Principal Issues: What are the CRA’s current views on situations where loans are received by a limited partner from a limited partnership that have a purpose of avoiding a gain that could be realized under subsection 40(3.1) of the Income Tax Act?
Position: See below.
Reasons: See below.
FEDERAL TAX ROUNDTABLE, OCTOBER 7, 2022
APFF CONFERENCE 2022
5. Loans made by a limited partnership
In Technical Interpretation 2016-0637341E5 (footnote 1), the CRA noted that the scope of ITA subparagraph 53(2)(c)(v) is very broad and could theoretically (based on all of the relevant facts) apply in respect of the amount of loans made by a partnership to a limited partner in a situation as described in the letter.
The situation described in Technical Interpretation 2016-0637341E5 entailed loans made by a limited partnership to a limited partner, the proceeds of which could be considered to be received by the limited partner on account of, or in full or partial payment of, the allocation (i.e., distribution) of the limited partner's share of the partnership's profits.
Question to the CRA
What is the CRA's current position in situations where loans from a limited partnership are received by a limited partner that have a purpose of avoiding a gain that could be realized pursuant to subsection 40(3.1)?
CRA Response
Depending on the facts and circumstances of a particular situation, money or other property received by a limited partner by way of loan from a partnership may or may not be considered to be received "as, on account or in lieu of payment of, or in satisfaction of” the limited partner's distribution of the profits or partnership capital, for the purposes of I.T.A. subparagraph 53(2)(c)(v).
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" (footnote 2) for the fiscal year and the adjusted cost base ("ACB") of the limited partner's interest at the end of the fiscal period (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 shelter (footnote 3), 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").
Nathalie Aubin
Robert Gagnon
Le 7 octobre 2022
2022-094761
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 CANADA REVENUE AGENCY, Technical Interpretation 2016-0637341E5, June 27, 2016.
2 The "limited partner's share of the partnership's adjusted net income" generally means for the partner the total of all amounts determined under subparagraph 53(1)(e)(i) I.T.A. for the fiscal period less the total of all amounts determined under subparagraph 53(2)(c)(i) I.T.A. for the period.
3 Tax shelter means "tax shelter investment" as defined in subsection 143.2(1) I.T.A.