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

Full Document:  

Act current to 2020-07-28 and last amended on 2020-07-27. Previous Versions

PART IIncome Tax (continued)

DIVISION BComputation of Income (continued)

SUBDIVISION CTaxable Capital Gains and Allowable Capital Losses (continued)

Marginal note:Convertible property

  •  (1) Where a share of the capital stock of a corporation is acquired by a taxpayer from the corporation in exchange for

    • (a) a capital property of the taxpayer that is another share of the corporation (in this section referred to as a “convertible property”), or

    • (b) a capital property of the taxpayer that is a bond, debenture or note of the corporation the terms of which confer on the holder the right to make the exchange (in this section referred to as a “convertible property”)

    and no consideration other than the share is received by the taxpayer for the convertible property,

    • (c) except for the purposes of subsections 20(21) and 44.1(6) and (7) and paragraph 94(2)(m), the exchange is deemed not to be a disposition of the convertible property,

    • (d) the cost to the taxpayer of all the shares of a particular class acquired by the taxpayer on the exchange shall be deemed to be the amount determined by the formula

      A × B/C

      where

      A
      is the adjusted cost base to the taxpayer of the convertible property immediately before the exchange,
      B
      is the fair market value, immediately after the exchange, of all the shares of the particular class acquired by the taxpayer on the exchange, and
      C
      is the fair market value, immediately after the exchange, of all the shares acquired by the taxpayer on the exchange,
    • (d.1) there shall be deducted, after the exchange, in computing the adjusted cost base to the taxpayer of a share acquired by the taxpayer on the exchange, the amount determined by the formula

      A × B/C

      where

      A
      is the total of all amounts deducted under paragraph 53(2)(g.1) in computing, immediately before the exchange, the adjusted cost base to the taxpayer of the convertible property,
      B
      is the fair market value, immediately after the exchange, of that share, and
      C
      is the fair market value, immediately after the exchange, of all the shares acquired by the taxpayer on the exchange,
    • (d.2) the amount determined under paragraph 51(1)(d.1) in respect of a share shall be added, after the exchange, in computing the adjusted cost base to the taxpayer of the share,

    • (e) for the purposes of sections 74.4 and 74.5, the exchange shall be deemed to be a transfer of the convertible property by the taxpayer to the corporation, and

    • (f) where the convertible property is taxable Canadian property of the taxpayer, the share acquired by the taxpayer on the exchange is deemed to be, at any time that is within 60 months after the exchange, taxable Canadian property of the taxpayer.

  • Marginal note:Idem

    (2) Notwithstanding subsection 51(1), where

    • (a) shares of the capital stock of a corporation have been acquired by a taxpayer in exchange for a convertible property in circumstances such that, but for this subsection, subsection 51(1) would have applied,

    • (b) the fair market value of the convertible property immediately before the exchange exceeds the fair market value of the shares immediately after the exchange, and

    • (c) it is reasonable to regard any portion of the excess (in this subsection referred to as the “gift portion”) as a benefit that the taxpayer desired to have conferred on a person related to the taxpayer,

    the following rules apply:

    • (d) the taxpayer shall be deemed to have disposed of the convertible property for proceeds of disposition equal to the lesser of

      • (i) the total of its adjusted cost base to the taxpayer immediately before the exchange and the gift portion, and

      • (ii) the fair market value of the convertible property immediately before the exchange,

    • (e) the taxpayer’s capital loss from the disposition of the convertible property shall be deemed to be nil, and

    • (f) the cost to the taxpayer of all the shares of a particular class acquired in exchange for the convertible property shall be deemed to be that proportion of the lesser of

      • (i) the adjusted cost base to the taxpayer of the convertible property immediately before the exchange, and

      • (ii) the total of the fair market value immediately after the exchange of all the shares acquired by the taxpayer in exchange for the convertible property and the amount that, but for paragraph 51(2)(e), would have been the taxpayer’s capital loss on the disposition of the convertible property,

      that

      • (iii) the fair market value, immediately after the exchange, of all the shares of the particular class acquired by the taxpayer on the exchange

      is of

      • (iv) the fair market value, immediately after the exchange, of all the shares acquired by the taxpayer on the exchange.

