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2026-10-20

Green, 2017 FCA 107: business losses keep their character as they flow through a tiered limited partnership

2017 FCA 107 · Federal Court of Appeal

Provisions

ITA s. 96ITA s. 102ITA s. 111ITA s. 3ITA s. 245

Text

Author: Sas Tullo

This is an income tax appeal about how the at-risk rules work when one limited partnership owns an interest in another. Four individuals were limited partners in a master limited partnership that in turn held interests in 31 lower-tier limited partnerships, each of which lost money for years. The Crown argued that because the master partnership had no at-risk amount in the lower-tier partnerships, the losses were converted into limited partnership losses at the master level and stranded there. The Tax Court disagreed on a question of law decided before trial, and the Federal Court of Appeal upheld that answer. The taxpayers won, and the result matters to anyone invested through layered partnerships, although Parliament has since amended the Act.

Facts

The Crown moved under Rule 58(1)(a) of the Tax Court of Canada Rules (General Procedure) for the determination of two questions: whether, where the top-tier partnership has no at-risk amount in the lower-tier partnership, the lower-tier business losses retain their character as business losses of the top-tier partnership, and, if not, whether the resulting limited partnership loss flows through to its partners (para 1). From 1996 to 2009 the respondents were limited partners in Monarch Entertainment 1994 Master Limited Partnership (MLP), itself a limited partner in 31 limited partnerships (the PSLPs). Each PSLP incurred business losses allocated mostly to MLP and then to its limited partners. From 1996 to 2008 the at-risk amount of each respondent in MLP, and of MLP in each PSLP, was nil, and the respondents accumulated the losses as limited partnership losses (para 7). In 2009 a capital gain allocated by MLP increased the respondents’ at-risk amounts, and each claimed a portion of the accumulated limited partnership losses (para 8). The Tax Court answered the first question in the affirmative and did not reach the second (para 2).

The decision under appeal

In Green v. The Queen, 2016 TCC 10, Paris J. decided the questions on a statement of agreed facts recording that 99.999 per cent of each PSLP’s loss was allocated to MLP and 99.999 per cent of MLP’s loss to its limited partners (TCC para 5). The Crown argued that paragraph 96(2.1)(e) deemed MLP’s share of the PSLP losses to be limited partnership losses that ceased to be business losses and could not flow up (TCC para 14); the appellants answered that the at-risk rules apply only to a partner that is a taxpayer, and that subsection 102(2) extends the partnership rules to tiered partnerships only for Subdivision j, which excludes the computation of income under section 3 (TCC paras 19-21).

Applying the textual, contextual, and purposive approach of Canada Trustco Mortgage Co. v. The Queen, [2005] 2 SCR 601 (TCC para 25), Paris J. held that subsection 96(2.1) operates only after a limited partner’s business loss has been computed under subsection 96(1), and that paragraphs (c) and (d) restrict deductibility without deeming the excess to stop being a business loss, since otherwise those paragraphs would be superfluous (TCC paras 27-31). The phrase “in computing the taxpayer’s income for the year” refers to the section 3 computation, which a partnership does not make (TCC paras 32-33), and the deeming rule in paragraph (e) does not say “for all purposes” (TCC paras 36-37). Subparagraph 53(2)(c)(i) confirmed that limited partnership losses remain business losses (TCC paras 41-42), and the at-risk rules defer rather than deny the excess, which the Crown’s reading would deny absolutely in a tiered structure (TCC paras 44-47). He answered the first question yes (TCC para 49).

Issues

The sole issue was whether the Tax Court judge was correct in determining that business losses could flow from one limited partnership to another and then to the partners of the second, retaining their character as business losses throughout (para 10).

Holding

The appeal was dismissed with costs (para 32). Paragraphs 96(2.1)(c), (d), and (e) apply only to taxpayers who compute income and non-capital losses under sections 3 and 111, and so do not apply to a partnership that is a member of a limited partnership; the lower-tier business losses retained their character in MLP and were allocated to the respondents as business losses (paras 22-23 and 29).

