(b) the sale or exchange was made in the course of a business carried on by the affiliate principally with persons with whom the affiliate deals at arm's length in the country under whose laws the affiliate was formed or continued and exists and is governed and in which the business is principally carried on by it; and

    (c) the terms and conditions of the sale or exchange of such property are substantially the same as the terms and conditions of similar sales or exchanges of such property by persons dealing at arm's length.

Application of paragraph (2)(a.3)

(2.4) Paragraph (2)(a.3) does not apply to a foreign affiliate of a taxpayer in respect of its income derived directly or indirectly from indebtedness to the extent that

    (a) the income is derived by the affiliate in the course of a business conducted principally with persons with whom the affiliate deals at arm's length carried on by it as a foreign bank, a trust company, a credit union, an insurance corporation or a trader or dealer in securities or commodities, the activities of which are regulated in the country under whose laws the affiliate was formed or continued and exists and is governed and in which the business is principally carried on, and

    (b) the income is derived by the affiliate from trading or dealing in the indebtedness (which, for this purpose, consists of income from the actual trading or dealing in the indebtedness and interest earned by the affiliate during a short term holding period on indebtedness acquired by it for the purpose of the trading or dealing) with persons (in this subsection referred to as ``regular customers'') with whom it deals at arm's length who were resident in a country other than Canada in which it and any competitor (which is resident in the country in which the affiliate is resident and regulated in the same manner the affiliate is regulated in the country under whose laws the affiliate was formed or continued and exists and is governed and in which its business is principally carried on) compete and have a substantial market presence,

and, for the purpose of this subsection, an acquisition of indebtedness from the taxpayer shall be deemed to be part of the trading or dealing in indebtedness described in paragraph (b) where the indebtedness is acquired by the affiliate and sold to regular customers and the terms and conditions of the acquisition and the sale are substantially the same as the terms and conditions of similar acquisitions and sales made by the affiliate in transactions with persons with whom it deals at arm's length.

Definitions for paragraph (2)(a.3)

(2.5) For the purpose of paragraph (2)(a.3),

``indebtedness ''
« dette »

``indebtedness'' does not include obligations of a person under agreements with non-resident corporations providing for the purchase, sale or exchange of currency where

      (a) the agreements are swap agreements, forward purchase or sale agreements, forward rate agreements, futures agreements, options or rights agreements, or similar agreements,

      (b) the person is a bank, a trust company, a credit union, an insurance corporation or a trader or dealer in securities or commodities resident in Canada, the business activities of which are subject by law to the supervision of a regulating authority in Canada such as the Superintendent of Financial Institutions or a similar authority of a province,

      (c) the agreements are entered into by the non-resident corporation in the course of a business carried on by it principally with persons with which it deals at arm's length in the country under whose laws the non-resident corporation was formed or continued and exists and is governed and in which the business is principally carried on by it, and

      (d) the terms and conditions of such agreements are substantially the same as the terms and conditions of similar agreements made by persons dealing at arm's length;

``specified deposit''
« dépôt déterminé »

``specified deposit'' means a deposit of a foreign affiliate of a taxpayer resident in Canada with a prescribed financial institution resident in Canada where

      (a) the income from the deposit is income of the affiliate for the year that would, but for paragraph (2)(a.3), be income from an active business carried on by it in a country other than Canada (other than a business the principal purpose of which is to derive income from property including interest, dividends, rents, royalties or similar returns or substitutes therefor or profits from the disposition of investment property), or

      (b) the income from the deposit is income of the affiliate for the year that would, but for paragraph (2)(a.3), be income from an active business carried on by the affiliate principally with persons with whom the affiliate deals at arm's length in the country under whose laws the affiliate was formed or continued and exists and is governed and in which the business is principally carried on by it and the deposit was held by the affiliate in the course of carrying on that part of the business conducted with non-resident persons with whom the affiliate deals at arm's length or that part of the business conducted with a person with whom the affiliate was related where it can be demonstrated that the related person used or held the funds deposited in the course of a business carried on by the related person with non-resident persons with whom the related person and the affiliate deal at arm's length.