  • Marginal note:Computation of paid-up capital

    (3) Where subsection 51(1) applies to the exchange of convertible property described in paragraph 51(1)(a) (referred to in this subsection as the “old shares”), in computing the paid-up capital in respect of a particular class of shares of the capital stock of the corporation at any particular time that is the time of, or any time after, the exchange

    • (a) there shall be deducted the amount determined by the formula

      (A - B) × C/A

      where

      A
      is the total of all amounts each of which is the amount of the increase, if any, as a result of the exchange, in the paid-up capital in respect of a class of shares of the capital stock of the corporation, computed without reference to this subsection as it applies to the exchange,
      B
      is the paid-up capital immediately before the exchange in respect of the old shares, and
      C
      is the increase, if any, as a result of the exchange, in the paid-up capital in respect of the particular class of shares, computed without reference to this subsection as it applies to the exchange; and
    • (b) there shall be added an amount equal to the lesser of

      • (i) the amount, if any, by which

        • (A) the total of all amounts deemed by subsection 84(3), 84(4) or 84(4.1) to be a dividend on shares of that class paid by the corporation before the particular time

        exceeds

        • (B) the total that would be determined under clause 51(3)(b)(i)(A) if this Act were read without reference to paragraph 51(3)(a), and

      • (ii) the total of all amounts required by paragraph 51(3)(a) to be deducted in respect of that particular class of shares before the particular time.

  • Marginal note:Application

    (4) Subsections 51(1) and 51(2) do not apply to any exchange to which subsection 85(1) or 85(2) or section 86 applies.

  • [NOTE: Application provisions are not included in the consolidated text
  • see relevant amending Acts and regulations.]
  • R.S., 1985, c. 1 (5th Supp.), s. 51
  • 1994, c. 21, s. 20
  • 1995, c. 21, s. 16
  • 1998, c. 19, s. 92
  • 2010, c. 12, s. 3
  • 2013, c. 34, s. 3

Marginal note:Conversion of debt obligation

 Where

  • (a) a taxpayer acquires a bond, debenture or note of a debtor (in this section referred to as the “new obligation”) in exchange for a capital property of the taxpayer that is another bond, debenture or note of the same debtor (in this section referred to as the “convertible obligation”),

  • (b) the terms of the convertible obligation conferred on the holder the right to make the exchange, and

  • (c) the principal amount of the new obligation is equal to the principal amount of the convertible obligation,

the cost to the taxpayer of the new obligation and the proceeds of disposition of the convertible obligation shall be deemed to be equal to the adjusted cost base to the taxpayer of the convertible obligation immediately before the exchange.

  • [NOTE: Application provisions are not included in the consolidated text
  • see relevant amending Acts and regulations.]
  • 1995, c. 21, s. 50

Marginal note:Cost of certain property the value of which included in income

  •  (1) In applying this Subdivision, an amount equal to the particular amount described by paragraph (d) shall be added in computing the cost at any time to a taxpayer of a property if

    • (a) the taxpayer acquired the property after 1971;

    • (b) the amount was not at or before that time otherwise added to the cost, or included in computing the adjusted cost base, to the taxpayer of the property;

    • (c) the property is not an annuity contract, a right as a beneficiary under a trust to enforce payment of an amount by the trust to the taxpayer, property acquired in circumstances to which subsection (2) or (3) applies, or property acquired from a trust in satisfaction of all or part of the taxpayer’s capital interest in the trust; and

    • (d) a particular amount in respect of the property’s value was

      • (i) included, otherwise than under section 7, in computing

        • (A) the taxpayer’s taxable income or taxable income earned in Canada, as the case may be, for a taxation year during which the taxpayer was non-resident, or

        • (B) the taxpayer’s income for a taxation year throughout which the taxpayer was resident in Canada, or

      • (ii) for the purpose of computing the tax payable under Part XIII by the taxpayer, included in an amount that was paid or credited to the taxpayer.

