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

Income from Specified Debt Obligations

Marginal note:Amounts to be included and deducted

• 142.3 (1) Subject to subsections 142.3(3) and (4), where a taxpayer that is, in a taxation year, a financial institution holds a specified debt obligation at any time in the year,

  • (a) there shall be included in computing the income of the taxpayer for the year the amount, if any, prescribed in respect of the obligation;

  • (b) there shall be deducted in computing the income of the taxpayer for the year the amount, if any, prescribed in respect of the obligation; and

  • (c) except as provided by this section, paragraphs 12(1)(d) and (i) and 20(1)(l) and (p) and section 142.4, no amount shall be included or deducted in respect of payments under the obligation (other than fees and similar amounts) in computing the income of the taxpayer for the year.

• Marginal note:Failure to report accrued amounts

  (2) Subject to subsection 142.3(3), where

  • (a) a taxpayer holds a specified debt obligation at any time in a particular taxation year in which the taxpayer is a financial institution, and

  • (b) all or part of an amount required by paragraph 142.3(1)(a) or subsection 12(3) to be included in respect of the obligation in computing the taxpayer’s income for a preceding taxation year was not so included,

  that part of the amount shall be included in computing the taxpayer’s income for the particular year, to the extent that it was not included in computing the taxpayer’s income for a preceding taxation year.

• Marginal note:Exception for certain obligations

  (3) Subsections 142.3(1) and (2) do not apply for a taxation year in respect of a taxpayer’s specified debt obligation that is

  • (a) a mark-to-market property for the year; or

  • (b) an indexed debt obligation, other than a prescribed obligation.

• Marginal note:Impaired specified debt obligations

  (4) Subsection 142.3(1) does not apply to a taxpayer in respect of a specified debt obligation for the part of a taxation year throughout which the obligation is impaired where an amount in respect of the obligation is deductible because of subparagraph 20(1)(l)(ii) in computing the taxpayer’s income for the year.

Disposition of Specified Debt Obligations

Marginal note:Definitions

• 142.4 (1) In this section,

  tax basis

  tax basis of a specified debt obligation at any time to a taxpayer means the amount, if any, by which the total of all amounts each of which is

  • (a) the cost of the obligation to the taxpayer,

  • (b) an amount included under subsection 12(3) or 16(2) or 16(3), paragraph 142.3(1)(a) or subsection 142.3(2) in respect of the obligation in computing the taxpayer’s income for a taxation year that began before that time,

  • (c) subject to subsection 138(13), where the taxpayer acquired the obligation in a taxation year ending before February 23, 1994, the part of the amount, if any, by which

    • (i) the principal amount of the obligation at the time it was acquired

    exceeds

    • (ii) the cost to the taxpayer of the obligation

    that was included in computing the taxpayer’s income for a taxation year ending before February 23, 1994,

  • (d) subject to subsection 138(13), where the taxpayer is a life insurer, an amount in respect of the obligation that was deemed by paragraph 142(3)(a) of the Income Tax Act, chapter 148 of the Revised Statutes of Canada, 1952, as it read in its application to the 1977 taxation year, to be a gain for a taxation year ending before 1978,

  • (e) where the obligation is an indexed debt obligation, an amount determined under subparagraph 16(6)(a)(i) in respect of the obligation and included in computing the income of the taxpayer for a taxation year beginning before that time,

  • (f) an amount in respect of the obligation that was included in computing the taxpayer’s income for a taxation year ending at or before that time in respect of changes in the value of the obligation attributable to the fluctuation in the value of a currency of a country other than Canada relative to Canadian currency, other than an amount included under paragraph 142.3(1)(a),

  • (g) an amount in respect of the obligation that was included under paragraph 12(1)(i) in computing the taxpayer’s income for a taxation year beginning before that time, or

  • (h) where the obligation was a capital property of the taxpayer on February 22, 1994, an amount required by paragraph 53(1)(f) or 53(1)(f.1) to be added in computing the adjusted cost base of the obligation to the taxpayer on that day

  exceeds the total of all amounts each of which is

  • (i) an amount deducted under paragraph 142.3(1)(b) in respect of the obligation in computing the taxpayer’s income for a taxation year beginning before that time,

  • (j) the amount of a payment received by the taxpayer under the obligation at or before that time, other than

    • (i) a fee or similar payment, and

    • (ii) proceeds of disposition of the obligation,

  • (k) subject to subsection 138(13), where the taxpayer acquired the obligation in a taxation year ending before February 23, 1994, the part of the amount, if any, by which

    • (i) the cost to the taxpayer of the obligation

    exceeds

    • (ii) the principal amount of the obligation at the time it was acquired

    that was deducted in computing the taxpayer’s income for a taxation year ending before February 23, 1994,

