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

Full Document:  

Act current to 2024-05-28 and last amended on 2024-01-22. Previous Versions

PART IIncome Tax (continued)

DIVISION BComputation of Income (continued)

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

 [Repealed, 2023, c. 26, s. 7]

 [Repealed, 2023, c. 26, s. 7]

Marginal note:Income and capital combined

  •  (1) Where, under a contract or other arrangement, an amount can reasonably be regarded as being in part interest or other amount of an income nature and in part an amount of a capital nature, the following rules apply:

    • (a) the part of the amount that can reasonably be regarded as interest shall, irrespective of when the contract or arrangement was made or the form or legal effect thereof, be deemed to be interest on a debt obligation held by the person to whom the amount is paid or payable; and

    • (b) the part of the amount that can reasonably be regarded as an amount of an income nature, other than interest, shall, irrespective of when the contract or arrangement was made or the form or legal effect thereof, be included in the income of the taxpayer to whom the amount is paid or payable for the taxation year in which the amount was received or became due to the extent it has not otherwise been included in the taxpayer’s income.

  • Marginal note:Obligation issued at discount

    (2) Where, in the case of a bond, debenture, bill, note, mortgage or similar obligation issued after December 20, 1960 and before June 19, 1971 by a person exempt from tax under section 149, a non-resident person not carrying on business in Canada, or a government, municipality or municipal or other public body performing a function of government,

    • (a) the obligation was issued for an amount that is less than the principal amount of the obligation,

    • (b) the interest stipulated to be payable on the obligation, expressed in terms of an annual rate on

      • (i) the principal amount thereof, if no amount is payable on account of the principal amount before the maturity of the obligation, or

      • (ii) the amount outstanding from time to time as or on account of the principal amount thereof, in any other case,

      is less than 5%, and

    • (c) the yield from the obligation, expressed in terms of an annual rate on the amount for which the obligation was issued (which annual rate shall, if the terms of the obligation or any agreement relating thereto conferred on the holder thereof a right to demand payment of the principal amount of the obligation or the amount outstanding as or on account of the principal amount, as the case may be, before the maturity of the obligation, be calculated on the basis of the yield that produces the highest annual rate obtainable either on the maturity of the obligation or conditional on the exercise of any such right) exceeds the annual rate determined under paragraph 16(2)(b) by more than 1/3 thereof,

    the amount by which the principal amount of the obligation exceeds the amount for which the obligation was issued shall be included in computing the income of the first owner of the obligation who is a resident of Canada and is not a person exempt from tax under section 149 or a government, for the taxation year of that owner of the obligation in which he, she or it became the owner thereof.

  • Marginal note:Obligation issued at discount

    (3) Where, in the case of a bond, debenture, bill, note, mortgage, hypothecary claim or similar obligation (other than an obligation that is a prescribed debt obligation for the purpose of subsection 12(9)) issued after June 18, 1971 by a person exempt, because of section 149, from Part I tax on part or on all of the person’s income, a non-resident person not carrying on business in Canada or a government, municipality or municipal or other public body performing a function of government,

    • (a) the obligation was issued for an amount that is less than the principal amount of the obligation, and

    • (b) the yield from the obligation, expressed in terms of an annual rate on the amount for which the obligation was issued (which annual rate shall, if the terms of the obligation or any agreement relating thereto conferred on the holder thereof a right to demand payment of the principal amount of the obligation or the amount outstanding as or on account of the principal amount, as the case may be, before the maturity of the obligation, be calculated on the basis of the yield that produces the highest annual rate obtainable either on the maturity of the obligation or conditional on the exercise of any such right) exceeds 4/3 of the interest stipulated to be payable on the obligation, expressed in terms of an annual rate on

      • (i) the principal amount of the obligation, if no amount is payable on account of the principal amount before the maturity of the obligation, or

      • (ii) the amount outstanding from time to time as or on account of the principal amount thereof, in any other case,

      the amount by which the principal amount of the obligation exceeds the amount for which the obligation was issued shall be included in computing the income of the first owner of the obligation

    • (c) who is resident in Canada,

    • (d) who is not a government nor a person exempt, because of section 149, from tax under this Part on all or part of the person’s taxable income, and

    • (e) of whom the obligation is a capital property,

    for the taxation year in which the owner acquired the obligation.

  • Marginal note:Where s. (1) does not apply

    (4) Subsection 16(1) does not apply to any amount received by a taxpayer in a taxation year

    • (a) as an annuity payment; or

    • (b) in satisfaction of the taxpayer’s rights under an annuity contract.

  • Marginal note:Idem

    (5) Subsection 16(1) does not apply in any case where subsection 16(2) or 16(3) applies.

