A June 27, 2016 French Technical Interpretation (2016-0637341E5, Gagnon, Robert) examined whether a loan to a limited partner could constitute a draw.
In the case, the limited partnership had a limited partner (LP), entitled to 99% of the partnership’s profit, and a general partner (GP), entitled to 1% of the partnership’s profits. The partnership earned income evenly throughout the year. At the beginning of the year the LP’s ACB was nil. Quarterly, the LP took a loan from the partnership equal to ¼ of the partnership’s annual profits. At the beginning of the following year, the partnership distributed profits in the form of a promissory note. The note and the loan were then immediately set-off.
CRA opined that the loan to the LP could constitute a draw as the scope of Subparagraph 53(2)(c)(v) is very broad. A review of the partnership agreement would be required to determine whether the draw was “on account or in lieu of… partnership profits.” If, the loan did constitute a draw, the ACB would be reduced immediately. As, in this case, the ACB at the start of the year was nil, a reduction would bring the ACB into a negative position, and, therefore, Subsection 40(3.1) would apply to deem the LP to realize a capital gain.
CRA also opined that there is a question as to whether a partner could in fact “loan” money from the partnership as a partnership is not a legal entity in and of itself.