The treatment of a particular partner under the Act can vary depending on whether the partner is considered to be a “limited partner” as defined in the Act. Among other things, if a partner is a limited partner, specific at-risk rules apply to restrict the partner’s ability to deduct partnership losses
For purposes of the relevant provisions of the Act, the term “limited partner”, defined in Sec. 96(2.4), includes, but is not limited to, a partner who has the status of a limited partner under limited partnership legislation. A taxpayer is a limited partner in a partnership at a particular time if, at that time or within three years after that time, any of the following conditions are met:
(a) by operation of any law governing the partnership arrangement, the partner’s liability as a partner of the partnership is limited;
(b) the partner (or any person not dealing at arm’s length) is entitled, absolutely or contingently, to receive certain types of benefits prescribed by the at-risk rules;
(c) one of the reasons for the existence of the partner is to limit the liability of any person with respect to the partnership and not to permit any person having an interest in the member to carry on that person’s business in the most effective manner; or
(d) there is an agreement or another arrangement for the disposition of an interest in the partnership, and one of the main reasons for the agreement or arrangement is to circumvent the definition of“limited partner”.
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Shared from: Bulletin for International Taxation