  • (l) subject to subsection 138(13), where the taxpayer is a life insurer, an amount in respect of the obligation that was deemed by paragraph 142(3)(b) of the Income Tax Act, chapter 148 of the Revised Statutes of Canada, 1952, as it read in its application to the 1977 taxation year, to be a loss for a taxation year ending before 1978,

  • (m) an amount that was deducted under subsection 20(14) in respect of the obligation in computing the taxpayer’s income for a taxation year beginning before that time,

  • (n) where the obligation is an indexed debt obligation, an amount determined under subparagraph 16(6)(a)(ii) in respect of the obligation and deducted in computing the income of the taxpayer for a taxation year beginning before that time,

  • (o) an amount in respect of the obligation that was deducted in computing the taxpayer’s income for a taxation year ending at or before that time in respect of changes in the value of the obligation attributable to the fluctuation in the value of a currency of a country other than Canada relative to Canadian currency, other than an amount deducted under paragraph 142.3(1)(b),

  • (p) an amount in respect of the obligation that was deducted under paragraph 20(1)(p) in computing the taxpayer’s income for a taxation year ending at or before that time, or

  • (q) where the obligation was a capital property of the taxpayer on February 22, 1994, an amount required by paragraph 53(2)(b.2) or 53(2)(g) to be deducted in computing the adjusted cost base of the obligation to the taxpayer on that day; (montant de base)

  transition amount

  transition amount of a taxpayer in respect of the disposition of a specified debt obligation has the meaning assigned by regulation. (montant de transition)

• Marginal note:Scope of section

  (2) This section applies to the disposition of a specified debt obligation by a taxpayer that is a financial institution, except that this section does not apply to the disposition of a specified debt obligation that is a mark-to-market property for the taxation year in which the disposition occurs.

• Marginal note:Rules applicable to disposition

  (3) Where a taxpayer has disposed of a specified debt obligation after February 22, 1994,

  • (a) except as provided by paragraph 79.1(7)(d) or this section, no amount shall be included or deducted in respect of the disposition in computing the taxpayer’s income; and

  • (b) except where the obligation is an indexed debt obligation (other than a prescribed obligation), paragraph 20(14)(a) shall not apply in respect of the disposition.

• Marginal note:Inclusions and deductions re disposition

  (4) Subject to subsection 142.4(5), where after 1994 a taxpayer disposes of a specified debt obligation in a taxation year,

  • (a) where the transition amount in respect of the disposition of the obligation is positive, it shall be included in computing the income of the taxpayer for the year;

  • (b) where the transition amount in respect of the disposition of the obligation is negative, the absolute value of the transition amount shall be deducted in computing the income of the taxpayer for the year;

  • (c) where the taxpayer has a gain from the disposition of the obligation,

    • (i) the current amount of the gain shall be included in computing the income of the taxpayer for the year, and

    • (ii) there shall be included in computing the taxpayer’s income for taxation years that end on or after the day of disposition the amount allocated, in accordance with prescribed rules, to the year in respect of the residual portion of the gain; and

  • (d) where the taxpayer has a loss from the disposition of the obligation,

    • (i) the current amount of the loss shall be deducted in computing the taxpayer’s income for the year, and

    • (ii) there shall be deducted in computing the taxpayer’s income for taxation years that end on or after the day of disposition the amount allocated, in accordance with prescribed rules, to the year in respect of the residual portion of the loss.

• Marginal note:Gain or loss not amortized

  (5) Where after February 22, 1994 a taxpayer disposes of a specified debt obligation in a taxation year, and

  • (a) the obligation is

    • (i) an indexed debt obligation (other than a prescribed obligation), or

    • (ii) a debt obligation prescribed in respect of the taxpayer,

  • (b) the disposition occurred

    • (i) before 1995,

    • (ii) after 1994 in connection with the transfer of all or part of a business of the taxpayer to a person or partnership, or

    • (iii) because of paragraph 142.6(1)(c), or

  • (c) in the case of a taxpayer other than a life insurance corporation,

    • (i) the disposition occurred before 1996, and

    • (ii) the taxpayer elects in writing, filed with the Minister before July 1997, to have this paragraph apply,

    the following rules apply:

  • (d) subsection 142.4(4) does not apply to the disposition,

  • (e) there shall be included in computing the taxpayer’s income for the year the amount, if any, by which the taxpayer’s proceeds of disposition exceed the tax basis of the obligation to the taxpayer immediately before the disposition, and

  • (f) there shall be deducted in computing the taxpayer’s income for the year the amount, if any, by which the tax basis of the obligation to the taxpayer immediately before the disposition exceeds the taxpayer’s proceeds of disposition.