  • Marginal note:Indexed debt obligations

    (6) Subject to subsection 16(7) and for the purposes of this Act, where at any time in a taxpayer’s taxation year

    • (a) an interest in an indexed debt obligation is held by the taxpayer,

      • (i) an amount determined in prescribed manner shall be deemed to be received and receivable by the taxpayer in the year as interest in respect of the obligation, and

      • (ii) an amount determined in prescribed manner shall be deemed to be paid and payable in respect of the year by the taxpayer as interest under a legal obligation of the taxpayer to pay interest on borrowed money used for the purpose of earning income from a business or property;

    • (b) an indexed debt obligation is an obligation of the taxpayer,

      • (i) an amount determined in prescribed manner shall be deemed to be payable in respect of the year by the taxpayer as interest in respect of the obligation, and

      • (ii) an amount determined in prescribed manner shall be deemed to be received and receivable by the taxpayer in the year as interest in respect of the obligation; and

    • (c) the taxpayer pays or credits an amount in respect of an amount determined under subparagraph 16(6)(b)(i) in respect of an indexed debt obligation, the payment or crediting shall be deemed to be a payment or crediting of interest on the obligation.

  • Marginal note:Impaired indexed debt obligations

    (7) Paragraph 16(6)(a) does not apply to a taxpayer in respect of an indexed 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.

  • [NOTE: Application provisions are not included in the consolidated text
  • see relevant amending Acts and regulations.]
  • R.S., 1985, c. 1 (5th Supp.), s. 16
  • 1994, c. 7, Sch. VIII, s. 7, c. 21, s. 10
  • 1998, c. 19, s. 78
  • 2001, c. 17, s. 200

Marginal note:Leasing properties

  •  (1) Where a taxpayer (in this section referred to as the “lessee”) leases tangible property, or for civil law corporeal property, that is not prescribed property and that would, if the lessee acquired the property, be depreciable property of the lessee, from a person resident in Canada other than a person whose taxable income is exempt from tax under this Part, or from a non-resident person who holds the lease in the course of carrying on a business through a permanent establishment in Canada, as defined by regulation, any income from which is subject to tax under this Part, who owns the property and with whom the lessee was dealing at arm’s length (in this section referred to as the “lessor”) for a term of more than one year, if the lessee and the lessor jointly elect in prescribed form filed with their returns of income for their respective taxation years that include the particular time when the lease began, the following rules apply for the purpose of computing the income of the lessee for the taxation year that includes the particular time and for all subsequent taxation years:

    • (a) in respect of amounts paid or payable for the use of, or for the right to use, the property, the lease shall be deemed not to be a lease;

    • (b) the lessee shall be deemed to have acquired the property from the lessor at the particular time at a cost equal to its fair market value at that time;

    • (c) the lessee shall be deemed to have borrowed money from the lessor at the particular time, for the purpose of acquiring the property, in a principal amount equal to the fair market value of the property at that time;

    • (d) interest shall be deemed to accrue on the principal amount of the borrowed money outstanding from time to time, compounded semi-annually, not in advance, at the prescribed rate in effect

      • (i) at the earlier of

        • (A) the time, if any, before the particular time, at which the lessee last entered into an agreement to lease the property, and

        • (B) the particular time, or

      • (ii) where the lease provides that the amount payable by the lessee for the use of, or the right to use, the property varies according to prevailing interest rates in effect from time to time, and the lessee so elects, in respect of all of the property that is subject to the lease, in the lessee’s return of income under this Part for the taxation year of the lessee in which the lease began, at the beginning of the period for which the interest is being calculated;

    • (e) all amounts paid or payable by or on behalf of the lessee for the use of, or the right to use, the property in the year shall be deemed to be blended payments, paid or payable by the lessee, of principal and interest on the borrowed money outstanding from time to time, calculated in accordance with paragraph 16.1(1)(d), applied firstly on account of interest on principal, secondly on account of interest on unpaid interest and thirdly on account of unpaid principal, if any, and the amount, if any, by which any such payment exceeds the total of those amounts shall be deemed to be paid or payable on account of interest, and any amount deemed by reason of this paragraph to be a payment of interest shall be deemed to have been an amount paid or payable, as the case may be, pursuant to a legal obligation to pay interest in respect of the year on the borrowed money;

    • (f) at the time of the expiration or cancellation of the lease, the assignment of the lease or the sublease of the property by the lessee, the lessee shall (except where subsection 16.1(4) applies) be deemed to have disposed of the property at that time for proceeds of disposition equal to the amount, if any, by which

      • (i) the total of

        • (A) the amount referred to in paragraph 16.1(1)(c), and

        • (B) all amounts received or receivable by the lessee in respect of the cancellation or assignment of the lease or the sublease of the property

        exceeds

      • (ii) the total of

        • (A) all amounts deemed under paragraph 16.1(1)(e) to have been paid or payable, as the case may be, by the lessee on account of the principal amount of the borrowed money, and

        • (B) all amounts paid or payable by or on behalf of the lessee in respect of the cancellation or assignment of the lease or the sublease of the property;

    • (g) for the purposes of subsections 13(5.2) and 13(5.3), each amount paid or payable by or on behalf of the lessee that would, but for this subsection, have been an amount paid or payable for the use of, or the right to use, the property shall be deemed to have been deducted in computing the lessee’s income as an amount paid or payable by the lessee for the use of, or the right to use, the property after the particular time;

    • (h) any amount paid or payable by or on behalf of the lessee in respect of the granting or assignment of the lease or the sublease of the property that would, but for this paragraph, be the capital cost to the lessee of a leasehold interest in the property shall be deemed to be an amount paid or payable, as the case may be, by the lessee for the use of, or the right to use, the property for the remaining term of the lease; and

    • (i) where the lessee elects under this subsection in respect of a property and, at any time after the lease was entered into, the owner of the property is a non-resident person who does not hold the lease in the course of carrying on a business through a permanent establishment in Canada, as defined by regulation, any income from which is subject to tax under this Part, for the purposes of this subsection the lease shall be deemed to have been cancelled at that time.

