Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.))

Act current to 2014-06-12 and last amended on 2014-01-01. Previous Versions

Conversion of Foreign Bank Affiliate to Branch

Marginal note:Definitions
  •  (1) The definitions in this subsection apply in this section.

    “Canadian affiliate”

    « filiale canadienne »

    “Canadian affiliate” of an entrant bank at any particular time means a Canadian corporation that was, immediately before the particular time, affiliated with the entrant bank and that was, at all times during the period that began on February 11, 1999 and ended immediately before the particular time,

    • (a) affiliated with either

      • (i) the entrant bank, or

      • (ii) a foreign bank (within the meaning assigned by section 2 of the Bank Act) that is affiliated with the entrant bank at the particular time; and

    • (b) either

      • (i) a bank,

      • (ii) a corporation authorized under the Trust and Loan Companies Act to carry on the business of offering to the public its services as trustee, or

      • (iii) a corporation of which the principal activity in Canada consists of any of the activities referred to in subparagraphs 518(3)(a)(i) to (v) of the Bank Act and in which the entrant bank or a non-resident person affiliated with the entrant bank holds shares under the authority, directly or indirectly, of an order issued by the Minister of Finance or the Governor in Council under subsection 521(1) of that Act.

    “eligible property”

    « bien admissible »

    “eligible property” of a Canadian affiliate at any time means a property described in any of paragraphs 85(1.1)(a) to (g.1) that is, immediately before that time, used or held by it in carrying on its business in Canada.

    “entrant bank”

    « banque entrante »

    “entrant bank” means a non-resident corporation that is, or has applied to the Superintendent of Financial Institutions to become, an authorized foreign bank.

    “qualifying foreign merger”

    « fision étrangère déterminée »

    “qualifying foreign merger” means a merger or combination of two or more corporations that would be a “foreign merger” within the meaning assigned by subsection 87(8.1) if that subsection were read without reference to the words “and otherwise than as a result of the distribution of property to one corporation on the winding-up of another corporation.

  • Marginal note:Qualifying foreign merger

    (2) Where an entrant bank was formed as the result of a qualifying foreign merger, after February 11, 1999, of two or more corporations (referred to in this subsection as “predecessors”), and at the time immediately before the merger, there were one or more Canadian corporations (referred to in this subsection as “predecessor affiliates”), each of which at that time would have been a Canadian affiliate of a predecessor if the predecessor were an entrant bank at that time,

    • (a) for the purpose of the definition “Canadian affiliate” in subsection (1),

      • (i) each predecessor affiliate is deemed to have been affiliated with the entrant bank throughout the period that began on February 11, 1999 and ended at the time of the merger,

      • (ii) the expression “entrant bank” in subparagraph (b)(iii) of the definition is deemed to include a predecessor, and

      • (iii) if two or more of the predecessor affiliates are amalgamated or merged at any time after February 11, 1999 to form a new corporation, the new corporation is deemed to have been affiliated with the entrant bank throughout the period that began on February 11, 1999 and ended at the time of the amalgamation or merger of the predecessor affiliates; and

    • (b) if at least one of the predecessors complied with the terms of subsection (11)(a), the entrant bank is deemed to have complied with those terms.

  • Marginal note:Branch-establishment rollover

    (3) If a Canadian affiliate of an entrant bank transfers an eligible property to the entrant bank, the entrant bank begins immediately after the transfer to use or hold the transferred property in its Canadian banking business and the Canadian affiliate and the entrant bank jointly elect, in accordance with subsection (11), to have this subsection apply in respect of the transfer, subsections 85(1) (other than paragraph (e.2)), (1.1), (1.4) and (5) apply, with any modifications that the circumstances require, in respect of the transfer, except that the portion of subsection 85(1) before paragraph (a) shall be read as follows:

    • “85. (1) Where a taxpayer that is a Canadian affiliate of an entrant bank (within the meanings assigned by subsection 142.7(1)) has, in a taxation year, disposed of any of the taxpayer’s property to the entrant bank (referred to in this subsection as the “corporation”), if the taxpayer and the corporation have jointly elected under subsection 142.7(3), the following rules apply:”.

  • Marginal note:Deemed fair market value

    (4) If a Canadian affiliate of an entrant bank and the entrant bank make an election under subsection (3) in respect of a transfer of property by the Canadian affiliate to the entrant bank, for the purposes of subsections 15(1), 52(2), 69(1), (4) and (5), 246(1) and 247(2) in respect of the transfer, the fair market value of the property is deemed to be the amount agreed by the Canadian affiliate and the entrant bank in their election.

