Income Tax Regulations (C.R.C., c. 945)

General Accrual Rules

Marginal note:Fixed payment obligation not in default

• 9102 (1) For the purpose of paragraph 9101(1)(a), a taxpayer’s accrued return for a taxation year from a fixed payment obligation, under which each payment required to be made before the end of the year was made by the debtor when it was required to be made, shall be determined in accordance with the following rules:

  • (a) determine, in the primary currency of the obligation, the portion of the taxpayer’s total return from the obligation that is allocated to each day in the year using

    • (i) the level-yield method described in subsection (2), or

    • (ii) any other reasonable method that is substantially similar to the level-yield method;

  • (b) if the primary currency of the obligation is not Canadian currency, translate to Canadian currency the amount allocated to each day in the year, using a reasonable method of translation; and

  • (c) determine the total of all amounts each of which is the Canadian currency amount allocated to a day, in the year, at the beginning of which the taxpayer holds the obligation.

• Marginal note:Level-yield method

  (2) For the purpose of subsection (1), the level-yield method for allocating a taxpayer’s total return from a fixed payment obligation is the method that allocates, to each particular day in the period that begins on the day following the day on which the taxpayer acquired the obligation and that ends on the day on which the obligation matures, the amount determined by the formula

  (A + B - C) × D

  where

  A

  is the cost of the obligation to the taxpayer (expressed in the primary currency of the obligation);

  B

  is the total of all amounts each of which is the portion of the taxpayer’s total return from the obligation that is allocated to a day before the particular day;

  C

  is the total of all payments required to be made under the obligation after it was acquired by the taxpayer and before the particular day; and

  D

  is the rate of interest per day that, if used in computing the present value (as of the end of the day on which the taxpayer acquired the obligation and based on daily compounding) of all payments to be made under the obligation after it was acquired by the taxpayer, produces a present value equal to the cost to the taxpayer of the obligation (expressed in the primary currency of the obligation).

• Marginal note:Other specified debt obligations

  (3) For the purpose of paragraph 9101(1)(a), a taxpayer’s accrued return for a taxation year from a specified debt obligation, other than an obligation to which subsection (1) applies, shall be determined

  • (a) using a reasonable method that,

    • (i) taking into account the extent to which the obligation differs from fixed payment obligations, is consistent with the principles implicit in the methods that can be used under subsection (1) for fixed payment obligations, and

    • (ii) is in accordance with generally accepted accounting practice for the measurement of profit from debt obligations; and

  • (b) on the basis of reasonable assumptions with respect to the timing and amount of any payments to be made by the debtor under the obligation that are not fixed in their timing or amount (expressed in the primary currency of the obligation).

• Marginal note:Accrual adjustment nil

  (4) For the purposes of paragraphs 9101(1)(b) and (2)(a), if subsection 142.3(1) of the Act applies to a taxpayer for a particular taxation year in respect of a specified debt obligation and either the subsection did not apply in respect of the obligation for the taxpayer’s immediately preceding taxation year or the taxpayer did not own the obligation at the end of that immediately preceding taxation year, the taxpayer’s accrual adjustment in respect of the obligation for the particular taxation year is nil.

• Marginal note:Accrual adjustment

  (5) For the purposes of paragraphs 9101(1)(b) and (2)(a), if subsection (4) does not apply to determine a taxpayer’s accrual adjustment in respect of a specified debt obligation for a particular taxation year, the taxpayer’s accrual adjustment is the positive or negative amount determined by the formula

  A - B

  where

  A

  is the total of all amounts each of which is the amount that would be the taxpayer’s accrued return from the obligation for a taxation year, before the particular taxation year, for which subsection 142.3(1) of the Act applied to the taxpayer in respect of the obligation if the accrued return were redetermined on the basis of

  • (a) the information available at the end of the particular taxation year, and

  • (b) the assumptions, if any, with respect to the timing and amount of payments to be made under the obligation after the particular taxation year that were used for the purpose of determining the taxpayer’s accrued return from the obligation for the particular taxation year; and

  B

  is the total of

  • (a) the amount included under paragraph 9101(1)(a) as the taxpayer’s accrued return from the obligation for the taxation year immediately preceding the particular taxation year, and

  • (b) if the taxpayer’s accrual adjustment in respect of the obligation for that immediately preceding taxation year was determined under this subsection, the value of A for the purpose of determining that accrual adjustment.

