agree with the Appellants that the text of
subsection 96(2.1) presumes that the excess continues to be a business loss. If
the excess did not continue to be a business loss, there would be no need for
paragraphs 96(2.1)(c) and (d). The Appellants express this
argument in their written submissions at paragraph 17 as follows:
If an Excess was, by operation of the
deeming rule in paragraph 96(2.1)(e), deemed to be a limited partnership
loss only and for all purposes, and ceased to be also a business loss,
paragraphs 96(2.1)(c) and (d) would be superfluous:
a. Paragraph 96(2.1)(c) says that the Excess business loss is
not deductible in computing income. Ordinary business losses are deductible in
computing income for the year up to the amount of the taxpayer’s income from
other sources under subsection 3(d) of the Act. Limited
partnership losses are deductible in computing taxable income under
paragraph 111(1)(e), which is in Division C of the Act. If the Excess
was only a limited partnership loss and not also a business loss it would
already be not “deductible in computing income” (since a limited partnership
loss is deductible only in computing taxable income), and thus there
would be no need for 96(2.1)(c).
b. If a taxpayer’s loss for the year exceeds income from other
sources, the taxpayer ordinarily has a non-capital loss for the year. Paragraph
96(2.1)(d), however, says that an Excess cannot be added to the
taxpayer’s non-capital loss for the year. “Non-capital loss,” as defined in
subsection 111(8), is the sum of the taxpayer’s loss from a source that is an
office, employment, business or property. If the Excess lost its character as a
business loss by virtue of the deeming rule, a limited partnership loss would
not be “from a source that is an office, employment, business or property” and
would therefore be excluded from the computation of a non-capital loss. If the
Excess lost its character as a business loss, the express prohibition of
96(2.1)(d) would be unnecessary.
[32]
In my view, the Respondent’s interpretation of
paragraph 96(2.1)(c) is untenable because it conflates the computation
of the partnership’s business loss with the computation of income under section
3 of the Act. It appears to me that the plain and ordinary meaning of
the phrase “in computing the taxpayer’s income for the year” in paragraph
96(2.1)(c) refers to the computation of income required by section 3 of
the Act, and not to the computation of income from business or property.
Section 3 sets out the rules
for determining a taxpayer’s “income” for a taxation year for income tax
purposes. The computation of income under
section 3 is made up of a number of components, including the taxpayer’s income
for the year from all sources, including “the taxpayer’s income for the year from each office, employment,
business and property” (paragraph 3(a))
as well as “the taxpayer’s loss
for the year from an office, employment, business or property” (paragraph 3(d)). The computation of
income or loss from a business or property is made according to the rules found
in subdivision b of Division B of Part 1 of the Act. Income or loss from
business or property is a component of section 3 income and therefore must be
computed prior to the computation of a taxpayer’s income under section 3.
[33]
I agree with the Appellants that the prohibition
found in paragraph 96(2.1)(c) against deducting the excess “in computing the taxpayer’s income for the
year” can only apply to
a limited partner that is a taxpayer and not to a limited partner that is a
partnership since a partnership is not required to compute section 3 income
under the Act. In Taxation of Corporations, Partnerships and Trusts
4th ed, (Carswell, 2013), author Norman C. Tobias writes that:
Section 3 of the Income Tax Act,
which is applicable to “taxpayers”, is not relevant to the determination of
income at the partnership level since partnership income or loss is allocated
to partners on a source by source basis [para. 96(1)(c)]. Section 3 is
relevant to the computation of income at the partner level.
(at page 43)
[34]
It is clear that the computation of a taxpayer’s
income for the year is not the same operation as the computation of a
taxpayer’s income from business for the year. Thus, those expressions are not
equivalent, as the Respondent suggests. The Respondent’s counsel says that paragraph
96(2.1)(c) deals with computing the income of the member of the partnership,
similar to paragraph 96(1)(g) of the Act and that if paragraph
96(1)(g) applies in a two-tier partnership situation, then so does
paragraph 96(2.1)(c).
[35]
Paragraph 96(1)(g), however, deals with
the computation of a partnership’s “loss . . . from any source or sources” , including a loss from a business, while
paragraph 96(2.1)(c) deals with the computation of income, which I have
found to mean section 3 income. A taxpayer’s loss from a source, such as a loss
from business, is a component of a taxpayer’s section 3 income. Paragraph
96(1)(g) reads:
96. (1) Where a taxpayer is a member of a
partnership, the taxpayer’s income, non-capital loss, net capital loss,
restricted farm loss and farm loss, if any, for a taxation year, or the
taxpayer’s taxable income earned in Canada for a taxation year, as the case may
be, shall be computed as if
. . .
