29 November 2022 CTF Roundtable Q. 1, 2022-0949781C6 - Loans Made by Limited Partnerships to Limited Partners -- summary under Subsection 40(3.1)

2016-0637341E5 stated that s. 53(2)(c)(v) is very broad and could in theory (depending on all relevant facts) apply to the amount of the loans made by a limited partnership to a limited partner where loans are made by the partnership to a limited partner, in lieu of the payment of distributions of the limited partner’s share of the partnership profits. 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)?

CRA noted that it had also answered this question at the 2022 APFF Roundtable, Q.5. A summary of that position (with editorial additions by it in bold) is provided below:

CRA generally will not attempt to include a loan received by the partner from a limited partnership under s. 53(2)(c)(v) if five conditions are met:

1. The loan should not be made in satisfaction of a return of contributions of capital of the partner. (This position is meant to permit only the distribution of profits.)
2. The aggregate of the loans received by the partner in respect of the partnership’s fiscal period should not materially exceed the total of:
   
   1. the partner’s share of the partnership-adjusted income for the period; and
   2. the limited partner’s ACB.
3. Shortly after the end of the fiscal period, the limited partnership should make a distribution payable to the partner which is equal to amount of the loans received by the partner in the fiscal period, and the distribution should be used to fully settle the loans – in other words, CRA needs to see a set-off of the loans and the distributions.
4. The loan should be made primarily for the purpose of avoiding a deemed gain under s. 40(3.1) that would be realized by the partner at the end of the partnership’s fiscal period, and that would solely be due to the timing difference between the addition in, and deduction from, the calculation of the ACB of the partnership interest related to the partner’s share of the partnership-adjusted income, and the distributions to the limited partner in respect of the period on their side. (This administrative position enables the partner to enjoy the income being earned during the year because of the technical mismatch between the timing of the income inclusion and the distributions.)
5. The partnership interest cannot be a tax shelter, and the transactions involving the partnership cannot be part of a series of transactions to which GAAR applies.

If any of these conditions are not met, CRA may consider the application of 53(2)(c)(v) or GAAR to the whole amount received as a loan.