  • Marginal note:Specified debt obligations

    (5) If a Canadian affiliate of an entrant bank transfers a specified debt obligation to the entrant bank in a transaction in respect of which an election is made under subsection (3), the Canadian affiliate is a financial institution in its taxation year in which the transfer is made, and the amount that the Canadian affiliate and the entrant bank agree on in their election in respect of the obligation is equal to the tax basis of the obligation within the meaning assigned by subsection 142.4(1), the entrant bank is deemed, in respect of the obligation, for the purposes of sections 142.2 to 142.4 and 142.6, to be the same corporation as, and a continuation of, the Canadian affiliate.

  • Marginal note:Mark-to-market property

    (6) If a Canadian affiliate of an entrant bank described in paragraph (11)(a) transfers at any time within the period described in paragraph (11)(c) to the entrant bank a property that is, for the Canadian affiliate’s taxation year in which the property is transferred, a mark-to-market property of the Canadian affiliate,

    • (a) for the purposes of subsections 112(5) to (5.21) and (5.4), the definition “mark-to-market property” in subsection 142.2(1) and subsection 142.5(9), the entrant bank is deemed, in respect of the property, to be the same corporation as and a continuation of, the Canadian affiliate; and

    • (b) for the purpose of applying subsection 142.5(2) in respect of the property, the Canadian affiliate’s taxation year in which the property is transferred is deemed to have ended immediately before the time the property was transferred.

  • Marginal note:Reserves

    (7) If

    • (a) at a particular time,

      • (i) a Canadian affiliate of an entrant bank transfers to the entrant bank property that is a loan or lending asset, or a right to receive an unpaid amount in respect of a disposition before the particular time of property by the affiliate, or

      • (ii) the entrant bank assumes an obligation of the Canadian affiliate that is an instrument or commitment described in paragraph 20(1)(l.1) or an obligation in respect of goods, services, land, or chattels or movable property, described in subparagraph 20(1)(m)(i), (ii) or (iii),

    • (b) the property is transferred or the obligation is assumed for an amount equal to its fair market value at the particular time,

    • (c) the entrant bank begins immediately after the particular time to use or hold the property or owe the obligation in its Canadian banking business, and

    • (d) the Canadian affiliate and the entrant bank jointly elect in accordance with subsection (11) to have this subsection apply in respect of the transfer or assumption,

    then

    • (e) in applying paragraphs 20(1)(l), (l.1), (m), (n) and (p) in respect of the obligation or property, the taxation year of the affiliate that would, but for this paragraph, include the particular time is deemed to end immediately before the particular time, and

    • (f) in computing the income of the Canadian affiliate and the entrant bank for taxation years that end on or after the particular time,

      • (i) any amount deducted under paragraph 20(1)(l), (l.1), (m) or (n) by the Canadian affiliate in respect of the property or obligation in computing its income for its taxation year that ended immediately before the particular time, or under paragraph 20(1)(p) in computing its income for that year or for a preceding taxation year (to the extent that the amount has not been included in the affiliate’s income under paragraph 12(1)(i)), is deemed to have been so deducted by the entrant bank in computing its income for its last taxation year that ended before the particular time and not to have been deducted by the Canadian affiliate,

      • (ii) in applying paragraph 20(1)(m), an amount in respect of the goods, services, land, chattels or movable property, that was included under paragraph 12(1)(a) in computing the Canadian affiliate’s income from a business is deemed to have been so included in computing the entrant bank’s income from its Canadian banking business for a preceding taxation year,

      • (iii) in applying paragraph 20(1)(n) in respect of a property described in subparagraph (a)(i) and paragraphs (b), (c) and (d) sold by the Canadian affiliate in the course of a business, the property is deemed to have been disposed of by the entrant bank (and not by the Canadian affiliate) at the time it was disposed of by the Canadian affiliate, and the amount in respect of the sale that was included in computing the Canadian affiliate’s income from a business is deemed to have been included in computing the entrant bank’s income from its Canadian banking business for its taxation year that includes the time at which the property was so disposed of, and

