Tiered Partnerships & Flow-Through Characteristics
A tiered or stacked partnership refers to a partnership that owns a partnership interest in another partnership. The Tax Court of Canada (TCC) affirmed the flow-through characteristics of income and losses through a tiered partnership structure in the decision in Devon Canada Corporation v. The Queen, 2013 TCC 415 (CanLII) [Devon]. According to the TCC at paragraph 45, “the source and location of income is preserved through each level of partnerships until the income is ultimately recognized by, and taxed in the hands of, the corporate or individual partners.”
Devon Canada Corporation v. The Queen, 2013 TCC 415 (CanLII)
Devon involved a consideration of the deduction of unused resource expenses by the transferee owner against specific income. The primary issue in Devon was whether the income and respective deductions flowed through a tiered partnership structure. The facts involved a transfer of properties from one partnership to another. The income from the properties owned by the first partnership was then allocated to a corporation. That corporation owned the properties through the first partnership which were then transferred to the second partnership.
A Transfer from Partnership To Partnership did not Trigger the Rules
According to the Canada Revenue Agency (CRA), because the successor rules are by purchase and election or triggered by an acquisition of control, a transfer from partnership to partnership did not trigger the rules nor the available deduction and the expenses expired and could not be deducted. The Tax Court rejected the CRAs characterization. According to the TCC the question was whether the deduction applies even though the property has been transferred through tiered partnerships. Per the TCC, at paragraph 23, the “answer turns on whether income earned through the subsidiary partnership remains income that ““may reasonably be regarded as being attributable to the production from”” the resource property for the purposes of subparagraph 66.7(10)(j)(ii).”
In a Tiered Partnership, the Source and Location of Income is Preserved
Ultimately, the issue rested upon whether the rules applicable to the property when it was held in the first partnership were applicable when the partnership was transferred to the second partnership. In acknowledging the flow-through characteristics of tiered-partnerships, the TCC ruled in the affirmative, stating at paragraph 45:
[în] a tiered partnership, the source and location of income is preserved through each level of partnerships until the income is ultimately recognized by, and taxed in the hands of, the corporate or individual partners. This is supported by [ITA] subsection 102(2) which provides that, in the context of computing the income of partnerships, ““a reference to . . . a taxpayer who is a member of a particular partnership shall include a reference to another partnership that is a member of the particular partnership.””
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