Natasha Reid and David Davies, “Tiered Partnership Losses” Tax for the Owner-Manager 16:2 (April 2016), comments on Green v R, 2016 TCC 10. The Tax Court chose not to follow a long-standing CRA position on tiered partnership losses. The CRA had held that an amount that would otherwise be a limited partnership loss “disappears” if the amount is allocated to a partner that is itself a partnership. The LPL cannot be claimed by partners of the top-tier partnership.
The appellants argued that on a TCP analysis, the at-risk rules operate in a two-tiered partnership structure in the same way that they operate in a single-tiered structure. Paragraph 96(2.1)(e) implements the at-risk rules and has application within the context of those rules. Because LPLs function solely within the context of computing taxable income, and partnerships do not compute taxable income, the deeming rule in paragraph 96(2.1)(e) has no application when the particular limited partner is a partnership. A partnership computes business income or loss for a fiscal period; for a top-tier partnership, computations of ARAs and of any excess losses are theoretical exercises with no endgame. Business losses of a bottom-tier partnership allocated to a top-tier partnership therefore remain business losses and can be allocated by the top-tier partnership to its members.
The TCC ruled in favour of the appellants. The decision has been appealed by the Crown.
