A tiered-partnership structure is fairly common in Canada: i.e., where one partnership (a top-tier partnership) is a member of another partnership (a bottom-tier partnership). In Green v. The Queen, 2017 FCA 107, the Federal Court of Appeal usefully confirmed how the partnership rules in section 96 are intended to work in this context – specifically in relation to the limited partnership at-risk (loss-limitation) rules in subsection 96(2.1). Here are the main points:
- Subsection 96(1) is intended only to compute the various sources of a particular partnership’s income and loss for purposes of allocating these separate sources to the partners (see paragraph 18 of the case).
- Where one or more of these partners is a top-tier partnership, these underlying sources of income and losses are to be kept separate in the hands of the top-tier partnership, for purposes of further allocating these separate sources to the partners of the top-tier partnership (see paragraph 28 of the case).
- A partnership is not a taxpayer for purposes of computing total income under section 3 or determining non-capital losses under subsection 111(8). Accordingly, the limited partnership at-risk rules in paragraphs 96(2.1)(c) and (d) (which refer to a taxpayer’s income and a taxpayer's non-capital loss) do not apply to top-tier partnerships (see paragraphs 20 through 22 of the case).
- The provision that allows a future deduction for limited partnership losses (paragraph 111(1)(e)) applies only to taxpayers, and a partnership is not a taxpayer for this purpose. It follows that Parliament could not have intended to apply the restriction on limited partnership losses in paragraph 95(2.1)(e) to top-tier partnerships, but deny these top-tier partnerships the benefit of a future deduction (in respect of these limited partnership losses) if the bottom-tier partnership later earns income (see paragraph 23 of the case).
- In short, the limited partnership at-risk rules in subsection 96(2.1) do not apply to top-tier partnerships in their capacity as members of a bottom-tier partnership.
Any potential tax avoidance concerns arising from the foregoing points might be addressed in one of two ways: (1) Parliament could amend the partnership rules; or (2) the general anti-avoidance rule in section 245 might be applied depending on the particular circumstances (see paragraph 31 of the case).