Principal Issues: Is the portion of a loss allocated by a partnership corresponding to the taxpayer's at-risk amount included in its non-capital loss?
Position: Yes
Reasons: Wording of the act.
APFF Federal Tax Roundtable 11 October 2013
APFF Conference 2013
Question 22
Interaction between the deduction of a limited partner loss and the definition of a non-capital loss
A Canadian corporation ("A") holds 99% of the shares of a Canadian limited partnership ("SEC"). The year end for A and SEC is December 31 of each year.
A contributed $99,000 for the acquisition of 99 SEC units at the time of its formation and no contributions or withdrawals were subsequently made by A.
The following table shows by year the adjusted cost base (footnote 1) ("ACB") of A's interest in the SEC, the at-risk amount (footnote 2) ("ARA") of A's interest in SENC, the net income (or loss) of the SEC allocable to A and the net income (or loss) of A, before the inclusion and/or deduction of the share of the SEC limited partnership loss (footnote 3) for A's interest in SEC.
|
ACB for A in SEC at: |
Share of net income |
ARA of A in SENC: |
Net income |
Taxable income (non-capital loss) (footnote 4) |
Partner- ship loss in the year |
Deemed limited partner-ship loss |
|
Creation 99 000 |
-- |
99 000 |
-- |
-- |
||
|
31-12-2011 99 000 |
29 700 |
128 700 |
50 000 |
79 700 (footnote 5) |
||
|
31-12-2012 128 700 |
(138 600) |
128 700 |
(150 000) |
(278 700) (footnote 6) |
9 900 (footnote 7) |
9 900 |
|
31-12-2013 -- |
9 900 |
9 900 |
(40 000) |
(30 100) (footnote 8) |
-- |
9 900 |
Based on the table above, A could deduct in 2013, in computing its taxable income, by virtue of paragraph 111(1)(e), an amount of limited partnership losses of $9,900. However, based on our understanding of the term "non-capital loss" ("NCL") as defined in subsection 111(8), A's NCL would not be increased by the amount deducted by virtue of paragraph 111(1)(e).
Questions to the CRA
a) Can you confirm that our understanding and interpretation of the interaction of paragraph 111(1)(e) and subsection 111(8) are accurate?
b) If so, would the CRA be prepared to accept, by administrative position, that A's NCLs be increased by the amount of the deduction available under paragraph 111(1)(e) in a situation such as the one presented, or to recommend to the Department of Finance that amendments be made to the Act?
CRA response
We agree with you that the amount of a limited partnership loss is not considered for purposes of computing the taxpayer's NCL. In fact, the amount of the NCL, as defined in subsection 111(8), is not increased by the amount that would otherwise be deductible under paragraph 111(1)(e) for a given taxation year.
Based on our understanding of tax policy, this result appears consistent with the one underlying the restrictions on the deductibility of partnership losses sustained by a taxpayer in a partnership. As such, the CRA does not intend to take any administrative position or recommend to the Department of Finance that legislative changes be made in this regard.
Hugo Gravel
957-8981
2013-049590
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 Calculated according to paragraphs 53(1)(e) and 53(2)(c)
2 Calculated according to subsection 96(2.2).
3 Calculated according to subsection 96(2.1).
4 Before the use of the deductions allowed in section 111.
5 $50,000 + $29,700 =$79,700
6 ($150,000) + ($128,700)= ($278,700)
7 $138,600 - $128,700= $9,900.
8 ($40,000) - $9,900= ($30,100)