11 September 1987 Income Tax Severed Letter 7-1529 - [Limited Partnerships]

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.

To- Victoria District Office

FROM- Small Business and General
         Division
         T. Marcogliese
        (613) 957-2095

ATTENTION Keith Donaldon
          Business Audit
          143-11

RE: XXXX Limited Partnership

This is in reply to your memorandum of December 3, 1986, requesting our views on three questions regarding the treatment of limited partnership losses of, XXXX

The facts as we understand them are as follows:

XXXX

In response to your first question on losses claimed in excess of partnership contributions, our position is, as stated in paragraph 20 of Interpretation Bulletin IT-138R , that a limited partner's share of a partnership's loss pursuant to paragraph 96(1)(g) cannot exceed the lesser of his share of the partnership's losses and his "equity" in the partnership. In this regard, the equity of a limited partner is generally the amount that the limited partner contributed and any amount he has agreed to pay to the partnership as an additional capital contribution plus amounts referred to in paragraph 53(1)(e) to the extent not already included and minus amounts referred to in paragraph 53(2)(c). This position, as discussed in the 1983 Tax Conference Report, is applicable to limited partnerships where all or substantially all of the partnership units were sold to the ultimate investor before 1984.

With respect to the personal guarantees, our position, as outlined in Interpretation Bulletin IT-138R , paragraph 20, is that "any obligations of the partnership guaranteed by a limited partner are not considered to be an addition to partnership "equity"." It is our view that the limited partners' guarantees to creditors directly are not included in equity since they are outside the framework of the partnership capital structure. If, as in this case, there is a requirement to honour the guarantees, the limited partner replaces the existing creditor with his own claim on the partnership.

A taxpayer required to honour a guarantee is considered to have acquired a debt at the time the guarantee is honoured equal to the amount of the payment made pursuant to the guarantee. This position, as outlined in Interpretation Bulletin IT-239R2 , provides for a taxpayer to have a capital loss within the meaning of paragraph 39(1)(b) in situations where the guarantee was given without adequate consideration only if certain conditions in paragraph 6 are satisfied. Although a question of fact, the information provided indicates the XXXX does not meet the condition that the operation has ceased permanently to carry on its business. The fact that a receiver-manager was appointed by the Court does not necessarily mean a business ceases to exist. As stated in paragraph 8, the receiver-manager is considered to be carrying on the same business formerly carried on by the owner unless the facts indicate otherwise. Furthermore, paragraph 98(1)(a) deems the partnership not to have ceased to exist and deems each partner to remain a partner until such time as all partnership property or substituted property has been distributed to those entitled to receipt. In this regard we are of the opinion that the determination of the timing of a capital loss or disposition of a partnership interest is dependent upon meeting the distribution requirements as discussed above.

We should note, however, that if the limited partners, once they have honoured their guarantees, have converted their claims against the partnership into capital of the partnership with the result that they would no longer be entitled to claim a capital loss on the disposition of their claims, the amount converted may then be considered to be part of "equity" for purposes of determining the limited partner's capital.

We hope these comments will be of assistance.

Chief Merchandising, Manufacturing and Construction Section Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch