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

Full Document:  

Act current to 2022-05-02 and last amended on 2021-12-17. Previous Versions

PART IIncome Tax (continued)

DIVISION BComputation of Income (continued)

SUBDIVISION FRules Relating to Computation of Income (continued)

Marginal note:Definitions

  •  (1) In this section,

    commercial debt obligation

    commercial debt obligation has the meaning assigned by subsection 80(1); (créance commerciale)

    commercial obligation

    commercial obligation has the meaning assigned by subsection 80(1); (dette commerciale)

    debtor

    debtor has the meaning assigned by subsection 80(1); (débiteur)

    distress preferred share

    distress preferred share has the meaning assigned by subsection 80(1); (action privilégiée de renflouement)

    forgiven amount

    forgiven amount has the meaning assigned by subsection 80(1) except that, where an amount would be included in computing a person’s income under paragraph 6(1)(a) or subsection 15(1) as a consequence of the settlement of an obligation if the obligation were settled without any payment being made in satisfaction of its principal amount, forgiven amount in respect of that obligation has the meaning assigned by subsection 6(15.1) or 15(1.21), as the case may be; (montant remis)

    person

    person has the meaning assigned by subsection 80(1); (personne)

    specified cost

    specified cost at any time to a person of an obligation means,

    • (a) where the obligation is capital property of the person at that time, the adjusted cost base at that time to the person of the obligation, and

    • (b) in any other case, the cost amount to the person of the obligation. (coût déterminé)

  • Marginal note:Application

    (2) For the purposes of this section,

    • (a) paragraphs 80(2)(a), 80(2)(b), 80(2)(j), 80(2)(l) and 80(2)(n) apply; and

    • (b) a person has a significant interest in a corporation at any time if the person owned at that time

      • (i) shares of the capital stock of the corporation that would give the person 25% or more of the votes that could be cast under all circumstances at an annual meeting of shareholders of the corporation, or

      • (ii) shares of the capital stock of the corporation having a fair market value of 25% or more of the fair market value of all the issued shares of the capital stock of the corporation

      and, for the purposes of this paragraph, a person shall be deemed to own at any time each share of the capital stock of a corporation that is owned, otherwise than because of this paragraph, at that time by another person with whom the person does not deal at arm’s length.

  • Marginal note:Deemed settlement on amalgamation

    (3) Where a commercial obligation or another obligation (in this subsection referred to as the “indebtedness”) of a debtor that is a corporation to pay an amount to another corporation (in this subsection referred to as the “creditor”) is settled on an amalgamation of the debtor and the creditor, the indebtedness shall be deemed to have been settled immediately before the time that is immediately before the amalgamation by a payment made by the debtor and received by the creditor of an amount equal to the amount that would have been the creditor’s cost amount of the indebtedness at that time if

    • (a) the definition cost amount in subsection 248(1) were read without reference to paragraph (e) of that definition; and

    • (b) that cost amount included amounts added in computing the creditor’s income in respect of the portion of the indebtedness representing unpaid interest, to the extent those amounts have not been deducted in computing the creditor’s income as bad debts in respect of that unpaid interest.

  • Marginal note:Deemed settlement on winding-up

    (4) Where there is a winding-up of a subsidiary to which the rules in subsection 88(1) apply and

    • (a) a debt or other obligation (in this subsection referred to as the “subsidiary’s obligation”) of the subsidiary to pay an amount to the parent, or

    • (b) a debt or other obligation (in this subsection referred to as the “parent’s obligation”) of the parent to pay an amount to the subsidiary

    is, as a consequence of the winding-up, settled at a particular time without any payment of an amount or by the payment of an amount that is less than the principal amount of the subsidiary’s obligation or the parent’s obligation, as the case may be,

    • (c) where that payment is less than the amount that would have been the cost amount to the parent or subsidiary of the subsidiary’s obligation or the parent’s obligation immediately before the particular time if the definition cost amount in subsection 248(1) were read without reference to paragraph (e) of that definition and the parent so elects in a prescribed form on or before the day on or before which the parent is required to file a return of income pursuant to section 150 for the taxation year that includes the particular time, the amount paid at that time in satisfaction of the principal amount of the subsidiary’s obligation or the parent’s obligation shall be deemed to be equal to the amount that would be the cost amount to the parent or the subsidiary, as the case may be, of the subsidiary’s obligation or the parent’s obligation immediately before the particular time if

