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

Full Document:  

Act current to 2022-08-08 and last amended on 2022-07-01. Previous Versions

PART IIncome Tax (continued)

DIVISION BComputation of Income (continued)

SUBDIVISION BIncome or Loss from a Business or Property (continued)

Marginal note:Interest on small business development bonds

  •  (1) Any amount received by a taxpayer as or on account of interest on a small business development bond shall, except for the purposes of Part IV, be deemed to have been received as a taxable dividend.

  • Marginal note:Rules for small business development bonds

    (2) Where a corporation (in this section referred to as the “issuer”) has issued an obligation that is at any time a small business development bond, notwithstanding any other provision of this Act,

    • (a) in computing the issuer’s income for a taxation year, no deduction shall be made in respect of any amount paid or payable (depending on the method regularly followed in computing the issuer’s income) as or on account of interest on the obligation in respect of a period that includes that time;

    • (b) except for the purpose of subsection 129(1), to the extent that any amount paid by the issuer as or on account of interest on the obligation is not allowed as a deduction because of paragraph 15.1(2)(a), it shall, when paid, be deemed to have been paid as a taxable dividend; and

    • (c) except for the purposes of paragraph 125(1)(b), the issuer’s taxable income for any taxation year that includes a period throughout which the obligation was a small business development bond but

      • (i) the issuer was not an eligible small business corporation, or

      • (ii) all or substantially all of the proceeds from the issue of the obligation cannot reasonably be regarded as having been used by the issuer or a corporation with which it was not dealing at arm’s length in the financing of an active business carried on in Canada immediately before the obligation was issued

      shall be deemed to be an amount equal to the total of

      • (iii) the amount paid or payable (depending on the method regularly followed in computing the issuer’s income) as or on account of interest on the obligation in respect of that period, and

      • (iv) the issuer’s taxable income otherwise determined for the year.

  • Marginal note:Definitions

    (3) In this section,

    eligible small business corporation

    eligible small business corporation at any time means a taxable Canadian corporation that at that time is

    • (a) a small business corporation, or

    • (b) a cooperative corporation (within the meaning assigned by subsection 136(2)) all or substantially all of the assets of which are used in an active business carried on by it in Canada; (société admissible exploitant une petite entreprise)

    joint election

    joint election means an election that is made in prescribed form, containing prescribed information, jointly by the issuer of an obligation and the person who is the holder of the obligation at the time of the election, that is filed with the Minister by the holder, and in which the holder and the issuer elect that this section apply to the obligation; (choix conjoint)

    majority interest partner

    majority interest partner[Repealed, 1998, c. 19, s. 76(1)]

    property used for specified purposes

    property used for specified purposes[Repealed, 1994, c. 7, Sch. VIII, s. 6(1)]

    qualifying debt obligation

    qualifying debt obligation of a corporation at a particular time means an obligation that is a bond, debenture, bill, note, mortgage, hypothecary claim or similar obligation issued after February 25, 1992 and before 1995,

    • (a) the principal amount of which is not less than $10,000 or more than $500,000,

    • (b) that is issued for a term of not more than 5 years and, except in the event of a failure or default under the terms or conditions of the obligation, not less than one year, and

    • (c) that was issued not more than 5 years before the particular time,

    if the obligation is issued by the corporation

    • (d) as part of a proposal to, or an arrangement with, its creditors that has been approved by a court under the Bankruptcy and Insolvency Act,

    • (e) at a time when all or substantially all of its assets are under the control of a receiver, receiver-manager, sequestrator or trustee in bankruptcy, or

    • (f) at a time when, because of financial difficulty, the corporation is in default, or could reasonably be expected to default, on a debt held by a person with whom the corporation was dealing at arm’s length and the obligation is issued, in whole or in part, directly or indirectly in exchange or substitution for that debt; (créance admissible)

    small business development bond

    small business development bond at any time means

    • (a) an obligation that is at that time a qualifying debt obligation issued after 1981 and before 1988 by a Canadian-controlled private corporation in respect of which a joint election was made within 90 days after the later of its issue date and March 30, 1983,

    • (b) an obligation that is at that time a qualifying debt obligation issued after February 25, 1992 by a Canadian-controlled private corporation in respect of which a joint election was made within 90 days after its issue date, or

    • (c) an obligation that is at that time a qualifying debt obligation issued by a Canadian-controlled private corporation if

      • (i) it is reasonable to consider that the corporation and the holder of the obligation intended that this section apply to the obligation, having regard to such factors as may be relevant, including the rate of interest stipulated under the terms of the obligation and the manner in which the corporation and the holder have treated the obligation for the purposes of this Act, and

      • (ii) the holder files with the Minister a joint election in respect of the obligation within 90 days after the date of notification by the Minister that a joint election in respect of the obligation has not been filed. (obligation pour le développement de la petite entreprise)

    specified property

    specified property[Repealed, 1994, c. 7, Sch. VIII, s. 6(1)]

  • Marginal note:Money borrowed

    (4) Notwithstanding any other provision of this Act, an amount paid or payable by a taxpayer pursuant to a legal obligation to pay interest on borrowed money used for the purpose of acquiring a small business development bond shall be deemed to be an amount paid or payable, as the case may be, on borrowed money used for the purpose of earning income from a business or property.

