Limited partnerships

Another type of tax shelter involves the purchase of an interest in a limited partnership. In this type of arrangement, you share the profits or loss of the business with the other partners and include in your income or loss a percentage of the partnership’s income or loss. However, your liability with respect to the partnership’s debts is limited. In general, you can only lose up to your original investment.

Special rules also prevent you from writing off more than the amount you have invested in the partnership (these are called the “at risk” rules). The write-off you can claim is further restricted if the purchase is financed with certain types of “limited recourse” financing.

If the adjusted cost base of your interest in a limited partnership becomes negative, you’ll have to report a capital gain equal to the negative amount.

Some limited partnerships have been scrutinized by the CRA. Investors should be aware that if the limited partnership is found to have no reasonable expectation of profit, the losses may be disallowed (see topic 150). As you would with any other investment, you should thoroughly evaluate the investment potential of a tax shelter. It doesn’t make any economic sense to invest in a shelter if there’s little chance of either earning a return on your investment or recovering the amount you have at risk.

The alternative minimum tax (AMT) (see topic 157) and cumulative net investment loss (CNIL) rules (see topic 149), as well as restrictions on the deductibility of limited partnership losses, make it imperative that you pursue expert tax advice about your situation before making an investment.