(g) the amount, if any, by
which
(i) the
loss of the partnership for a taxation year from any source or sources in a
particular place,
exceeds
(ii) in
the case of a specified member (within the meaning of the definition “specified
member” in subsection 248(1) if that definition were read without reference to
paragraph (b) thereof) of the partnership in the year, the amount, if
any, deducted by the partnership by virtue of section 37 in calculating its
income for the taxation year from that source or sources in the particular
place, as the case may be, and
(iii) in
any other case, nil
[36]
I would also add that the deeming provision in
paragraph 96(2.1)(e) does not state that the deeming of the excess of
the business or property losses of a limited partner over his at-risk amount
causes those losses to cease to be business or property losses. The Respondent’s argument that
the deeming provision in paragraph 96(2.1)(e) is “of general application” is not supported by the
actual wording of that provision. Such an interpretation would in fact require
reading words such as “for all
purposes” into
paragraph 96(2.1)(e) after the phrase “be deemed to be the taxpayer’s limited partnership loss”. In the absence of such
wording, the scope of the deeming provision should be governed by its context,
since a deeming provision must be taken to operate for a particular purpose. In
Verrette v. The Queen, [1978] 2 S.C.R. 838 the Supreme Court of Canada
said that:
A deeming provision is a statutory fiction; as a
rule it implicitly admits that a thing is not what it is deemed to be but
decrees that for some particular purpose it shall be taken as if it were that thing
although it is not or there is doubt as to whether it is. A deeming provision
artificially imports into a word or an expression an additional meaning which
they would not otherwise convey beside the normal meaning which they retain
where they are used; it plays a function of enlargement analogous to the word
“includes” in certain definitions; however, “includes” would be logically
inappropriate and would sound unreal because of the fictional aspect of the
provision. (at pages
845-46)
[37]
In this case, the context of the deeming
provision suggests that it is intended to operate at the level of computation
of income and taxable income, as do paragraphs 96(2.1)(c) and (d),
and only after the taxpayer has computed his or her or its income or loss from
business and property. Since a partnership is not a taxpayer and does not
compute income or taxable income, the deeming provision in paragraph 96(2.1)(e)
can have no application to it.
[38]
Therefore, I find that according to a plain
reading of subsection 96(2.1), the business losses of a bottom-tier partnership
that exceed the top-tier partnership’s at-risk amount in respect of the limited
partnership do not cease to be business losses and are available to be flowed
out to the partners of the top-tier partnership.
Context
[39]
I also find that this conclusion is supported by
the context of subsection 96(2.1).
[40]
Within the Act, there are numerous
provisions dealing with various aspects of the application of the at-risk
rules, and the use of limited partnership losses. The Appellants have set out a
list of such provisions in their factum. However, in my opinion, only one of
those provisions, subparagraph 53(2)(c)(i), offers contextual guidance
for the specific interpretive question arising in this case.
[41]
Subparagraph 53(2)(c)(i) of the Act
reduces the adjusted cost base of a partnership interest by the taxpayer’s
share of any loss of the partnership from any source for that fiscal period,
except to the extent that all or a portion of
such a loss may reasonably be considered to have been included in the
taxpayer’s limited partnership loss in respect of the partnership for the
taxpayer’s taxation year in which that fiscal period ended,
[42]
As the Appellants’
counsel points out, if a limited partnership loss did not also retain its character
as a business loss, there would be no need to include the portion of subparagraph
53(2)(c)(i) reproduced above. That is, the limited partnership loss
remains a business or property loss and must be carved out of the adjusted cost
base reduction rule.
[43]
Finally,
the Respondent has not offered any contextual analysis to counter the
Appellants’ interpretation.
Purpose
[44]
The purpose of the at-risk rules is
straightforward: to limit the extent to which a limited partner may deduct
partnership losses from business or property against income from other sources
to the capital risked in the partnership (i.e. the partner's at-risk amount).
The amount by which the partnership business or property losses exceed the
limited partner’s at-risk amount may be carried forward and deducted in future
years either against income from the partnership which generated the losses or,
where the taxpayer's at-risk amount in respect of the partnership has
increased, against income from other sources (Canada Tax Service- McCarthy
Tetrault, Volume 8, Analysis section 96, p. 96-1, October 9, 2015.)
[45]
Clearly then, the purpose is not to deny absolutely
the losses in excess of a limited partner’s at-risk amount but, rather, to
defer deduction of the excess until a time when the partnership has generated
income or the partner’s at-risk amount has increased for some other reason.
[46]
The Respondent’s interpretation would, in the
case of a tiered partnership, result in any business or property losses of a
limited partnership that exceed the top-tier partnership’s at-risk amount to be
denied absolutely because there is no means by which the limited partnership
loss created by paragraph 96(2.1)(e) can be allocated to the top-tier partnership.
[47]
The ability to carry forward a limited
partnership loss is a key element of the at-risk rules and I find, therefore,
that the interpretation proposed by the Respondent is not consonant with the
purpose of the at-risk rules.
[48]
More generally, I also believe that the following
excerpt from the Department of Finance Technical Notes to sections 96(2.1) to
96(2.7) support the proposition that the purpose of the at-risk rules is not to limit the allocation of losses from business or property
to a limited partner, but rather to limit the deductibility of those losses
once they have been allocated:
There is no
restriction on the amount of business losses that may be allocated to a limited
partner by the partnership. Such losses, however, may only be claimed by the
limited partner to the extent of his remaining at-risk amount. Losses that may
not be so claimed may be carried forward indefinitely by the limited partner to
be applied against income from the same limited partnership.
Conclusion
[49]
For all of these reasons, I would answer the
first question in the affirmative. Given this conclusion, it is not necessary
to proceed to the second question. Costs on this motion are left to the discretion of the trial judge.
Signed at Vancouver,
British Columbia this 11th day of January 2016.
“B. Paris”
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