(7) Subsection 95(6) of the Act is replaced by the following:

Where rights or shares issued, acquired or disposed of to avoid tax

(6) For the purposes of this subdivision (other than section 90),

    (a) where any person or partnership has a right under a contract, in equity or otherwise, either immediately or in the future and either absolutely or contingently, to, or to acquire, shares of the capital stock of a corporation and

      (i) it can reasonably be considered that the principal purpose for the existence of the right is to cause 2 or more corporations to be related for the purpose of paragraph (2)(a), those corporations shall be deemed not to be related for that purpose, or

      (ii) it can reasonably be considered that the principal purpose for the existence of the right is to permit any person to avoid, reduce or defer the payment of tax or any other amount that would otherwise be payable under this Act, those shares shall be deemed to be owned by that person or partnership; and

    (b) where a person or partnership acquires or disposes of shares of the capital stock of a corporation, either directly or indirectly, and it can reasonably be considered that the principal purpose for the acquisition or disposition of the shares is to permit a person to avoid, reduce or defer the payment of tax or any other amount that would otherwise be payable under this Act, those shares shall be deemed not to have been acquired or disposed of, as the case may be, and where the shares were unissued by the corporation immediately prior to the acquisition, those shares shall be deemed not to have been issued.

(8) Subsections (1) to (7) apply to taxation years of foreign affiliates of taxpayers that begin after 1994 except that, where there has been a change in the taxation year of a foreign affiliate of a taxpayer in 1994 and after February 22, 1994, subsections (1) to (7) apply to taxation years of such foreign affiliate of the taxpayer that end after 1994, unless

    (a) such foreign affiliate had requested that change in the taxation year in writing before February 22, 1994 from the income taxation authority of the country in which it was resident and subject to income taxation; or

    (b) the first taxation year of such foreign affiliate that began after 1994 began at a time in 1995 that is earlier than the time that that taxation year would have begun if there had not been that change in the taxation year of such foreign affiliate.

47. (1) The definition ``business'' in subsection 248(1) of the Act is replaced by the following:

``business''
« affairs » « commerce » « entreprise »

``business'' includes a profession, calling, trade, manufacture or undertaking of any kind whatever and, except for the purposes of paragraph 18(2)(c), section 54.2, subsection 95(1) and paragraph 110.6(14)(f), an adventure or concern in the nature of trade but does not include an office or employment;

(2) Subsection (1) applies to taxation years that end after 1994.

PART III

AMENDMENTS RELATING TO SECURITIES HELD BY FINANCIAL INSTITUTIONS

48. (1) The portion of subsection 18(13) of the Act before paragraph (a) is replaced by the following:

Superficial loss

(13) Subject to subsection 142.6(7) and notwithstanding any other provision of this Act, where a taxpayer (other than an insurer)

(2) Subsection (1) applies to dispositions occurring after October 30, 1994.

49. (1) Paragraph 39(1)(a) of the Act is amended by adding the following after subparagraph (ii.1):

      (ii.2) a property to the disposition of which subsection 142.4(4) or (5) or 142.5(1) applies,

(2) Subparagraph 39(1)(b)(ii) of the Act is replaced by the following:

      (ii) property described in any of subparagraphs (a)(i), (ii) to (iii) and (v); and

(3) Paragraphs 39(5)(b) to (e) of the Act are replaced by the following:

    (b) a financial institution (as defined in subsection 142.2(1)),

(4) Subsection (1) applies to dispositions of property occurring after February 22, 1994.

(5) Subsection (2) applies to taxation years that end after February 22, 1994 except that, in its application to property disposed of before February 23, 1994, subparagraph 39(1)(b)(ii) of the Act, as enacted by subsection (2), shall be read as follows:

      (ii) property described in subparagraph (a)(i), (ii), (ii.1), (iii) or (v); and

(6) Subsection (3) applies to dispositions of property occurring after February 22, 1994, other than the disposition of property in a taxation year that begins before November 1994 where the property is mark-to-market property (as defined in subsection 142.2(1) of the Act, as enacted by subsection 58(1)) for the year.

50. (1) The Act is amended by adding the following after section 51:

Conversion of debt obligation

51.1 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.

(2) Subsection (1) applies to exchanges occurring after October 1994.