      • (iv) in applying paragraph 40(1)(a) or 44(1)(e) in respect of a property described in subparagraph (a)(i) and paragraphs (b), (c) and (d) disposed of by the Canadian affiliate, the property is deemed to have been disposed of by the entrant bank (and not by the Canadian affiliate) at the time it was disposed of by the Canadian affiliate, the amount determined under subparagraph 40(1)(a)(i) or 44(1)(e)(i) in respect of the Canadian affiliate is deemed to be the amount determined under that subparagraph in respect of the entrant bank, and any amount claimed by the Canadian affiliate under subparagraph 40(1)(a)(iii) or 44(1)(e)(iii) in computing its gain from the disposition of the property for its last taxation year that ended before the particular time is deemed to have been so claimed by the entrant bank for its last taxation year that ended before the particular time.

  • Marginal note:Assumption of debt obligation

    (8) If a Canadian affiliate of an entrant bank described in paragraph (11)(a) transfers at any time within the period described in paragraph (11)(c) property to the entrant bank, and any part of the consideration for the transfer is the assumption by the entrant bank in respect of its Canadian banking business of a debt obligation of the Canadian affiliate,

    • (a) where the Canadian affiliate and the entrant bank jointly elect in accordance with subsection (11) to have this paragraph apply,

      • (i) both

        • (A) the value of that part of the consideration for the transfer of the property, and

        • (B) for the purpose of determining the consequences of the assumption of the obligation and any subsequent settlement or extinguishment of it, the value of the consideration given to the entrant bank for the assumption of the obligation,

      are deemed to be an amount (in this paragraph referred to as the “assumption amount”) equal to the amount outstanding on account of the principal amount of the obligation at that time, and

      • (ii) the assumption amount shall not be considered a term of the transaction that differs from that which would have been made between persons dealing at arm’s length solely because it is not equal to the fair market value of the obligation at that time;

    • (a.1[Repealed, 2013, c. 34, s. 290]

    • (b) where the obligation is denominated in a foreign currency, and the Canadian affiliate and the entrant bank jointly elect in accordance with subsection (11) to have this paragraph apply,

      • (i) the amount of any income, loss, capital gain or capital loss in respect of the obligation due to the fluctuation in the value of the foreign currency relative to Canadian currency realized by

        • (A) the Canadian affiliate on the assumption of the obligation is deemed to be nil, and

        • (B) the entrant bank on the settlement or extinguishment of the obligation shall be determined based on the amount of the obligation in Canadian currency at the time it became an obligation of the Canadian affiliate, and

      • (ii) for the purpose of an election made in respect of the obligation under paragraph (a), the amount outstanding on account of the principal amount of the obligation at that time is the total of all amounts each of which is an amount that was advanced to the Canadian affiliate on account of principal, that remains outstanding at that time, and that is determined using the exchange rate that applied between the foreign currency and Canadian currency at the time of the advance; and

    • (c) for the purpose of applying paragraphs 20(1)(e) and (f) in respect of the debt obligation, the obligation is deemed not to have been settled or extinguished by virtue of its assumption by the entrant bank and the entrant bank is deemed to be the same corporation as, and a continuation of, the Canadian affiliate.

  • Marginal note:Branch-establishment dividend

    (9) Notwithstanding any other provision of this Act, the rules in subsection (10) apply if

    • (a) a dividend is paid by a Canadian affiliate of an entrant bank to the entrant bank or to a person that is affiliated with the Canadian affiliate and that is resident in the country in which the entrant bank is resident, or

    • (b) a dividend is deemed to be paid for the purposes of this Part or Part XIII (other than by paragraph 214(3)(a)) as a result of a transfer of property from the Canadian affiliate to such a person,

    and the Canadian affiliate and the entrant bank jointly elect in accordance with subsection (11) to have subsection (10) apply in respect of the dividend.

  • Marginal note:Treatment of dividend

    (10) If the conditions in subsection (9) are met,

    • (a) the dividend is deemed (except for the purposes of subsections 112(3) to (7)) not to be a taxable dividend; and

    • (b) there is added to the amount otherwise determined under paragraph 219(1)(g) in respect of the entrant bank for its first taxation year that ends after the time at which the dividend is paid, the amount of the dividend less, where the dividend is paid by means of, or arises as a result of, a transfer of eligible property in respect of which the Canadian affiliate and the entrant bank have jointly elected under subsection (3), the amount by which the fair market value of the property transferred exceeds the amount the Canadian affiliate and the entrant bank have agreed on in their election.

