| November 8, 1989 | |
| Review Committee | Resource Industries |
| Section | |
| Allan B. Nelson | |
| 957-8984 |
SUBJECT: Limited Partner At-risk Rules Paragraph 96(2.2)(d) of the Act
Purpose
We are writing to request your direction concerning the possible application of paragraph 96(2.23(d) of the Act in a fact situation on which we have been asked to provide an advance income tax ruling.
Facts
1.
2. 24(1)
3.
Issue
We have been asked to rule that the Indemnity given by the Resource Company to the Partnership viiI not reduce the limited partners' at-risk amounts pursuant to paragraph 96(2.23(d) of the Act.
Significance and Analysis
Subsection 96(2.13 of the Act provides that the losses of a partnership allocated to a limited partner in his taxation year will be deductible by the partner only to the extent of the partner's at-risk amount as at the end of the fiscal period of the partnership ending in that year. Therefore, any reduction in a limited partner's at-risk amount pursuant to paragraph 96(2.23(d) directly effects the deductibility of that partner's share of Partnership losses for the year.
Under paragraph 96(2.2)(d) of the Act, subject to the exceptions noted therein, a taxpayer's at-risk amount is reduced where the taxpayer is entitled, either immediately or in the future, either absolutely or contingently, to receive or obtain any amount or benefit granted for the purpose of reducing the impact of any loss that he may sustain by virtue of his being a member of the partnership or by virtue of his holding or disposing of his partnership interest.
The amount of the at-risk reduction would be the same as vas the amount or benefit that vas granted for the purposes referred to above.
It appears that the wording in paragraph 96(2.2)(d) of the Act is sufficiently broad to include the amount of the Indemnity provided to the Partnership by the Resource Company, as referred to in 3 above.
The Resource Company's contingent obligation to reimburse or pay compensation to the Partnership in respect of costs, damages, expenses or losses incurred by the Partnership as a result of the Resource Company's breach of its obligations under the Participation Agreement would appear to constitute a contingent right of each partner in the Partnership to receive or obtain an amount or benefit granted to reduce the impact of any loss that each partner might otherwise have sustained by virtue of his being a member of the Partnership or by virtue of his holding or disposing of his interest in the Partnership (i.e. the reimbursement or compensation from the Resource Company provides additional Partnership capital which reduces the partners' potential losses on the disposition of their Partnership interests).
Alternatively, a somewhat weaker argument can be made that since the Resource Company has provided the Indemnity to the Partnership (and not to the partners), the partners are not entitled to directly receive any amount or benefit granted for the purposes noted above and therefore paragraph 96(2.2)(d) of the Act would not apply to reduce the partners' at-risk amounts in respect of the Indemnity.
Finance's Comments
1. The June, 1986 Technical Notes issued by Finance state inter alia that "New subsection 96(2.2) of the Act defines that at-risk amount of a limited partner at any particular time. This at-risk amount is calculated as follows: ... less ... any amount or benefit to which the partner is entitled, where the amount or benefit is intended to protect him from the loss of his investment."
2. 21(1)(b)
Legal Opinion
23
Previous Departmental Positions Taken
We are not aware of any positions previously taken by the Department specifically on this issue. However, an opinion was given to 19(1) dated November 23, 1988 (a copy of which is attached herewith) to the effect that an indemnification given by a particular general partner to other general partners in the same partnership against any debts and obligations incurred as a result of the particular partner acting outside of his authority granted under their partnership agreement would not normally be viewed as an amount or benefit described in paragraph 96(2.2)(d) of the Act.
23
Taxpayer's Representations
Concerning the possible inclusion of the amount of the Indemnity in each of the partners' at-risk amount calculations, pursuant to paragraph 96(2.2)(d) of the Act, the taxpayer's representative commented as follows:
24(1)
Alternatives
1.
2. 21(1)(b)
Recommendation
21(1)(b)
Chief Resource Industries Section Bilingual Services and ResourceIndustries Division Rulings Directorate
Enclosure