• Marginal note:Special cases and transition

  (6) The rules in this section for determining accrued returns and accrual adjustments are subject to section 9103.

Accrual Rules — Special Cases and Transition

Marginal note:Convertible obligation

• 9103 (1) For the purposes of section 9102, if the terms of a specified debt obligation of a taxpayer give the taxpayer the right to exchange the obligation for shares of the debtor or of a corporation related to the debtor

  • (a) subject to paragraph (b), the right shall be disregarded (whether it has been exercised or not); and

  • (b) if 5% or more of the cost of the obligation to the taxpayer is attributable to the right, the cost is deemed to equal the amount by which the cost exceeds the portion of the cost attributable to the right.

• (2) [Repealed, SOR/2009-222, s. 7]

• Marginal note:Amendment of obligation

  (3) If the terms of a specified debt obligation of a taxpayer are amended at any time in a taxation year of the taxpayer to change the timing or amount of any payment to be made, at or after that time, under the obligation, the taxpayer’s accrued returns for the taxation year and for each subsequent taxation year are to be redetermined under section 9102 using a reasonable method that fully gives effect, in those accrued returns, to the alteration to the payments under the obligation.

• Marginal note:Obligations acquired before financial institution rules apply

  (4) If a taxpayer held a specified debt obligation at the beginning of the taxpayer’s first taxation year (in this subsection referred to as the “initial year”) for which subsection 142.3(1) of the Act applied to the taxpayer in respect of the obligation, the following rules apply:

  • (a) the taxpayer’s accrued return from the obligation for the initial year or a subsequent taxation year shall not include an amount to the extent that the amount was included in computing the taxpayer’s income for a taxation year preceding the initial year; and

  • (b) if interest on the obligation in respect of a period before the initial year becomes receivable or is received by the taxpayer in a particular taxation year that is the initial year or a subsequent taxation year, and all or part of the interest would not, but for this paragraph, be included in computing the taxpayer’s income for any taxation year, there shall be included in determining the taxpayer’s accrued return from the obligation for the particular taxation year the amount, if any, by which

    • (i) the portion of the interest that would not otherwise be included in computing the taxpayer’s income for any taxation year

    exceeds

    • (ii) the portion of the cost of the obligation to the taxpayer that is reasonably attributable to that portion of the interest.

• Marginal note:Prepaid interest — transition rule

  (5) If, before November 1994 and in a taxation year that ended after February 22, 1994, a taxpayer received an amount under a specified debt obligation in satisfaction, in whole or in part, of the debtor’s obligation to pay interest in respect of a period after the taxation year,

  • (a) the amount may, at the election of the taxpayer, be included in determining the taxpayer’s accrued return for the taxation year from the obligation; and

  • (b) if the amount is so included, the taxpayer’s accrued returns for subsequent taxation years from the obligation shall not include any amount in respect of interest that, because of the payment of the amount, the debtor is no longer required to pay.

Foreign Exchange Adjustment

Marginal note:Obligations held at end of taxation year

• 9104 (1) For the purposes of paragraphs 9101(1)(c) and (2)(b), if, at the end of a taxation year, a taxpayer holds a specified debt obligation the primary currency of which is not Canadian currency, the taxpayer’s foreign exchange adjustment in respect of the obligation for the taxation year is the positive or negative amount determined by the formula

  (A × B) - C

  where

  A

  is the amount that would be the tax basis of the obligation to the taxpayer at the end of the year if

  • (a) the tax basis were determined using the primary currency of the obligation as the currency in which all amounts are expressed,

  • (b) the definition tax basis in subsection 142.4(1) of the Act were read without reference to paragraphs (f), (h), (o) and (q), and

  • (c) the taxpayer’s foreign exchange adjustment in respect of the obligation for each year were nil;

  B

  is the rate of exchange at the end of the year of the primary currency of the obligation into Canadian currency; and

  C

  is the amount that would be the tax basis of the obligation to the taxpayer at the end of the year if

  • (a) the definition tax basis in subsection 142.4(1) of the Act were read without reference to paragraphs (h) and (q), and

  • (b) the taxpayer’s foreign exchange adjustment in respect of the obligation for the year were nil.