  • Marginal note:Elections

    (11) An election under subsection (3) or (7), paragraph (8)(a) or (b) or subsection (10), (12) or (14) is valid only if

    • (a) the entrant bank by which the election is made has, on or before the day that is 6 months after the day on which the Income Tax Amendments Act, 2000 receives royal assent, complied with paragraphs 1.1(b) and (c) of the “Guide to Foreign Bank Branching” in respect of the establishment and commencement of business of a foreign bank branch in Canada issued by the Office of the Superintendent of Financial Institutions, as it read on December 31, 2000;

    • (b) the election is made in prescribed form on or before the earlier of the filing-due date of the Canadian affiliate and the filing-due date of the entrant bank, for the taxation year that includes the time at which

      • (i) in the case of an election under subsection (3) or (7), paragraph (8)(a) or (b) or subsection (10), the dividend, transfer or assumption to which the election relates is paid, made or effected, or

      • (ii) in the case of an election under subsection (12), the dissolution order was granted or the winding up commenced; and

    • (c) in the case of an election under subsection (3) or (7), paragraph (8)(a) or (b) or subsection (10), the dividend, transfer or assumption to which the election relates is paid, made or effected within the period that

      • (i) begins on the day on which the Superintendent makes an order in respect of the entrant bank under subsection 534(1) of the Bank Act, and

      • (ii) ends on the later of

        • (A) the earlier of

          • (I) the day that is one year after the day referred to subparagraph (i), and

          • (II) the day that is three years after the day on which the Income Tax Amendments Act, 2000 receives royal assent, and

        • (B) the day that is one year after the day on which the Income Tax Amendments Act, 2000 receives royal assent.

  • Marginal note:Winding-up of Canadian affiliate: losses

    (12) If

    • (a) within the period described in paragraph (11)(c) in respect of the entrant bank,

      • (i) the Minister of Finance has issued letters patent under section 342 of the Bank Act or section 347 of the Trust and Loan Companies Act dissolving the Canadian affiliate or an order under section 345 of the Bank Act or section 350 of the Trust and Loan Companies Act approving the Canadian affiliate’s application for dissolution (such letters patent or order being referred to in this subsection as the “dissolution order”), or

      • (ii) the affiliate has been wound up under the terms of the corporate law that governs it,

    • (b) the entrant bank carries on all or part of the business in Canada that was formerly carried on by the Canadian affiliate, and

    • (c) the Canadian affiliate and the entrant bank jointly elect in accordance with subsection (11) to have this section apply

    then in applying section 111 for the purpose of computing the taxable income earned in Canada of the entrant bank for any taxation year that begins after the date of the dissolution order or the commencement of the winding up, as the case may be,

    • (d) subject to paragraphs (e) and (h), the portion of a non-capital loss of the Canadian affiliate for a taxation year (in this paragraph referred to as the “Canadian affiliate’s loss year”) that can reasonably be regarded as being its loss from carrying on a business in Canada (in this paragraph referred to as the “loss business”) or being in respect of a claim made under section 110.5, to the extent that it

      • (i) was not deducted in computing the taxable income of the Canadian affiliate or any other entrant bank for any taxation year, and

      • (ii) would have been deductible in computing the taxable income of the Canadian affiliate for any taxation year that begins after the date of the dissolution order or the commencement of the winding up, as the case may be, on the assumption that it had such a taxation year and that it had sufficient income for that year,

      is deemed, for the taxation year of the entrant bank in which the Canadian affiliate’s loss year ended, to be a non-capital loss of the entrant bank from carrying on the loss business (or, in respect of a claim made under section 110.5, to be a non-capital loss of the entrant bank in respect of a claim under subparagraph 115(1)(a)(vii)) that was not deductible by the entrant bank in computing its taxable income earned in Canada for any taxation year that began before the date of the dissolution order or the commencement of the winding up, as the case may be,

    • (e) if at any time control of the Canadian affiliate or entrant bank has been acquired by a person or group of persons, no amount in respect of the Canadian affiliate’s non-capital loss for a taxation year that ends before that time is deductible in computing the taxable income earned in Canada of the entrant bank for a particular taxation year that ends after that time, except that the portion of the loss that can reasonably be regarded as the Canadian affiliate’s loss from carrying on a business in Canada and, where a business was carried on by the Canadian affiliate in Canada in the earlier year, the portion of the loss that can reasonably be regarded as being in respect of an amount deductible under paragraph 110(1)(k) in computing its taxable income for the year are deductible only

