When will CRA treat loans from a limited partnership received by a limited partner in order to avoid a gain under s. 40(3.1) as a distribution of partnership capital or profits per s. 53(2)(c)(v), so that such negative-ACB gain is not avoided?
CRA responded that it “will generally” not do so where the following five tests 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 (i) the limited partner's share of the adjusted net income of the partnership for the fiscal period (i.e., s. 53(1)(e)(i) additions minus 53(2)(c)(i) year losses), and (ii) the ACB of the limited partner's interest at the end of the fiscal year - “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 s. 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 of the limited partner's share of the adjusted net income of the partnership for the fiscal period, and the time of the deduction of distributions to the limited partner for the fiscal period pursuant to s. 53(2)(c)(v) (other than the mooted loans).
5. The partnership interest is not a tax shelter, and this is not part of a larger series of transactions that includes an avoidance transaction to which s. 245(2) should apply.