Budget 2018
At-Risk Rules for Tiered Partnerships
The income (or loss) of a partnership for income tax purposes is allocated to its partners, who include (or deduct) the amount in calculating their own income. Limited partners of a partnership may deduct losses of the partnership allocated to them only to the extent of their “at-risk amount” in respect of the partnership. This amount is generally a measure of the limited partner’s invested capital that is at risk in the partnership, and is increased by unpaid income allocated from the partnership. The at-risk rules ensure that a limited partner cannot shelter income from other sources with partnership losses in excess of what they put at risk in the partnership.
Losses of a partnership allocated to a limited partner in excess of their at-risk amount in respect of the partnership are not deductible and become “limited partnership losses”, which are generally eligible for an indefinite carry-forward. If eligible, these losses can be deducted in a future year to the extent that the limited partner’s at-risk amount in the partnership has increased. When a limited partner disposes of a limited partnership interest, any undeducted limited partnership losses of the limited partner are reflected in the adjusted cost base of the partnership interest, which would result in a lower capital gain or higher capital loss on the disposition.
The long-standing understanding of the at-risk rules, on which basis they have been administered since their introduction, has been that their application extends to cases in which the limited partner holding a limited partnership interest is another partnership (a “tiered partnership” structure). In such cases, the limited partnership losses would not be eligible to be carried forward by the partnership holding the limited partnership interest. However, such limited partnership losses would be reflected in the adjusted cost base of the limited partnership interest.
A recent Federal Court of Appeal decision has constrained the application of the at-risk rules in the context of tiered partnership structures. The decision is inconsistent with the policy underlying the at-risk rules and could result in limited partnership losses becoming deductible in situations where, under the long-standing understanding of the at-risk rules, they would have been restricted. Given the indefinite carry-forward of limited partnership losses, this poses a significant risk to the tax base.
Budget 2018 proposes to clarify that the at-risk rules apply to a partnership that is itself a limited partner of another partnership. This measure, along with a number of consequential changes, will ensure that the at-risk rules apply appropriately at each level of a tiered partnership structure. In particular, for a partnership that is a limited partner of another partnership, the losses from the other partnership that can be allocated to the partnership’s members will be restricted by that partnership’s at-risk amount in respect of the other partnership.
In addition, consistent with the long-standing understanding of the at-risk rules, limited partnership losses of a limited partner that is itself a partnership will not be eligible for an indefinite carry-forward. Such losses will be reflected in the adjusted cost base of the partnership’s interest in the limited partnership.
This measure will apply in respect of taxation years that end on or after Budget Day, including in respect of losses incurred in taxation years that end prior to Budget Day. In particular, losses from a partnership incurred in a taxation year that ended prior to Budget Day will not be available to be carried forward to a taxation year that ends on or after Budget Day if the losses were allocated – for the year in which the losses were incurred – to a limited partner that is another partnership.
Legislation
Tiered partnerships
ITA 96(2.01)
New subsection 96(2.01) of the Act reverses the effect of a 2017 decision of the Federal Court of Appeal (R v Green), in which the court held that at least certain portions of section 96 do not apply to partnerships.
Subsection 96(2.01) provides that, for the purposes of section 96, a partnership is a taxpayer. This subsection is introduced to ensure that all portions of section 96 could apply to a partnership that is itself a partner of another partnership.
This amendment applies to taxation years that end after February 26, 2018.
Limited partnership losses
ITA 96(2.1)
Subsection 96(2.1) of the Act deals with the losses of limited partnerships. This subsection generally limits the deduction by a limited partner of losses to the extent of the limited partner’s “at-risk amount” in respect of a partnership at the end of the fiscal period of the partnership ending in that year.
Paragraph 96(2.1)(e) is amended to ensure that a limited partner that is itself a partnership is not deemed to have a limited partnership loss for the amount of losses rendered non-deductible by subsection 96(2.1) and cannot carry forward a limited partnership loss under paragraph 111(1)(e).
Paragraph 96(2.1)(f) provides that for a partnership that is a limited partner of another partnership, the losses from the other partnership that can be allocated to the partnership’s members is restricted by that partnership’s at-risk amount in respect of the other partnership. For the purposes of the calculation of the total of the amounts of the limited partner’s share of the losses from the other partnership in paragraph 96(2.1)(a), this amount is to be determined without reference to the denial of a loss in paragraph (f).
This amendment applies to taxation years that end after February 26, 2018.
Tiered partnerships – adjustments
ITA 96(2.11)
New subsection 96(2.11) of the Act provides that an ultimate partner in a tiered partnership structure cannot deduct under section 111 in a taxation year that ends after February 26, 2018 partnership losses incurred in a taxation year that ended prior to February 27, 2018 that would have been reduced if subsection 96(2.01) and paragraph 96(2.1)(f) applied.
The adjusted cost base to the ultimate partner of a partnership interest in the tiered partnership structure will be increased by the amount that was denied as a deduction under section 111 by new paragraph 96(2.11)(a) to the extent that the amount can reasonably be considered to relate to an amount that was a loss previously deducted from the adjusted cost base under subparagraph 53(2)(c)(i). This subsection applies only to taxpayers that are not partnerships.
This new subsection is intended to preclude retrospective planning to carry forward losses arising in taxation years that ended before February 27, 2018.
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