• Marginal note:Disposition of obligation

  (2) If a taxpayer disposes of a specified debt obligation the primary currency of which is not Canadian currency, the taxpayer’s foreign exchange adjustment in respect of the obligation for the taxation year in which the disposition occurs is the amount that would be the foreign exchange adjustment if the taxation year had ended immediately before the disposition.

• Marginal note:Disposition of obligation before 1996

  (3) At the election of a taxpayer, subsection (2) does not apply to specified debt obligations disposed of by the taxpayer before 1996.

PART XCIIFinancial Institutions — Disposition of Specified Debt Obligations

Interpretation

Marginal note:Definitions

• 9200 (1) The following definitions apply in this Part.

  gain

  gain, of a taxpayer from the disposition of a specified debt obligation, means the gain from the disposition determined under paragraph 142.4(6)(a) of the Act. (gain)

  loss

  loss, of a taxpayer from the disposition of a specified debt obligation, means the loss from the disposition determined under paragraph 142.4(6)(b) of the Act. (perte)

  residual portion

  residual portion, of a taxpayer’s gain or loss from the disposition of a specified debt obligation, means the amount determined under subsection 142.4(8) of the Act in respect of the disposition. (partie résiduelle)

• Marginal note:Amortization date

  (2) For the purposes of this Part, the amortization date for a specified debt obligation disposed of by a taxpayer is the day determined as follows:

  • (a) subject to paragraphs (b) to (d), the amortization date is the later of the day of disposition and the day on which the debtor is required to make the final payment under the obligation, determined without regard to any option respecting the timing of payments under the obligation (other than an option that was exercised before the disposition);

  • (b) subject to paragraphs (c) and (d), the amortization date is the day of disposition if the day on which the debtor is required to make the final payment under the obligation is not determinable for the purpose of paragraph (a);

  • (c) subject to paragraph (d), the amortization date is the first day, if any, after the disposition on which the interest rate could change, if the obligation is one in respect of which the following conditions are satisfied:

    • (i) the obligation provides for stipulated interest payments,

    • (ii) the rate of interest for one or more periods after the issuance of the obligation was not fixed on the day of issue, and

    • (iii) when the obligation was issued, it was reasonable to expect that the interest rate for each period would equal or approximate a reasonable market rate of interest for that period; and

  • (d) if, for purposes of its financial statements, the taxpayer had a gain or loss from the disposition that is being amortized to profit, the amortization date is the last day of the amortization period.

Marginal note:Transition amount

9201 For the purpose of subsection 142.4(1) of the Act, transition amount, of a taxpayer in respect of the disposition of a specified debt obligation, means,

• (a) if neither paragraph (b) nor (c) applies, nil;

• (b) if

  • (i) the taxpayer acquired the obligation before its taxation year that includes February 23, 1994,

  • (ii) neither paragraph 7000(2)(a) nor (b) has applied to the obligation, and

  • (iii) the principal amount of the obligation exceeds the cost of the obligation to the taxpayer (which excess is referred to in this paragraph as the “discount”),

  the amount determined by the formula

  A - B

  where

  A

  is the total of all amounts each of which is the amount included in respect of the discount in computing the taxpayer’s profit for a taxation year that ended before February 23, 1994, and

  B

  is the total of all amounts each of which is the amount included in respect of the discount in computing the taxpayer’s income for a taxation year that ended before February 23, 1994; and

• (c) where

  • (i) the conditions in subparagraphs (b)(i) and (ii) are satisfied, and

  • (ii) the cost of the obligation to the taxpayer exceeds the principal amount of the obligation (which excess is referred to in this paragraph as the “premium”),

  the negative of the amount determined by the formula

  A - B

  where

  A

  is the total of all amounts each of which is the amount deducted in respect of the premium in computing the taxpayer’s profit for a taxation year that ended before February 23, 1994, and

  B

  is the total of all amounts each of which is the amount deducted in respect of the premium in computing the taxpayer’s income for a taxation year that ended before February 23, 1994.