Principal Issues: Is there a provision in the Act that ensures that the at-risk amount of a taxpayer in respect of a partnership interest will not be immediately reduced at the time of a partial disposition of the interest?
Position: No.
Reasons: Application of the Act.
9 OCTOBER 2015 FEDERAL TAX ROUNDTABLE
2015 APFF CONFERENCE
Question 16
Partial disposition of an interest in a limited partnership ("LP")
Where a taxpayer disposes of all of the taxpayer's interest in an LP at a particular time in the year, certain legislative provisions allow the former partner to include the income or deduct the loss allocated by the LP at the end of its fiscal period in the computation of the ACB and at-risk amount ("ARA") before the time of the disposition of that interest.
Where a taxpayer disposes of only part of the taxpayer's interest in an LP at a particular time in the year, the legislation provides for an immediate downward adjustment to the partner's ACB and ARA. In such a situation, and unlike a former partner who would have disposed of all of that partner's interest in the LP, the partner who disposed of part only of an interest could end up with a nil ARA and, therefore, be denied a loss allocated by the LP at the end of its fiscal period.
For the purposes of the question, we will use the following facts:
1- A taxpayer has an interest of 1,000 units in an LP.
2- The ACB and ARA of its interest is $1,000 ($1 per unit).
3- The fiscal period end of the LP is December 31, 20X1.
In addition to these facts, the following assumptions will be made:
1- The taxpayer disposes, to an unrelated third party, of its 1,000 units in the LP on June 30, 20X1 for proceeds of disposition of $1,100.
2- On December 31, 20X1, the LP allocates an operating loss of $600 to the former partner.
This operating loss corresponds to the share thereof allocable to the former partner for the period from January 1, 20X1 to June 30, 20X1.
The tax consequences arising from these facts would be as follows:
Paragraph 96(1.01)(a) provides that a taxpayer who ceased to be a member of an LP in the course of the year is deemed to be a partner of the LP at the end of the fiscal year respecting the allocation of income or the loss of the LP for that year. The income or loss so allocated at the end of the LP's fiscal period is therefore included in the computation of the ACB of the former partner immediately before it ceased to be a partner.
Subparagraph 96(1.01)(b)(ii) provides that, for purposes of computing the ACB and ARA of the LP interest of the former partner, the fiscal period of the LP is deemed to have ended immediately before the time that is immediately before the time that the taxpayer ceased to be a member of the LP.
Subsection 96(2.1) provides that a partner can deduct, from its other sources of income, the loss which is allocated to it by the LP up to amount of its ARA at the end of the fiscal period.
Under subsection 96(2.2), a limited partner's ARA is essentially calculated as follows:
(a) the ACB to the taxpayer of the taxpayer’s partnership interest at the particular time;
(b) where the particular time is the end of the fiscal period of the partnership, the taxpayer’s share of the income of the partnership from a source for that fiscal period computed under the method described in subparagraph 53(1)(e)(i);
(B.1) where the particular time is the end of the fiscal period of the LP, the amount referred to in subparagraph 53 (1) (e) (viii)
[...]
In this example, and for the purposes of the deductibility of the loss under subsection 96(2.1), the former partner will have to calculate its ARA in accordance with subparagraph 96(1.01)(b)(ii), immediately before the time that is immediately before the time the taxpayer ceased to be a member of the LP. At that time, the taxpayer's ARA is $1,000. Considering the above, the former partner will be able to deduct, on 31 December 20X1, a loss of $600 against its other sources of income.
In addition to the base facts of the question, the following assumptions will now be considered:
1- The taxpayer disposes of 999 units in the LP to an unrelated third party as at June 30, 20X1 for proceeds of disposition of $1,099.
2- On December 31, 20X1, the LP allocates an operating loss of $600 to the partner. This operating loss corresponds to the pro rata portion attributable to the partner for the full fiscal period.
The tax consequences arising from these facts would be as follows:
In this example, the taxpayer will have to reduce the ACB of its interest at the time of the disposition, i.e., June 30, 20X1. Accordingly, the partner's ACB as a result of the partial disposition of its interest, namely July 1, 20X1, will be $1.
In this example, and for the purposes of the deductibility of the loss under subsection 96(2.1), the partner will have to calculate its ARA at the end of the LP's fiscal period, i.e., December 31, 20X1. At that time, the taxpayer's ARA will be based on the ACB calculated as a result of the partial disposition, of $1. Considering the above, the former partner can only deduct, on December 31, 20X1, a loss of $1 from its other sources of income. The difference between the allocated loss of $600 and the deductible loss of $1, or $599, will be deferred to the future. Thus, and because it disposed of only 99% of its interest, the taxpayer would benefit from a loss of only $1.
Question to CRA
Does a statutory provision allow a taxpayer who has disposed of only a portion of its interest in an LP to adjust its ARA in the same manner as is permitted under a total disposition, such that the taxpayer does not end up with a nil ARA as a result of its partial disposition?
CRA Response
Even if a member of a partnership retains only a minute interest in the partnership, it nonetheless will retain its status as a partner. Thus, the deeming rule in subsection 96(1.01) cannot apply in situations such as this and the reduction in the ACB and, consequently in the ARA, of the interest in the partnership occurs at the moment of the partial disposition of the interest. In our view, no legislative provision alters this result.
Sylvain Grégoire
2015-059580