Words and Phrases - "on account of"
27 June 2016 External T.I. 2016-0637341E5 F - Partnerships - Negative ACB
Rather than making current distributions of its cash flow to a limited partner, those sums are lent by the LP to the limited partner – then at the beginning of the following year the LP effects a distribution of the applicable share of the previous year’s profits to the limited partner by issuing a demand note to it and pays that note by way of set-off against the loans owing by the limited partner. Does this approach avoid negative ACB gains under s. 40(3.1)?
CRA referred to the “general principle of civil law to the effect that a person cannot make a contract with itself,” so as to suggest that a partnership loan to a partner may not be valid and went on to state:
Should it not be possible for a limited partnership to make loans to the limited partner…the amounts styled as loans…would be treated by the CRA as amounts received in lieu of or in full or partial payment of the distribution of the taxpayer’s share of the limited partnership profits under subparagraph 53(2)(c)(v).
CRA also stated:
[T]he scope of subparagraph 53(2)(c)(v) is very broad and could in theory…apply in respect of the loan amount (on the assumption that the loans were permitted under the civil law)… .
[T]he Courts…have given a very wide scope to the terms "on account of" and "in lieu of"…, which are also used in subparagraph 53(2)(c)(v).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.1) | loans by LP to partner potentially gave rise to negative ACB gain | 164 |
| Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.13) | retention of partnership profits not a contribution | 146 |
| Tax Topics - Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(e) - Subparagraph 53(1)(e)(iv) | assumption of loan can be contribution, but not retained profits | 177 |
Transocean Offshore Ltd. v. Canada, 2005 DTC 5201, 2005 FCA 104
Lump-sum damages received by the non-resident taxpayer from Canadian residents for the repudiation, prior to the slated operational commencement date, of a bare-boat charter of a drilling rig owned by its parent, were found to be payments received in lieu of the payment of rent, so that it was not entitled to a refund of Part XIII tax withheld. After noting (at para. 45) that "rent is defined as an amount paid as compensation for the use or occupation of property, or for the right to use or occupy property", and that the references to payments made "on account of" such compensation or "in satisfaction of" such compensation would "appear to cover virtually all situations in which a payment is made to discharge, in full or in part, an obligation to pay compensation to a non-resident for the past or current use, in Canada, of property", Sharlow J.A. went on to state (at paras. 47-48):
The ordinary meaning of the phrase 'in lieu of', according to a number of dictionaries, is 'instead of' or 'in place of' ... . It seems axiomatic that an amount that is paid instead of a payment of a particular legal character, or in the place of such a payment, does not have the same legal character ... "If the phrase 'in lieu of rent' is interpreted to include only payments made as compensation for the past or current use of property, which essentially the position of counsel for Transocean, it would add nothing to paragraph 212(1)(d) ... .
Puder v. MNR, 63 DTC 1282 (Ex Ct) imposed "an unjustifiably narrow meaning on the phrase 'in lieu of'" as it failed to recognize that "a thing may take the place of another thing if it...performs a function that is not exactly the same but is a reasonable substitute" (para. 60).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Onus | no onus to rebut a factual assmption re something not within the taxpayer's purview | 170 |