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

Prescribed Debt Obligations

Marginal note:Application of related election

• 9202 (1) The following rules apply with respect to an election made under subsection (3) or (4) by a taxpayer:

  • (a) the election applies only if

    • (i) it is in writing,

    • (ii) it specifies the first taxation year (in this subsection referred to as the “initial year”) of the taxpayer to which it is to apply, and

    • (iii) either it is received by the Minister within six months after the end of the initial year, or the Minister has expressly accepted the later filing of the election;

  • (b) subject to paragraph (c), the election applies to dispositions of specified debt obligations in the initial year and subsequent taxation years; and

  • (c) if the Minister has approved, on written application by the taxpayer, the revocation of the election, the election does not apply to dispositions of specified debt obligations in the taxation year specified in the application and in subsequent taxation years.

• Marginal note:Prescribed specified debt obligation

  (2) For the purpose of subparagraph 142.4(5)(a)(ii) of the Act, a specified debt obligation disposed of by a taxpayer in a taxation year is prescribed in respect of the taxpayer if the amortization date for the obligation is not more than two years after the end of the taxation year.

• Marginal note:Prescribed specified debt obligation — exception

  (3) Subsection (2) does not apply in respect of a taxpayer for a taxation year if

  • (a) generally accepted accounting principles require that the taxpayer’s gains and losses arising on the disposition of a class of debt obligations be amortized to profit for the purpose of the taxpayer’s financial statements;

  • (b) the taxpayer has elected not to have subsection (2) apply; and

  • (c) the election applies to dispositions in the year.

• Marginal note:Prescribed specified debt obligation

  (4) For the purpose of subparagraph 142.4(5)(a)(ii) of the Act, a specified debt obligation disposed of by a taxpayer in a taxation year is prescribed in respect of the taxpayer if

  • (a) the taxpayer has elected to have this subsection apply;

  • (b) the election applies to dispositions in the year; and

  • (c) the absolute value of the positive or negative amount determined by the formula (A - B) does not exceed the lesser of $5,000 and the amount, if any, specified in the election, where

    A

    is the total of all amounts each of which is the residual portion of the taxpayer’s gain from the disposition of the obligation or any other specified debt obligation disposed of in the same transaction, and

    B

    is the total of all amounts each of which is the residual portion of the taxpayer’s loss from the disposition of the obligation or any other specified debt obligation disposed of in the same transaction.

• Marginal note:Prescribed specified debt obligation

  (5) For the purpose of subparagraph 142.4(5)(a)(ii) of the Act, a specified debt obligation disposed of by a taxpayer in a taxation year is prescribed in respect of the taxpayer if

  • (a) the disposition resulted in an extinguishment of the obligation, other than an extinguishment that occurred because of a purchase of the obligation by the debtor in the open market;

  • (b) the taxpayer had the right to require the obligation to be settled at any time; or

  • (c) the debtor had the right to settle the obligation at any time.

Residual Portion of Gain or Loss

Marginal note:Allocation of residual portion

• 9203 (1) Subject to section 9204, if subsection 142.4(4) of the Act applies to the disposition of a specified debt obligation by a taxpayer, the amount allocated to each taxation year in respect of the residual portion of the gain or loss from the disposition shall be determined, for the purpose of that subsection,

  • (a) by a method that complies with, or is substantially similar to a method that complies with, subsection (2); or

  • (b) if gains and losses from the disposition of debt obligations are amortized to profit for the purpose of the taxpayer’s financial statements, by the method used for the purpose of the taxpayer’s financial statements.

• Marginal note:Proration method

  (2) For the purpose of subsection (1), a method for allocating to taxation years the residual portion of a taxpayer’s gain or loss from the disposition of a specified debt obligation complies with this subsection if the amount allocated to each taxation year is determined by the formula

  A × B/C

  where

  A

  is the residual portion of the taxpayer’s gain or loss;

  B

  is the number of days in the taxation year that are in the period referred to in the description of C; and

  C

  is the number of days in the period that,

  • (a) where subsection (3) applies in respect of the obligation, is determined under that subsection, and

  • (b) in any other case,

    • (i) begins on the day on which the taxpayer disposed of the obligation, and

    • (ii) ends on the earlier of

      • (A) the amortization date for the obligation, and

      • (B) the day that is 20 years after the day on which the taxpayer disposed of the obligation.

• Marginal note:Single proration period

  (3) This subsection applies in respect of specified debt obligations disposed of by a taxpayer in a transaction in a taxation year, and the period determined under this subsection in respect of the obligations is the period that begins on the day of disposition and ends on the weighted average amortization date for those obligations so disposed of to which subsection 142.4(4) of the Act applies, if

  • (a) the taxpayer has elected in its return of income for the taxation year to have this subsection apply in respect of the obligations so disposed of;

  • (b) all the obligations so disposed of were disposed of at the same time; and

  • (c) the number of the obligations so disposed of to which subsection 142.4(4) of the Act applies is at least 50.