51. (1) Paragraph 66.3(1)(a) of the Act is replaced by the following:

    (a) shall, if acquired before November 13, 1981, be deemed

      (i) not to be a capital property of the taxpayer,

      (ii) subject to subsection 142.6(3), to be inventory of the taxpayer, and

      (iii) to have been acquired by the taxpayer at a cost to the taxpayer of nil; and

(2) Subsection (1) applies to taxation years that begin after October 1994.

52. (1) Section 77 of the Act is repealed.

(2) Subsection (1) applies to exchanges occurring after October 1994.

53. (1) The portion of paragraph 85(1)(c.1) of the Act before subparagraph (i) is replaced by the following:

    (c.1) where the property was inventory, capital property (other than depreciable property of a prescribed class), a NISA Fund No. 2 or a property that is eligible property because of paragraph (1.1)(g) or (g.1), and the amount that the taxpayer and corporation have agreed on in their election in respect of the property is less than the lesser of

(2) Paragraph 85(1.1)(g) of the Act is replaced by the following:

    (g) a property that is a security or debt obligation used by the taxpayer in the year in, or held by it in the year in the course of, carrying on the business of insurance or lending money, other than

      (i) a capital property,

      (ii) inventory, or

      (iii) where the taxpayer is a financial institution in the year, a mark-to-market property for the year;

(3) Subsection 85(1.1) of the Act is amended by adding the following after paragraph (g):

    (g.1) where the taxpayer is a financial institution in the year, a specified debt obligation (other than a mark-to-market property of the taxpayer for the year);

(4) Section 85 of the Act is amended by adding the following after subsection (1.3):

Definitions

(1.4) For the purpose of subsection (1.1), ``financial institution'', ``mark-to-market property'' and ``specified debt obligation'' have the meanings assigned by subsection 142.2(1).

(5) Subsections (1), (3) and (4) apply to dispositions occurring after February 22, 1994.

(6) Subsection (2) applies to dispositions occurring in taxation years that begin after October 1994.

54. (1) Section 87 of the Act is amended by adding the following after subsection (1.4):

Definitions

(1.5) For the purpose of this section, ``financial institution'', ``mark-to-market property'' and ``specified debt obligation'' have the meanings assigned by subsection 142.2(1).

(2) Paragraph 87(2)(e) of the Act is replaced by the following:

Capital property

    (e) subject to paragraph (e.4) and subsection 142.6(5), where a capital property (other than depreciable property or an interest in a partnership) has been acquired by the new corporation from a predecessor corporation, the cost of the property to the new corporation shall be deemed to be the amount that was the adjusted cost base of the property to the predecessor corporation immediately before the amalgamation;

(3) Paragraph 87(2)(e.2) of the Act is replaced by the following:

Security or debt obligation

    (e.2) subject to paragraphs (e.3) and (e.4) and subsection 142.6(5), where a property that is a security or debt obligation (other than a capital property or an inventory) of a predecessor corporation used by it in the year in, or held by it in the year in the course of, carrying on the business of insurance or lending money in the taxation year ending immediately before the amalgamation has been acquired by the new corporation from the predecessor corporation, the cost of the property to the new corporation shall be deemed to be the amount that was the cost amount of the property to the predecessor corporation immediately before the amalgamation;

Financial institutions - specified debt obligation

    (e.3) where the new corporation is a financial institution in its first taxation year, it shall be deemed, in respect of a specified debt obligation (other than a mark-to-market property) acquired from a predecessor corporation that was a financial institution in its last taxation year, to be the same corporation as, and a continuation of, the predecessor corporation;

Financial institutions - mark-to-mark et property

    (e.4) where

      (i) the new corporation is a financial institution in its first taxation year and a property acquired by the new corporation from a predecessor corporation is a mark-to-market property of the new corporation for the year, or

      (ii) a predecessor corporation was a financial institution in its last taxation year and a property acquired by the new corporation from the predecessor corporation was a mark-to-market property of the predecessor corporation for the year,

    the cost of the property to the new corporation shall be deemed to be the amount that was the fair market value of the property immediately before the amalgamation;

Financial institutions - mark-to-mark et property

    (e.5) for the purposes of subsections 112(5) to (5.2) and (5.4) and the definition ``mark-to-market property'' in subsection 142.2(1), the new corporation shall be deemed to be the same corporation as, and a continuation of, each predecessor corporation;

(4) Subsection 87(2) of the Act is amended by adding the following after paragraph (g.1):