• Marginal note:Gain or loss from disposition of obligation

  (6) For the purposes of this section,

  • (a) where the amount determined under paragraph 142.4(6)(c) in respect of the disposition of a specified debt obligation by a taxpayer is positive, that amount is the taxpayer’s gain from the disposition of the obligation;

  • (b) where the amount determined under paragraph 142.4(6)(c) in respect of the disposition of a specified debt obligation by a taxpayer is negative, the absolute value of that amount is the taxpayer’s loss from the disposition of the obligation; and

  • (c) the amount determined under this paragraph in respect of the disposition of a specified debt obligation by a taxpayer is the positive or negative amount determined by the formula

    A - (B + C)

    where

    A

    is the taxpayer’s proceeds of disposition,

    B

    is the tax basis of the obligation to the taxpayer immediately before the time of disposition, and

    C

    is the taxpayer’s transition amount in respect of the disposition.

• Marginal note:Current amount

  (7) For the purposes of subsections 142.4(4) and 142.4(8), the current amount of a taxpayer’s gain or loss from the disposition of a specified debt obligation is

  • (a) where the taxpayer has a gain from the disposition of the obligation, the part, if any, of the gain that is reasonably attributable to a material increase in the probability, or perceived probability, that the debtor will make all payments as required by the obligation; and

  • (b) where the taxpayer has a loss from the disposition of the obligation, the amount that the taxpayer claims not exceeding the part, if any, of the loss that is reasonably attributable to a default by the debtor or a material decrease in the probability, or perceived probability, that the debtor will make all payments as required by the obligation.

• Marginal note:Residual portion of gain or loss

  (8) For the purpose of subsection 142.4(4), the residual portion of a taxpayer’s gain or loss from the disposition of a specified debt obligation is the amount, if any, by which the gain or loss exceeds the current amount of the gain or loss.

• Marginal note:Disposition of part of obligation

  (9) Where a taxpayer disposes of part of a specified debt obligation, section 142.3 and this section apply as if the part disposed of and the part retained were separate specified debt obligations.

• Marginal note:Penalties and bonuses

  (10) Notwithstanding subsection 18(9.1), where a taxpayer that holds a specified debt obligation receives a penalty or bonus because of the repayment before maturity of all or part of the principal amount of the debt obligation, the payment is deemed to be received by the taxpayer as proceeds of disposition of the specified debt obligation.

• Marginal note:Payments received on or after disposition

  (11) For the purposes of this section, where at any time a taxpayer receives a payment (other than proceeds of disposition) under a specified debt obligation on or after the disposition of the obligation, the payment is deemed not to have been so received at that time but to have been so received immediately before the disposition.

Mark-to-Market Properties

Marginal note:Income treatment for profits and losses

• 142.5 (1) Where, in a taxation year that begins after October 1994, a taxpayer that is a financial institution in the year disposes of a property that is a mark-to-market property for the year,

  • (a) there shall be included in computing the taxpayer’s income for the year the profit, if any, from the disposition; and

  • (b) there shall be deducted in computing the taxpayer’s income for the year the loss, if any, from the disposition.

• Marginal note:Mark-to-market requirement

  (2) Where a taxpayer that is a financial institution in a taxation year holds, at the end of the year, a mark-to-market property for the year, the taxpayer shall be deemed

  • (a) to have disposed of the property immediately before the end of the year for proceeds equal to its fair market value at the time of disposition, and

  • (b) to have reacquired the property at the end of the year at a cost equal to those proceeds.

• Marginal note:Mark-to-market debt obligation

  (3) Where a taxpayer is a financial institution in a particular taxation year that begins after October 1994, the following rules apply with respect to a specified debt obligation that is a mark-to-market property of the taxpayer for the particular year:

  • (a) paragraph 12(1)(c) and subsections 12(3) and 20(14) and (21) do not apply to the obligation in computing the taxpayer’s income for the particular year;

  • (b) there shall be included in computing the taxpayer’s income for the particular year an amount received by the taxpayer in the particular year as, on account of, in lieu of payment of, or in satisfaction of, interest on the obligation, to the extent that the interest was not included in computing the taxpayer’s income for a preceding taxation year; and

  • (c) for the purpose of paragraph 142.5(3)(b), where the taxpayer was deemed by subsection 142.5(2) or paragraph 142.6(1)(b) to have disposed of the obligation in a preceding taxation year, no part of an amount included in computing the income of the taxpayer for that preceding year because of the disposition shall be considered to be in respect of interest on the obligation.