      • (i) the definition cost amount in subsection 248(1) were read without reference to paragraph (e) of that definition, and

      • (ii) that cost amount included amounts added in computing the parent’s income or the subsidiary’s income in respect of the portion of the indebtedness representing unpaid interest, to the extent that the parent or the subsidiary has not deducted any amounts as bad debts in respect of that unpaid interest, and

    • (d) for the purposes of applying section 80 to the subsidiary’s obligation, where property is distributed at any time in circumstances to which paragraph 88(1)(a) or 88(1)(b) applies and the subsidiary’s obligation is settled as a consequence of the distribution, the subsidiary’s obligation shall be deemed to have been settled immediately before the time that is immediately before the time of the distribution and not at any later time.

  • Marginal note:Deemed settlement on winding-up

    (5) Where there is a winding-up of a subsidiary to which the rules in subsection 88(1) apply and, as a consequence of the winding-up, a distress preferred share issued by the subsidiary and owned by the parent (or a distress preferred share issued by the parent and owned by the subsidiary) is settled at any time without any payment of an amount or by the payment of an amount that is less than the principal amount of the share,

    • (a) where the payment was less than the adjusted cost base of the share to the parent or the subsidiary, as the case may be, immediately before that time, for the purposes of applying the provisions of this Act to the issuer of the share, the amount paid at that time in satisfaction of the principal amount of the share shall be deemed to be equal to its adjusted cost base to the parent or to the subsidiary, as the case may be; and

    • (b) for the purposes of applying section 80 to the share, where property is distributed at any time in circumstances to which paragraph 88(1)(a) or 88(1)(b) applies and the share is settled as a consequence of the distribution, the share shall be deemed to have been settled immediately before the time that is immediately before the time of the distribution and not at any later time.

  • Marginal note:Deemed settlement on SIFT trust wind-up event

    (5.1) If a trust that is a SIFT wind-up entity is the only beneficiary under another trust (in this subsection referred to as the “subsidiary trust”), and a capital property that is a debt or other obligation (in this subsection referred to as the “subsidiary trust’s obligation”) of the subsidiary trust to pay an amount to the SIFT wind-up entity is, as a consequence of a distribution from the subsidiary trust that is a SIFT trust wind-up event, settled at a particular time without any payment of an amount or by the payment of an amount that is less than the principal amount of the subsidiary trust’s obligation

    • (a) paragraph (b) applies if

      • (i) the payment is less than the amount that would have been the adjusted cost base to the SIFT wind-up entity of the subsidiary trust’s obligation immediately before the particular time, and

      • (ii) the SIFT wind-up entity elects, in prescribed form on or before the SIFT wind-up entity’s filing-due date for the taxation year that includes the particular time, to have paragraph (b) apply;

    • (b) if this paragraph applies, the amount paid at the particular time in satisfaction of the principal amount of the subsidiary trust’s obligation is deemed to be equal to the amount that would be the adjusted cost base to the SIFT wind-up entity of the subsidiary trust’s obligation immediately before the particular time if that adjusted cost base included amounts added in computing the SIFT wind-up entity’s income in respect of the portion of the indebtedness representing unpaid interest, to the extent that the SIFT wind-up entity has not deducted any amounts as bad debts in respect of that unpaid interest; and

    • (c) for the purposes of applying section 80 to the subsidiary trust’s obligation, the subsidiary trust’s obligation is deemed to have been settled immediately before the time that is immediately before the distribution.

  • Marginal note:Specified obligation in relation to debt parking

    (6) For the purpose of subsection (7), an obligation issued by a debtor is, at a particular time, a specified obligation of the debtor where

    • (a) at any previous time (other than a time before the last time, if any, the obligation became a parked obligation before the particular time),

      • (i) a person who owned the obligation

        • (A) dealt at arm’s length with the debtor, and

        • (B) where the debtor is a corporation, did not have a significant interest in the debtor, or

      • (ii) the obligation was acquired by the holder of the obligation from another person who was, at the time of that acquisition, not related to the holder or related to the holder only because of paragraph 251(5)(b); or

    • (b) the obligation is deemed by subsection 50(1) to be reacquired at the particular time.

