http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/127577/index.do
Green v. The Queen (January 11, 2016 – 2016 TCC 10, Paris J.).
Précis: This is a report of a determination of a legal question under section 58 of the Tax Court of Canada Rules (General Procedure). The question at issue was as follows:
(a) In a two-tiered partnership structure, where the top-tier partnership has no at risk amount in respect of the lower-tier partnership at the end of a particular fiscal period, do business losses incurred by the lower-tier partnership in the particular fiscal period retain their character as business losses of the top-tier partnership, thus available to be allocated to the partners of the top-tier partnership as business losses (which would then be subject to the application of the at-risk rules in the hands of the partners of the top-tier partnership)?
(b) If the answer to question (a) above is no, does a limited partnership loss that the top-tier partnership has in the lower-tier partnership flow through to the partners of the top-tier partnership such that they have a limited partnership loss?
The Crown contended that since the top tier partnership had no at risk amount in respect of the lower tier partnership no business losses could be flowed through to it from the lower tier partnership. The Tax Court did not accept the Crown’s position and held that business losses could flow through to the top tier partnership.
Costs on the motion were left to the trial judge.
Decision: This very intricate decision is probably best summarized in the six concluding paragraphs:
Purpose
[44] The purpose of the at-risk rules is straightforward: to limit the extent to which a limited partner may deduct partnership losses from business or property against income from other sources to the capital risked in the partnership (i.e. the partner's at-risk amount). The amount by which the partnership business or property losses exceed the limited partner’s at-risk amount may be carried forward and deducted in future years either against income from the partnership which generated the losses or, where the taxpayer's at-risk amount in respect of the partnership has increased, against income from other sources (Canada Tax Service- McCarthy Tetrault, Volume 8, Analysis section 96, p. 96-1, October 9, 2015.)
[45] Clearly then, the purpose is not to deny absolutely the losses in excess of a limited partner’s at-risk amount but, rather, to defer deduction of the excess until a time when the partnership has generated income or the partner’s at-risk amount has increased for some other reason.
[46] The Respondent’s interpretation would, in the case of a tiered partnership, result in any business or property losses of a limited partnership that exceed the top-tier partnership’s at-risk amount to be denied absolutely because there is no means by which the limited partnership loss created by paragraph 96(2.1)(e) can be allocated to the top-tier partnership.
[47] The ability to carry forward a limited partnership loss is a key element of the at-risk rules and I find, therefore, that the interpretation proposed by the Respondent is not consonant with the purpose of the at-risk rules.
[48] More generally, I also believe that the following excerpt from the Department of Finance Technical Notes to sections 96(2.1) to 96(2.7) support the proposition that the purpose of the at-risk rules is not to limit the allocation of losses from business or property to a limited partner, but rather to limit the deductibility of those losses once they have been allocated:
There is no restriction on the amount of business losses that may be allocated to a limited partner by the partnership. Such losses, however, may only be claimed by the limited partner to the extent of his remaining at-risk amount. Losses that may not be so claimed may be carried forward indefinitely by the limited partner to be applied against income from the same limited partnership.
Conclusion
[49] For all of these reasons, I would answer the first question in the affirmative. Given this conclusion, it is not necessary to proceed to the second question. Costs on this motion are left to the discretion of the trial judge.