2016-0637341E5 indicated that s. 53(2)(c)(v) potentially could apply respecting the amount of loans made by a partnership to a limited partner. What is the current position in situations where loans from a limited partnership are received by a limited partner in order to avoid a gain under s. 40(3.1)? CRA responded:
The CRA will generally not seek to include a loan received (as, on account or in lieu of payment of, or in satisfaction of a distribution of the taxpayer's share of the profits or partnership capital) by a limited partner of a partnership under subparagraph 53(2)(c)(v) if all of the following conditions are satisfied:
1. The loan is not made on account of or in full or partial payment of a withdrawal of a limited partner's capital contribution.
2. The total amount of all loans received by the limited partner in respect of a fiscal period of the partnership does not exceed the total of the limited partner's "share of the adjusted net income of the partnership"7 for the fiscal year and the adjusted cost base ("ACB") of the limited partner's interest at the end of the fiscal year (the ACB being determined before the application of subparagraph 53(2)(c)(v) in respect of the loans); or, if there is an excess amount, it is not material in the circumstances.
3. Shortly after the end of the fiscal period, the partnership declares a distribution payable to the limited partner in an amount equal to the total amount of the loans received by the limited partner during the fiscal period and the distribution is used to settle the loans to the limited partner (in cash or by way of set-off).
4. The loan (made in lieu of the cash payment of the distribution) is made primarily for the purpose of avoiding a deemed gain to the limited partner pursuant to subsection 40(3.1) that would be realized at the end of the fiscal period of the partnership caused solely by the difference between the time of the addition and the time of the deduction of the following respective amounts in computing the ACB of the limited partner's interest in the partnership:
(a) the limited partner's share of the adjusted net income of the partnership for the fiscal period, and
(b) the distributions to the limited partner for the fiscal period pursuant to subparagraph 53(2)(c)(v), where no portion of such distributions were made in the form of loans.
5. The partnership interest is not a tax shelter8, and the partnership or transactions involving or related to the partnership are not part of a larger series of transactions that includes an avoidance transaction (as defined in subsection 245(3)) to which subsection 245(2) should apply.
Where one of the above conditions is not satisfied, the CRA could consider the full amount received as a loan to be received "as, on account or in lieu of” a distribution of the limited partner's share of the profits of the partnership or the partnership capital for purposes of applying subparagraph 53(2)(c)(v), but without any further reduction in the ACB of the interest pursuant to that subparagraph in respect of the distribution made by the partnership to repay the loan; or the CRA may consider applying the general anti-avoidance rule ("GAAR").