  • Marginal note:Parked obligation

    (7) For the purposes of this subsection and subsections (6), (8) and (10),

    • (a) an obligation issued by a debtor is a “parked obligation” at any time where at that time

      • (i) the obligation is a specified obligation of the debtor, and

      • (ii) the holder of the obligation

        • (A) does not deal at arm’s length with the debtor, or

        • (B) where the debtor is a corporation and the holder acquired the obligation after July 12, 1994 (otherwise than pursuant to an agreement in writing entered into on or before July 12, 1994), has a significant interest in the debtor; and

    • (b) an obligation that is, at any time, acquired or reacquired in circumstances to which subparagraph (6)(a)(ii) or paragraph (6)(b) applies shall, if the obligation is a parked obligation immediately after that time, be deemed to have become a parked obligation at that time.

  • Marginal note:Deemed settlement after debt parking

    (8) Where at any particular time after February 21, 1994 a commercial debt obligation that was issued by a debtor becomes a parked obligation (otherwise than pursuant to an agreement in writing entered into before February 22, 1994) and the specified cost at the particular time to the holder of the obligation is less than 80% of the principal amount of the obligation, for the purpose of applying the provisions of this Act to the debtor

    • (a) the obligation shall be deemed to have been settled at the particular time; and

    • (b) the forgiven amount at the particular time in respect of the obligation shall be determined as if the debtor had paid an amount at the particular time in satisfaction of the principal amount of the obligation equal to that specified cost.

  • Marginal note:Statute-barred debt

    (9) Where at any particular time after February 21, 1994 a commercial debt obligation issued by a debtor that is payable to a person (other than a person with whom the debtor is related at the particular time) becomes unenforceable in a court of competent jurisdiction because of a statutory limitation period and the obligation would, but for this subsection, not have been settled or extinguished at the particular time, for the purpose of applying the provisions of this Act to the debtor, the obligation shall be deemed to have been settled at the particular time.

  • Marginal note:Subsequent payments in satisfaction of debt

    (10) Where a commercial debt obligation issued by a debtor is first deemed by subsection (8) or (9) to have been settled at a particular time, at a subsequent time a payment is made by the debtor of an amount in satisfaction of the principal amount of the obligation and it cannot reasonably be considered that one of the reasons the obligation became a parked obligation or became unenforceable, as the case may be, before the subsequent time was to have this subsection apply to the payment, in computing the debtor’s income for the taxation year (in this subsection referred to as the “subsequent year”) that includes the subsequent time from the source in connection with which the obligation was issued, there may be deducted the amount determined by the formula

    0.5(A - B) - C

    where

    A
    is the amount of the payment,
    B
    is the amount, if any, by which
    • (a) the principal amount of the obligation

    exceeds the total of

    • (b) all amounts each of which is a forgiven amount at any time

      • (i) in the period that began at the particular time and ended immediately before the subsequent time, and

      • (ii) at which a particular portion of the obligation is deemed by subsection (8) or (9) to be settled

      in respect of the particular portion, and

    • (c) all amounts paid in satisfaction of the principal amount of the obligation in the period that began at the particular time and ended immediately before the subsequent time, and

    C
    is the amount, if any, by which the total of
    • (a) all amounts deducted under section 61.3 in computing the debtor’s income for the subsequent year or a preceding taxation year,

    • (b) all amounts added because of subsection 80(13) in computing the debtor’s income for the subsequent year or a preceding taxation year in respect of a settlement under subsection (8) or (9) in a period during which the debtor was exempt from tax under this Part on its taxable income, and

    • (c) all amounts added because of subsection 80(13) in computing the debtor’s income for the subsequent year or a preceding taxation year in respect of a settlement under subsection (8) or (9) in a period during which the debtor was non-resident (other than any of those amounts added in computing the debtor’s taxable income or taxable income earned in Canada)

    exceeds the total of

    • (d) the amount, if any, deducted because of paragraph 37(1)(f.1) in determining the balance determined under subsection 37(1) in respect of the debtor immediately after the subsequent year, and

    • (e) all amounts by which the amount deductible under this subsection in respect of a payment made by the debtor before the subsequent time in computing the debtor’s income for the subsequent year or a preceding year has been reduced because of this description.

  • Marginal note:Foreign currency gains and losses

    (11) Where an obligation issued by a debtor is denominated in a currency (other than the Canadian currency) and the obligation is deemed by subsection (8) or (9) to have been settled, those subsections do not apply for the purpose of determining any gain or loss of the debtor on the settlement that is attributable to a fluctuation in the value of the currency relative to the value of Canadian currency.

  • [NOTE: Application provisions are not included in the consolidated text
  • see relevant amending Acts and regulations.]
  • 1995, c. 21, s. 27
  • 2001, c. 17, s. 59
  • 2009, c. 2, s. 17

Marginal note:Definitions

  •  (1) In this section, commercial debt obligation, commercial obligation, distress preferred share and person have the meanings assigned by subsection 80(1).