      • (i) if that business is carried on by the Canadian affiliate or the entrant bank for profit or with a reasonable expectation of profit throughout the particular year, and

      • (ii) to the extent of the total of the entrant bank’s income for the particular year from that business, and where properties were sold, leased, rented or developed or services rendered in the course of carrying on that business before that time, from any other business substantially all of the income of which was derived from the sale, leasing, rental or development, as the case may be, of similar properties or the rendering of similar services,

      and for the purpose of this paragraph, where subsection 88(1.1) applied to the dissolution of another corporation in respect of which the Canadian affiliate was the parent and paragraph 88(1.1)(e) applied in respect of losses of that other corporation, the Canadian affiliate is deemed to be the same corporation as, and a continuation of, that other corporation with respect to those losses,

    • (f) subject to paragraphs (g) and (h), a net capital loss of the Canadian affiliate for a taxation year (in this paragraph referred to as the “Canadian affiliate’s loss year”) is deemed to be a net capital loss of the entrant bank for its taxation year in which the Canadian affiliate’s loss year ended to the extent that the loss

      • (i) was not deducted in computing the taxable income of the Canadian affiliate or any other entrant bank for any taxation year, and

      • (ii) would have been deductible in computing the taxable income of the Canadian affiliate for any taxation year beginning after the date of the dissolution order or the commencement of the winding-up, as the case may be, on the assumption that the Canadian affiliate had such a taxation year and that it had sufficient income and taxable capital gains for that year,

    • (g) if at any time control of the Canadian affiliate or the entrant bank has been acquired by a person or group of persons, no amount in respect of the Canadian affiliate’s net capital loss for a taxation year that ends before that time is deductible in computing the entrant bank’s taxable income earned in Canada for a taxation year that ends after that time, and

    • (h) any loss of the Canadian affiliate that would otherwise be deemed by paragraph (d) or (f) to be a loss of the entrant bank for a particular taxation year that begins after the date of the dissolution order or the commencement of the winding-up, as the case may be, is deemed, for the purpose of computing the entrant bank’s taxable income earned in Canada for taxation years that begin after that date, to be such a loss of the entrant bank for its immediately preceding taxation year and not for the particular year, if the entrant bank so elects in its return of income for the particular year.

  • Marginal note:Winding-up of Canadian affiliate: stop loss

    (13) If a Canadian affiliate and its entrant bank have at any time made a joint election under either of subsection (3) or (12),

    • (a) in respect of any transfer of property, directly or indirectly, by the Canadian affiliate to the entrant bank or a person with whom the entrant bank does not deal at arm’s length,

      • (i) subparagraph 13(21.2)(e)(iii) shall be read without reference to clause (E) of that subparagraph,

      • (ii) subsection 14(12) shall be read without reference to paragraph (g) of that subsection,

      • (iii) paragraph 18(15)(b) shall be read without reference to subparagraph (iv) of that paragraph, and

      • (iv) paragraph 40(3.4)(b) shall be read without reference to subparagraph (v) of that paragraph;

    • (b) in respect of any property of the Canadian affiliate appropriated to or for the benefit of the entrant bank or any person with whom the entrant bank does not deal at arm’s length, section 69(5) shall be read without reference to paragraph (d); and

    • (c) for the purposes of applying subsection 13(21.2), 14(12), 18(15) and 40(3.4) to any property that was disposed of by the affiliate, after the dissolution or winding-up of the affiliate, the entrant bank is deemed to be the same corporation as, and a continuation of, the affiliate.

  • Marginal note:Winding-up of Canadian affiliate: SDOs

    (14) If a Canadian affiliate of an entrant bank and the entrant bank meet the conditions set out in paragraphs (12)(a) and (b) and jointly elect in accordance with subsection (11) to have this subsection apply, and the Canadian affiliate has not made an election under this subsection with any other entrant bank, the entrant bank is deemed to be the same corporation as, and a continuation of, the Canadian affiliate for the purposes of paragraphs 142.4(4)(c) and (d) in respect of any specified debt obligation disposed of by the Canadian affiliate.

  • NOTE: Application provisions are not included in the consolidated text;
  • see relevant amending Acts. 2001, c. 17, s. 138;
  • 2013, c. 34, ss. 136, 290.