  • Marginal note:False declaration

    (5) Where the Minister establishes that an issuer has knowingly or under circumstances amounting to gross negligence made a false declaration in a joint election in respect of an obligation, the reference in subparagraph 15.1(2)(c)(iii) to “the amount paid or payable” shall in respect of the obligation be read as a reference to “3 times the amount paid or payable”.

  • Marginal note:Disqualification

    (6) Where at a particular time an issuer makes a joint election in respect of an obligation and

    • (a) the issuer or any other corporation associated at the time the obligation was issued with the issuer,

    • (b) an individual who controls or is a member of a related group that controls the issuer, or

    • (c) a partnership any member of which, who is a majority interest partner of the partnership, controls, or is a member of a related group that controls, the issuer

    had at or before the particular time made a joint election in respect of any small business development bond or small business bond, as the case may be, for the purposes of this section, the issuer shall be deemed not to be an eligible small business corporation in respect of the obligation.

  • Marginal note:Exception

    (7) Subsection 15.1(6) does not apply in respect of an obligation issued at any time where the issue price of the obligation does not exceed the amount, if any, by which

    • (a) $500,000

    exceeds

    • (b) the total of all amounts each of which is the principal amount outstanding immediately after that time in respect of

      • (i) another obligation that is a small business development bond issued by

        • (A) the issuer, or

        • (B) a corporation associated with the issuer, or

      • (ii) a small business bond issued by

        • (A) an individual who controls, or is a member of a related group that controls, the issuer, or

        • (B) a partnership any member of which, who is a majority interest partner of the partnership, controls, or is a member of a related group that controls, the issuer.

  • (8) to (12) [Repealed, 1994, c. 7, Sch. VIII, s. 6(1)]

  • [NOTE: Application provisions are not included in the consolidated text
  • see relevant amending Acts and regulations.]
  • R.S., 1985, c. 1 (5th Supp.), s. 15.1
  • 1994, c. 7, Sch. V, s. 90, Sch. VIII, s. 6, c. 8, s. 1
  • 1998, c. 19, s. 76
  • 2001, c. 17, s. 198

Marginal note:Interest on small business bond

  •  (1) Any amount received by a taxpayer as or on account of interest on a small business bond shall, except for the purposes of Part IV, be deemed to have been received as a taxable dividend from a taxable Canadian corporation.

  • Marginal note:Rules for small business bonds

    (2) Where an individual or a partnership (in this section referred to as the “issuer”) has issued an obligation that is at any time a small business bond, notwithstanding any other provision of this Act,

    • (a) in computing the issuer’s income for a taxation year, no deduction shall be made in respect of any amount paid or payable (depending on the method regularly followed in computing the issuer’s income) as or on account of interest on the bond in respect of a period that includes that time; and

    • (b) for any taxation year that includes a period throughout which the obligation was a small business bond but

      • (i) the issuer was not an eligible issuer, or

      • (ii) all or substantially all of the proceeds from the issue of the obligation were not used by the issuer in the financing of an active business carried on by the issuer in Canada immediately before the time of the issue of the obligation,

      there shall be added to the tax otherwise payable under this Part by the issuer for that taxation year an amount equal to 29% of the amount of interest paid or payable (depending on the method regularly followed in computing the issuer’s income) in respect of the bond for that period.

  • Marginal note:Definitions

    (3) In this section,

    eligible issuer

    eligible issuer at any time means

    • (a) an individual (other than a trust) who is resident in Canada and who

      • (i) has not made a joint election before that time in respect of a small business bond,

      • (ii) is not a majority interest partner of a partnership that has made a joint election before that time in respect of a small business bond, and

      • (iii) neither controls nor is a member of a related group that controls

        • (A) a corporation that has made a joint election before that time in respect of a small business development bond, or

        • (B) a corporation that is associated with a corporation referred to in clause (A), or

    • (b) a partnership

      • (i) each member of which is an individual (other than a trust) who is resident in Canada,

      • (ii) each majority interest partner, if any, of which is an eligible issuer, and

      • (iii) that has not made a joint election before that time in respect of a small business bond; (émetteur admissible)

    joint election

    joint election means an election that is made in prescribed form, containing prescribed information, jointly by the issuer of an obligation and the person who is the holder of the obligation at the time of the election, that is filed with the Minister by the holder and in which the holder and the issuer elect that the provisions of this section apply to that obligation; (choix conjoint)

    majority interest partner

    majority interest partner[Repealed, 1998, c. 19, s. 77(1)]

    qualifying debt obligation

    qualifying debt obligation of an issuer at a particular time means an obligation that is a bill, note, mortgage, hypothecary claim or similar obligation issued after February 25, 1992 and before 1995,

