A recent CRA administrative position provides comfort in situations where a partnership distributes its current year cashflow to a limited partner as an advance.
Distributions by a partnership to a partner generally reduce the adjusted cost base (“ACB”) of the partner’s interest in the partnership. On the other hand, partnership income allocated to the partner for tax purposes is added to the ACB of the partner’s interest. However, the addition occurs only after the partnership’s fiscal year-end. This timing mismatch can result in a negative ACB.
Under the tax rules, a negative ACB of a limited partnership interest results in an immediate capital gain for the partner.
A common strategy to avoid triggering a negative-ACB gain is for the partnership to make an advance rather than distribute its profits to members during the year, and then make an offsetting distribution immediately after the year-end .However, in a 2016 technical interpretation, CRA stated that such a loan may be treated as an amount received “in lieu” of a distribution of partnership profits, resulting in a deduction from the ACB of the partnership interest.1
At the Annual Congress of the Association de Planification Fiscale et Financière (APFF) this past October, CRA was asked2 to clarify its position on whether advances to limited partners for the purpose of avoiding negative-ACB gains would be treated as distributions. CRA replied that it will generally not treat the loans as distributions, provided that certain conditions are met. In very general terms, the conditions are as follows:
- the loan does not constitute a withdrawal of a limited partner’s capital contribution;
- the amount of the loan does not materially exceed the partner’s share of partnership profits for the year;
- the loan is offset immediately after year-end by a partnership distribution of an equivalent amount;
- the purpose of the loan is to avoid the realization of negative-ACB gain resulting from the timing mismatch in the partnership tax rules; and
- the partnership is not a tax shelter, and the general anti-avoidance rule does not apply.
This CRA pronouncement provides welcome relief to limited partners who should now be able to draw advances for their share of partnership profits, provided that the advances are set-off immediately after-year end with actual partnership distributions, and the other conditions above are met.
1 CRA document 2016-0637341E5, June 27, 2016.
2 APFF Federal Roundtable, 7 October 2022, Q.5,