  • Marginal note:General rules for distress preferred shares

    (2) For the purpose of applying the provisions of this Act to an issuer of a distress preferred share,

    • (a) the principal amount, at any time, of the share shall be deemed to be the amount (determined at that time) for which the share was issued;

    • (b) the amount for which the share was issued shall, at any time, be deemed to be the amount, if any, by which the total of

      • (i) the amount for which the share was issued, determined without reference to this paragraph, and

      • (ii) all amounts by which the paid-up capital in respect of the share increased after the share was issued and before that time

      exceeds

      • (iii) the total of all amounts each of which is an amount paid before that time on a reduction of the paid-up capital in respect of the share, except to the extent that the amount is deemed by section 84 to have been paid as a dividend;

    • (c) the share shall be deemed to be settled at such time as it is redeemed, acquired or cancelled by the issuer; and

    • (d) a payment in satisfaction of the principal amount of the share is any payment made on a reduction of the paid-up capital in respect of the share to the extent that the payment would be proceeds of disposition of the share within the meaning that would be assigned by the definition proceeds of disposition in section 54 if that definition were read without reference to paragraph (j).

  • Marginal note:Substitution of distress preferred share for debt

    (3) Where any part of the consideration given by a corporation to another person for the settlement or extinguishment at any time of a commercial debt obligation that was issued by the corporation and owned immediately before that time by the other person consists of a distress preferred share issued by the corporation to the other person,

    • (a) for the purposes of section 80, the amount paid at that time in satisfaction of the principal amount of the obligation because of the issue of that share shall be deemed to be equal to the lesser of

      • (i) the principal amount of the obligation, and

      • (ii) the amount by which the paid-up capital in respect of the class of shares that include that share increases because of the issue of that share; and

    • (b) for the purpose of subparagraph (2)(b)(i), the amount for which the share was issued shall be deemed to be equal to the amount deemed by paragraph (a) to have been paid at that time.

  • Marginal note:Substitution of commercial debt obligation for distress preferred share

    (4) Where any part of the consideration given by a corporation to another person for the settlement at any time of a distress preferred share that was issued by the corporation and owned immediately before that time by the other person consists of a commercial debt obligation issued by the corporation to the other person, for the purposes of section 80

    • (a) the amount paid at that time in satisfaction of the principal amount of the share because of the issue of that obligation shall be deemed to be equal to the principal amount of the obligation; and

    • (b) the amount for which the obligation was issued shall be deemed to be equal to its principal amount.

  • Marginal note:Substitution of distress preferred share for other distress preferred share

    (5) Where any part of the consideration given by a corporation to another person for the settlement at any time of a particular distress preferred share that was issued by the corporation and owned immediately before that time by the other person consists of another distress preferred share issued by the corporation to the other person, for the purposes of section 80

    • (a) the amount paid at that time in satisfaction of the principal amount of the particular share because of the issue of the other share shall be deemed to be equal to the amount by which the paid-up capital in respect of the class of shares that includes the other share increases because of the issue of the other share; and

    • (b) for the purpose of subparagraph (2)(b)(i), the amount for which the other share was issued shall be deemed to be equal to the amount deemed by paragraph (a) to have been paid at that time.

  • Marginal note:Substitution of non-commercial obligation for distress preferred share

    (6) Where any part of the consideration given by a corporation to another person for the settlement at any time of a distress preferred share that was issued by the corporation and owned immediately before that time by the other person consists of another share (other than a distress preferred share) or an obligation (other than a commercial obligation) issued by the corporation to the other person, for the purposes of section 80, the amount paid at that time in satisfaction of the principal amount of the distress preferred share because of the issue of the other share or obligation shall be deemed to be equal to the fair market value of the other share or obligation, as the case may be, at that time.

  • Marginal note:Deemed settlement on expiry of term

    (7) Where at any time a distress preferred share becomes a share that is not a distress preferred share, for the purposes of section 80

    • (a) the share shall be deemed to have been settled immediately before that time; and

    • (b) a payment equal to the fair market value of the share at that time shall be deemed to have been made immediately before that time in satisfaction of the principal amount of the share.

  • [NOTE: Application provisions are not included in the consolidated text
  • see relevant amending Acts and regulations.]
  • 1995, c. 21, s. 27
 
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