    • (a) the principal amount of which is not less than $10,000 or more than $500,000,

    • (b) that is issued for a term of not more than 5 years and, except in the event of a failure or default under the terms or conditions of the obligation, not less than one year, and

    • (c) that was issued not more than 5 years before the particular time,if the obligation is issued

    • (d) as part of a proposal to, or an arrangement with, the issuer’s creditors that has been approved by a court under the Bankruptcy and Insolvency Act,

    • (e) at a time when all or substantially all of the issuer’s assets are under the control of a receiver, receiver-manager, sequestrator or trustee in bankruptcy, or

    • (f) at a time when, because of financial difficulty, the issuer is in default, or could reasonably be expected to default, on a debt incurred in the course of the issuer’s business and held by a person with whom the issuer was dealing at arm’s length or, where the issuer is a partnership, by a person with whom each member of the partnership was dealing at arm’s length, and it is issued, in whole or in part, directly or indirectly in exchange or substitution for that debt,

    and the funds from the issue of the obligation are used in Canada in a business of the issuer carried on immediately before the time of issue; (créance admissible)

    small business bond

    small business bond at any time means

    • (a) an obligation that is at that time a qualifying debt obligation, issued by an individual or a partnership, in respect of which a joint election was made within 90 days after its issue date, or

    • (b) an obligation that is at that time a qualifying debt obligation issued by an individual or a partnership if

      • (i) it is reasonable to consider that the issuer and the holder of the obligation intended that this section apply to the obligation, having regard to such factors as may be relevant, including the rate of interest stipulated under the terms of the obligation and the manner in which the issuer and the holder have treated the obligation for the purposes of this Act, and

      • (ii) the holder files with the Minister a joint election in respect of the obligation within 90 days after the date of notification by the Minister that a joint election in respect of the obligation has not been filed under paragraph (a). (obligation pour la petite entreprise)

  • Marginal note:Status of interest

    (4) Notwithstanding any other provision of this Act, an amount paid or payable by a taxpayer pursuant to a legal obligation to pay interest on borrowed money used for the purpose of acquiring a small business bond shall be deemed to be an amount paid or payable, as the case may be, on borrowed money used for the purpose of earning income from a business or property.

  • Marginal note:False declaration

    (5) Where the Minister establishes that an issuer has knowingly or under circumstances amounting to gross negligence made a false declaration in a joint election in respect of an obligation, the reference in paragraph 15.2(2)(b) to “29%” shall, in respect of the obligation, be read as a reference to “87%”.

  • Marginal note:Partnerships

    (6) For the purpose of paragraph 15.2(2)(b), in the case of an issuer that is a partnership, the expression “tax otherwise payable under this Part by the issuer” shall be read as a reference to the “tax otherwise payable under this Part by each member of the partnership” and each member shall add to that member’s tax otherwise payable under this Part for the taxation year that includes the period described in paragraph 15.2(2)(b) the amount that can reasonably be regarded as that member’s share of the amount determined under that paragraph with respect to the partnership.

  • Marginal note:Deemed eligible issuer

    (7) Where, but for subparagraphs (a)(i), (ii) and (iii) and (b)(ii) of the definition eligible issuer in subsection 15.2(3), an individual or a partnership would be an “eligible issuer”, the individual or partnership shall be deemed to be an eligible issuer in respect of a small business bond at any time where the issue price of the bond does not exceed the amount, if any, by which

    • (a) $500,000

    exceeds

    • (b) where the issuer is an individual, the total of all amounts each of which is the principal amount outstanding immediately after that time in respect of

      • (i) another obligation that is a small business bond issued by

        • (A) the individual, or

        • (B) a partnership of which the individual is a majority interest partner, or

      • (ii) a small business development bond issued by

        • (A) a corporation that is controlled by the individual or by a related group of which the individual is a member, or

        • (B) a corporation that is associated with a corporation referred to in clause (A), or

    • (c) where the issuer is a partnership, the total of all amounts each of which is the principal amount outstanding immediately after that time in respect of

      • (i) another obligation that is a small business bond issued by

        • (A) the partnership,

        • (B) an individual who is a majority interest partner of the partnership, or

        • (C) a partnership of which the individual referred to in clause (B) is a majority interest partner, or

      • (ii) a small business development bond issued by

        • (A) a corporation that is controlled by the individual referred to in clause (B) or by a related group of which the individual is a member, or

        • (B) a corporation that is associated with a corporation referred to in clause (A).

  • (8) and (9) [Repealed, 1994, c. 7, Sch. VIII, s. 6(1)]

  • [NOTE: Application provisions are not included in the consolidated text
  • see relevant amending Acts and regulations.]
  • R.S., 1985, c. 1 (5th Supp.), s. 15.2
  • 1994, c. 7, Sch. V, s. 90, Sch. VIII, s. 6, c. 8, s. 2
  • 1998, c. 19, s. 77
  • 2001, c. 17, s. 199
 
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