CRA guidance on loans from Limited Partnerships to limited partners in Ontario

CRA guidance on loans from Limited Partnerships to limited partners in Ontario

According to comments from CRA, a loan from a partnership to a general partner will be considered as a distribution.

CRA stated that determining whether a payment, presented as a loan, made by a limited partnership to a limited partner should be treated as a loan or a distribution under ss. 96(2.2)(c) and 53(2)(c)(v), would depend on the laws of Ontario.

Referring to the Rye v. Rye/Klein cases, the Directorate commented on common law by stating that it is firmly established that a person cannot enter into a contract with themselves, and a partner cannot enter into a contract with their partnership.

Thus, it becomes important to ascertain whether statutory law permits a limited partnership to provide a loan to a limited partner, thereby overriding the longstanding common law principle.

Earlier, CRA had cited section 60(1) of the Partnership Act (B.C.), which allows a limited partner to lend money to, borrow money from, and conduct business with the limited partnership. CRA also mentioned that such a loan would be considered valid under this provision.

Although the provision in question was section 60(1) of the Partnership Act (B.C.), it was surprising that CRA did not refer to section 12 of the Limited Partnerships Act (Ontario), which contains a similar provision, stating that

"A limited partner may loan money to and transact other business with the limited partnership..." (however, section 12 does not specifically mention limited partner borrowings).

Nonetheless, CRA clarified that the doubts expressed in 2016-0637341E5 regarding whether a limited partnership could lend money to a limited partner under civil law did not apply to Ontario limited partnerships.

Overall, based on these comments, it appears that CRA Headquarters would classify a loan given to a general partner by a partnership governed by the laws of a common law province, like Ontario, as a distribution instead.

“Please note that the information provided in this article is of a general nature and may not be accurate for your specific situation. The information is current as of the date of posting and is not intended to provide legal advice. It's always recommended that you consult with a professional accountant and lawyer for personalized guidance and advice."