The court’s reasoning

Webb J.A., for a unanimous panel, treated the issue as a question of law reviewable for correctness under Housen v. Nikolaisen, 2002 SCC 33 (para 11). A partnership is a relationship, not a person, and pays no tax; section 96 allocates its income to the partners source by source (paras 4-5), and subsection 102(2) treats a partnership as a member of another only for Subdivision j, sections 96 to 103 (paras 6 and 12). Paragraphs 96(1)(f) and (g) preserve the source of each item of income or loss, a concept the Supreme Court called fundamental in Stewart v. Her Majesty the Queen, 2002 SCC 46 (para 13). Subsection 96(2.1) limits a limited partner’s loss to the at-risk amount and directs that the excess not be deducted in computing income, not be included in a non-capital loss, and be deemed a limited partnership loss (paras 14-15).

The Crown argued that MLP, a taxpayer for Subdivision j purposes, was caught by subsection 96(2.1) as a member of each PSLP, so that the excess became MLP’s limited partnership loss, which it could never deduct because paragraph 111(1)(e) lies outside Subdivision j (para 16). Applying Canada Trustco Mortgage Co. v. Her Majesty The Queen, 2005 SCC 54, the Court declined to read the text in isolation (para 17). The purpose of section 96 is not to compute a partnership’s income for tax but to allocate income and loss to the partners while preserving its source for section 3 (para 18). The words “as the case may be” in subsection 96(1) recognise that not every listed computation applies to every member, and section 3 and subsection 111(8) both speak of a “taxpayer”, which a partnership is not for those purposes (paras 19-21). Read in context, paragraphs 96(2.1)(c) and (d) apply only to taxpayers who must compute those amounts (para 22), and since the carry-forward in paragraph 111(1)(e) is likewise unavailable to a partnership, Parliament cannot have intended paragraph 96(2.1)(e) to impose the restriction on a partnership while denying it the later deduction (para 23).

Requiring a top-tier partnership to compute income would also blend sources into a single figure, so that “[t]he source of income would be lost” when MLP allocated it to its members (paras 24-27), and it would be arbitrary for the computation to apply only in loss years (para 28). Parliament therefore intended sources to retain their identity through each tier (para 29). On the Crown’s reading, a lower-tier partnership that lost $1,000 in year one and earned $1,000 in year two would leave the ultimate partners taxed on the income with no deduction for the loss, which “could not have been the intended result” (para 30). The Crown’s concern that losses of one limited partnership might shelter income from another did not outweigh those problems; Parliament could amend the Act, and the general anti-avoidance rule in section 245 remained available (para 31).

Practical implications

Both courts reached the same result by the same route: the at-risk rules are drafted around a “taxpayer” who computes income under section 3 and taxable income under Division C, and subsection 102(2) does not make a partnership that kind of taxpayer. In my view the most durable part of the reasoning is the Court’s refusal to adopt an interpretation that would turn a deferral rule into an absolute denial, a point that carries beyond tiered partnerships to any provision that both restricts and defers a deduction.

The holding itself has been overtaken. Webb J.A. invited Parliament to amend the Act if it disagreed with the result, and the current text of section 96 on the Government of Canada’s Justice Laws website contains subsection 96(2.01), headed “Tiered partnerships”, which provides that for the purposes of section 96 a taxpayer includes a partnership. The decision therefore states the law for the years it governed and explains why the amendment was made. Whether an appeal was taken is not verified here.

For investors in layered partnerships, the practical point is that Green cannot be relied on for current years, because the Act now treats a partnership as a taxpayer for the at-risk rules, while for older years still under objection or appeal it remains the governing authority.

This comment is general information, not legal advice. The law may have changed since the decision; check the current text in the tax wiki.

Canada v. Green, 2017 FCA 107 (Her Majesty the Queen v. Jeffrey N. Green, Yves Potvin, Jonathan Rubenstein, and Ian Dixon). Heard at Vancouver, British Columbia, on December 1, 2016; judgment delivered at Ottawa, Ontario, on May 19, 2017. Pelletier, Webb, and de Montigny JJ.A.; reasons by Webb J.A. Docket A-38-16. Reasons on the Federal Court of Appeal’s site. Also on CanLII. The decision under appeal is Green v. The Queen, 2016 TCC 10, Paris J., order dated January 11, 2016, dockets 2013-897(IT)G, 2013-899(IT)G, 2013-900(IT)G, and 2013-3334(IT)G: Reasons on the Tax Court’s site; also on CanLII.