  • (1.1) [Repealed, 2001, c. 17, s. 35(1)]

  • Marginal note:Cost of property received as dividend in kind

    (2) Where any property has, after 1971, been received by a shareholder of a corporation at any time as, on account or in lieu of payment of, or in satisfaction of, a dividend payable in kind (other that a stock dividend) in respect of a share owned by the shareholder of the capital stock of the corporation, the shareholder shall be deemed to have acquired the property at a cost to the shareholder equal to its fair market value at that time, and the corporation shall be deemed to have disposed of the property at that time fore proceeds equal to that fair market value.

  • Marginal note:Cost of stock dividend

    (3) Where a shareholder of a corporation has, after 1971, received a stock dividend in respect of a share owned by the shareholder of the capital stock of the corporation, the shareholder shall be deemed to have acquired the share or shares received by the shareholder as a stock dividend at a cost to the shareholder equal to the total of

    • (a) where the stock dividend is a dividend,

      • (i) in the case of a shareholder that is an individual, the amount of the stock dividend, and

      • (ii) in any other case, the total of all amounts each of which is

        • (A) the amount, if any, by which

          • (I) the amount that is the lesser of the amount of the stock dividend and its fair market value

          exceeds

          • (II) the amount of the dividend that the shareholder may deduct under subsection 112(1) in computing the shareholder’s taxable income, except any portion of the dividend that, if paid as a separate dividend, would not be subject to subsection 55(2) because the amount of the separate dividend would not exceed the amount of the income earned or realized by any corporation — after 1971 and before the safe-income determination time for the transaction, event or series of transactions or events as part of which the dividend is received — that could reasonably be considered to contribute to the capital gain that could be realized on a disposition at fair market value, immediately before the dividend, of the share on which the dividend is received, and

        • (B) the amount determined by the formula

          A + B

          where

          A
          is the amount of the deemed gain under paragraph 55(2)(c) in respect of that stock dividend, and
          B
          is the amount, if any, by which the amount of the reduction under paragraph 55(2.3)(b) in respect of that stock dividend to which paragraph 55(2)(a) would otherwise apply exceeds the amount determined for clause (A) in respect of that dividend;
    • (a.1) where the stock dividend is not a dividend, nil, and

    • (b) where an amount is included in the shareholder’s income in respect of the stock dividend under subsection 15(1.1), the amount so included.

  • Marginal note:Cost of property acquired as prize

    (4) Where any property has been acquired by a taxpayer at any time after 1971 as a prize in connection with a lottery scheme, the taxpayer shall be deemed to have acquired the property at a cost to the taxpayer equal to its fair market value at that time.

  • (6) [Repealed, 2001, c. 17, s. 35(2)]

  • Marginal note:Cost of shares of subsidiary

    (7) Notwithstanding any other provision of this Act, where a corporation disposes of property to another corporation in a transaction to which paragraph 219(1)(l) applies, the cost to it of any share of a particular class of the capital stock of the other corporation received by it as consideration for the property is deemed to be the lesser of the cost of the share to the corporation otherwise determined immediately after the disposition and the amount by which the paid-up capital in respect of that class increases because of the issuance of the share.

  • Marginal note:Cost of shares of immigrant corporation

    (8) Notwithstanding any other provision of this Act, where at any time a corporation becomes resident in Canada, the cost to any shareholder who is not at that time resident in Canada of any share of the corporation’s capital stock, other than a share that was taxable Canadian property immediately before that time, is deemed to be equal to the fair market value of the share at that time.

  • [NOTE: Application provisions are not included in the consolidated text
  • see relevant amending Acts and regulations.]
  • R.S., 1985, c. 1 (5th Supp.), s. 52
  • 1994, c. 7, Sch. II, s. 29, Sch. VIII, s. 14, c. 21, s. 21
  • 1998, c. 19, s. 93
  • 1999, c. 22, s. 13
  • 2001, c. 17, s. 35
  • 2013, c. 34, s. 189
  • 2016, c. 7, s. 2
 
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