• Marginal note:Weighted average amortization date

  (4) For the purpose of subsection (3), the weighted average amortization date for a group of specified debt obligations disposed of on the same day by a taxpayer is,

  • (a) if paragraph (b) does not apply, the day that is the number of days after the day of disposition equal to the total of the number of days determined in respect of each obligation by the formula

    A × B/C

    where

    A

    is the number of days from the day of disposition to the amortization date for the obligation,

    B

    is the residual portion of the gain or loss from the disposition of the obligation, and

    C

    is the total of all amounts each of which is the residual portion of the gain or loss from the disposition of an obligation in the group; and

  • (b) the day that the taxpayer determines using a reasonable method for estimating the day determined under paragraph (a).

Special Rules for Residual Portion of Gain or Loss

Marginal note:Application

• 9204 (1) This section applies for the purposes of subparagraphs 142.4(4)(c)(ii) and (d)(ii) of the Act.

• Marginal note:Winding-up

  (2) If subsection 88(1) of the Act has applied to the winding-up of a taxpayer (in this subsection referred to as the “subsidiary”), the following rules apply in respect of the residual portion of a gain or loss of the subsidiary from the disposition of a specified debt obligation to which subsection 142.4(4) of the Act applies:

  • (a) the amount of that residual portion allocated to the taxation year of the subsidiary in which its assets were distributed to its parent on the winding-up shall be determined on the assumption that the taxation year ended when the assets were distributed to its parent;

  • (b) no amount shall be allocated in respect of that residual portion to any taxation year of the subsidiary after its taxation year in which its assets were distributed to its parent; and

  • (c) the amount of that residual portion allocated to the taxation year of the parent in which the subsidiary’s assets were distributed to it shall be determined on the assumption that the taxation year began when the assets were distributed to it.

• (2.1) [Repealed, SOR/2009-302, s. 12]

• Marginal note:Transfer of an insurance business

  (3) No amount in respect of the residual portion of a gain or loss of an insurer from the disposition of a specified debt obligation to which subsection 142.4(4) of the Act applies shall be allocated to any taxation year of the insurer that ends after the insurer ceased to carry on all or substantially all of an insurance business, if

  • (a) subsection 138(11.5) or (11.94) of the Act has applied to the transfer of that business; and

  • (b) the person to whom that business was transferred is considered, because of paragraph 138(11.5)(k) of the Act, to be the same person as the insurer in respect of that residual portion.

• Marginal note:Transfer to new partnership

  (4) If subsection 98(6) of the Act deems a partnership (in this subsection referred to as the “new partnership”) to be a continuation of another partnership (in this subsection referred to as the “predecessor partnership”), the following rules apply in respect of the residual portion of a gain or loss of the predecessor partnership from the disposition of a specified debt obligation to which subsection 142.4(4) of the Act applies:

  • (a) the amount of that residual portion allocated to the taxation year of the predecessor partnership in which its property was transferred to the new partnership shall be determined on the assumption that the taxation year ended when the property was transferred;

  • (b) no amount shall be allocated in respect of that residual portion to any taxation year of the predecessor partnership after its taxation year in which its property was transferred to the new partnership; and

  • (c) the amount of that residual portion allocated to the taxation year of the new partnership in which the predecessor partnership’s property was transferred to it shall be determined on the assumption that the taxation year began when the property was transferred to it.

• Marginal note:Ceasing to carry on business

  (5) There shall be allocated to a particular taxation year of a taxpayer the part, if any, of the residual portion of the taxpayer’s gain or loss that is from a disposition of a specified debt obligation to which subsection 142.4(4) of the Act applies and that was not allocated to a preceding taxation year, if

  • (a) at any time in the particular taxation year the taxpayer ceases to carry on all or substantially all of a business, otherwise than as a result of a merger to which subsection 87(2) of the Act applies, a winding-up to which subsection 88(1) of the Act applies or a transfer of the business to which subsection 98(6) or 138(11.5) or (11.94) of the Act applies;

  • (b) the disposition occurred before that time; and

  • (c) the specified debt obligation was property used in the business.

• Marginal note:Non-resident taxpayer

  (5.1) For the purpose of subsection (5), a non-resident taxpayer is considered to cease to carry on all or substantially all of a business if the taxpayer ceases to carry on, or ceases to carry on in Canada, all or substantially all of the part of the business that was carried on in Canada.

• Marginal note:Ceasing to be a financial institution

  (6) There shall be allocated to a particular taxation year of a taxpayer the part, if any, of the residual portion of the taxpayer’s gain or loss that is from a disposition of a specified debt obligation to which subsection 142.4(4) of the Act applies and that was not allocated to a preceding taxation year, if

  • (a) the particular taxation year ends immediately before the time at which the taxpayer ceases to be a financial institution, otherwise than because it has ceased to carry on a business; and

  • (b) the disposition occurred before that time.