  • Marginal note:Assignments and subleases

    (2) Subject to subsections 16.1(3) and 16.1(4), where at any particular time a lessee who has made an election under subsection 16.1(1) in respect of a leased property assigns the lease or subleases the property to another person (in this section referred to as the “assignee”),

    • (a) subsection 16.1(1) shall not apply in computing the income of the lessee in respect of the lease for any period after the particular time; and

    • (b) if the lessee and the assignee jointly elect in prescribed form filed with their returns of income under this Part for their respective taxation years that include the particular time, subsection 16.1(1) shall apply to the assignee as if

      • (i) the assignee leased the property at the particular time from the owner of the property for a term of more than one year, and

      • (ii) the assignee and the owner of the property jointly elected under subsection 16.1(1) in respect of the property with their returns of income under this Part for their respective taxation years that include the particular time.

  • Marginal note:Idem

    (3) Subject to subsection 16.1(4), where at any particular time a lessee who has made an election under subsection 16.1(1) in respect of a leased property assigns the lease or subleases the property to another person with whom the lessee is not dealing at arm’s length, the other person shall, for the purposes of subsection 16.1(1) and for the purposes of computing that person’s income in respect of the lease for any period after the particular time, be deemed to be the same person as, and a continuation of, the lessee, except that, notwithstanding paragraph 16.1(1)(b), that other person shall be deemed to have acquired the property from the lessee at the time that it was acquired by the lessee at a cost equal to the amount that would be the lessee’s proceeds of disposition of the property determined under paragraph 16.1(1)(f) if that amount were determined without reference to clauses 16.1(1)(f)(i)(B) and (ii)(B).

  • Marginal note:Amalgamations and windings-up

    (4) Notwithstanding subsection 16.1(2), where at any time a particular corporation that has made an election under subsection 16.1(1) in respect of a lease assigns the lease

    • (a) by reason of an amalgamation (within the meaning assigned by subsection 87(1)), or

    • (b) in the course of the winding-up of a Canadian corporation in respect of which subsection 88(1) applies,

    to another corporation with which it does not deal at arm’s length, the other corporation shall, for the purposes of subsection 16.1(1) and for the purposes of computing its income in respect of the lease after that time, be deemed to be the same person as, and a continuation of, the particular corporation.

  • Marginal note:Replacement property

    (5) For the purposes of subsection 16.1(1), where at any time a property (in this subsection referred to as a “replacement property”) is provided by a lessor to a lessee as a replacement for a similar property of the lessor (in this subsection referred to as the “original property”) that was leased by the lessor to the lessee, and the amount payable by the lessee for the use of, or the right to use, the replacement property is the same as the amount that was so payable in respect of the original property, the replacement property shall be deemed to be the same property as the original property.

  • Marginal note:Additional property

    (6) For the purposes of subsection 16.1(1), where at any particular time

    • (a) an addition or alteration (in this subsection referred to as “additional property”) is made by a lessor to a property (in this subsection referred to as the “original property”) of the lessor that is the subject of a lease,

    • (b) the lessor and the lessee of the original property have jointly elected under subsection 16.1(1) in respect of the original property, and

    • (c) as a consequence of the addition or alteration, the total amount payable by the lessee for the use of, or the right to use, the original property and the additional property exceeds the amount so payable in respect of the original property,

    the following rules apply:

    • (d) the lessee shall be deemed to have leased the additional property from the lessor at the particular time,

    • (e) the term of the lease of the additional property shall be deemed to be greater than one year,

    • (f) the lessor and the lessee shall be deemed to have jointly elected under subsection 16.1(1) in respect of the additional property,

    • (g) the prescribed rate in effect at the particular time in respect of the additional property shall be deemed to be equal to the prescribed rate in effect in respect of the original property at the particular time,

    • (h) the additional property shall be deemed not to be prescribed property, and

    • (i) the excess referred to in paragraph 16.1(6)(c) shall be deemed to be an amount payable by the lessee for the use of, or the right to use, the additional property.

  • Marginal note:Renegotiation of lease

    (7) For the purposes of subsection 16.1(1), where at any time

    • (a) a lease (in this subsection referred to as the “original lease”) of property is renegotiated in the course of a bona fide renegotiation, and

    • (b) as a result of the renegotiation, the amount payable by the lessee of the property for the use of, or the right to use, the property is altered in respect of a period after that time (otherwise than because of an addition or alteration to which subsection 16.1(6) applies),

    the original lease shall be deemed to have expired and the renegotiated lease shall be deemed to be a new lease of the property entered into 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. 16.1
  • 1994, c. 7, Sch. II, s. 12
  • 1999, c. 22, s. 7
  • 2013, c. 34, s. 94
 

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