• Marginal note:Proceeds — mark-to-market property

  (4) For greater certainty, if a taxpayer is a financial institution in a taxation year and disposes of a share that is mark-to-market property of the taxpayer for the year, the taxpayer’s proceeds from the disposition do not include any amount that would otherwise be proceeds from the disposition to the extent that the amount is deemed by subsection 84(2) or (3) to be a dividend received except to the extent the dividend is deemed by subparagraph 88(2)(b)(ii) not to be a dividend.

• (5) to (7) [Repealed, 2013, c. 34, s. 288]

• Marginal note:First deemed disposition of debt obligation

  (8) Where

  • (a) in a particular taxation year that ends after October 30, 1994, a taxpayer disposed of a specified debt obligation that is a mark-to-market property of the taxpayer for the following taxation year, and

  • (b) either

    • (i) the disposition occurred because of subsection 142.5(2) and the particular year includes October 31, 1994, or

    • (ii) the disposition occurred because of paragraph 142.6(1)(b),

  the following rules apply:

  • (c) subsection 20(21) does not apply to the disposition, and

  • (d) where

    • (i) an amount has been deducted under paragraph 20(1)(p) in respect of the obligation in computing the taxpayer’s income for the particular year or a preceding taxation year, and

    • (ii) section 12.4 does not apply to the disposition,

    there shall be included in computing the taxpayer’s income for the particular year the amount, if any, by which

    • (iii) the total of all amounts referred to in subparagraph 142.5(8)(d)(i)

    exceeds

    • (iv) the total of all amounts included under paragraph 12(1)(i) in respect of the obligation in computing the taxpayer’s income for the particular year or a preceding taxation year.

• Marginal note:Application of subsection (8.2)

  (8.1) Subsection (8.2) applies to a taxpayer for its transition year if

  • (a) subsection (2) deems the taxpayer to have disposed of a particular specified debt obligation immediately before the end of its transition year (in subsection (8.2) referred to as “the particular disposition”); and

  • (b) the particular specified debt obligation was owned by the taxpayer at the end of its base year and was not a mark-to-market property of the taxpayer for its base year.

• Marginal note:Rules applicable to first deemed disposition of debt obligation

  (8.2) If this subsection applies to a taxpayer for its transition year, the following rules apply to the taxpayer in respect of the particular disposition:

  • (a) subsection 20(21) does not apply to the taxpayer in respect of the particular disposition; and

  • (b) if section 12.4 does not apply to the taxpayer in respect of the particular disposition, there shall be included in computing the taxpayer’s income for its transition year the amount, if any, by which

    • (i) the total of all amounts each of which is

      • (A) an amount deducted under paragraph 20(1)(l) in respect of the particular specified debt obligation of the taxpayer in computing the taxpayer’s income for its base year, or

      • (B) an amount deducted under paragraph 20(1)(p) in respect of the particular specified debt obligation of the taxpayer in computing the taxpayer’s income for a taxation year that preceded its transition year,

    exceeds

    • (ii) the total of all amounts each of which is

      • (A) an amount included under paragraph 12(1)(d) in respect of the particular specified debt obligation of the taxpayer in computing the taxpayer’s income for its transition year, or

      • (B) an amount included under paragraph 12(1)(i) in respect of the particular specified debt obligation of the taxpayer in computing the taxpayer’s income for its transition year or a preceding taxation year.

• Marginal note:Transition — property acquired on rollover

  (9) Where

  • (a) a taxpayer acquired a property before October 31, 1994 at a cost less than the fair market value of the property at the time of acquisition,

  • (b) the property was transferred, directly or indirectly, to the taxpayer by a person that would never have been a financial institution before the transfer if the definition financial institution in subsection 142.2(1) had always applied,

  • (c) the cost is less than the fair market value because subsection 85(1) applied in respect of the disposition of the property by the person, and

  • (d) subsection 142.5(2) deemed the taxpayer to have disposed of the property in its particular taxation year that includes October 31, 1994,

  the following rules apply:

  • (e) where the taxpayer would, but for this paragraph, have a taxable capital gain for the particular year from the disposition of the property, the part of the taxable capital gain that can reasonably be considered to have arisen while the property was held by a person described in paragraph 142.5(9)(b) shall be deemed to be a taxable capital gain of the taxpayer from the disposition of the property for the taxation year in which the taxpayer disposes of the property otherwise than because of subsection 142.5(2), and not to be a taxable capital gain for the particular year, and

  • (f) where the taxpayer has a profit (other than a capital gain) from the disposition of the property, the part of the profit that can reasonably be considered to have arisen while the property was held by a person described in paragraph 142.5(9)(b) shall be included in computing the taxpayer’s income for the taxation year in which the taxpayer disposes of the property otherwise than because of subsection 142.5(2), and shall not be included in computing the taxpayer’s income for the particular year.