(b) in determining the consequences of the disposition in subparagraph (a)(i), subsection 142.4(11) does not apply to any payment received by the taxpayer after the particular time.

Beginning to use property in a Canadian business

(1.2) If at a particular time a taxpayer that is a non-resident financial institution (other than a life insurance corporation) begins to use, in connection with a business or part of a business carried on by the taxpayer in Canada, a property that is a mark-to-market property of the taxpayer for the year that includes the particular time or a specified debt obligation, but that is not a property that was acquired by the taxpayer at the particular time, the taxpayer is deemed

    (a) to have disposed of the property immediately before the time that was immediately before the particular time for proceeds equal to its fair market value at the time of disposition; and

    (b) to have reacquired the property at the particular time at a cost equal to those proceeds.

Specified debt obligation marked to market

(1.3) In applying subsection (1.1) to a taxpayer in respect of a property in a taxation year,

    (a) the definition ``mark-to-market property'' in subsection 142.2(1) shall be applied as if the year ended immediately before the particular time referred to in subsection (1.1); and

    (b) if the taxpayer does not have financial statements for the period ending immediately before the particular time referred to in subsection (1.1), references in the definition to financial statements for the year shall be read as references to the financial statements that it is reasonable to expect would have been prepared if the year had ended immediately before the particular time.

Deemed disposition not applicable

(2) For the purposes of this Act, the determination of when a taxpayer acquired a share shall be made without regard to a disposition or acquisition that occurred because of subsection 142.5(2) or subsection (1), (1.1) or (1.2).

(2) Subsection (1) applies after June 27, 1999 in respect of an authorized foreign bank, and after August 8, 2000 in any other case.

138. (1) The Act is amended by adding the following after section 142.6:

Conversion of Foreign Bank Affiliate to Branch

Definitions

142.7 (1) The definitions in this subsection apply in this section.

``Canadian affiliate''
« filiale canadienne »

``Canadian affiliate'' of an entrant bank at any particular time means a Canadian corporation that was, immediately before the particular time, affiliated with the entrant bank and that was, at all times during the period that began on February 11, 1999 and ended immediately before the particular time,

      (a) affiliated with either

        (i) the entrant bank, or

        (ii) a foreign bank (within the meaning assigned by section 2 of the Bank Act) that is affiliated with the entrant bank at the particular time; and

      (b) either

        (i) a bank,

        (ii) a corporation authorized under the Trust and Loan Companies Act to carry on the business of offering to the public its services as trustee, or

        (iii) a corporation of which the principal activity in Canada consists of any of the activities referred to in subparagraphs 518(3)(a)(i) to (v) of the Bank Act and in which the entrant bank or a non-resident person affiliated with the entrant bank holds shares under the authority, directly or indirectly, of an order issued by the Minister of Finance or the Governor in Council under subsection 521(1) of that Act.

``eligible property''
« bien admissible »

``eligible property'' of a Canadian affiliate at any time means a property described in any of paragraphs 85(1.1)(a) to (g.1) that is, immediately before that time, used or held by it in carrying on its business in Canada.

``entrant bank''
« banque entrante »

``entrant bank'' means a non-resident corporation that is, or has applied to the Superintendent of Financial Institutions to become, an authorized foreign bank.

``qualifying foreign merger''
« fusion étrangère détermi-
née
»

``qualifying foreign merger'' means a merger or combination of two or more corporations that would be a ``foreign merger'' within the meaning assigned by subsection 87(8.1) if that subsection were read without reference to the words ``and otherwise than as a result of the distribution of property to one corporation on the winding-up of another corporation.

Qualifying foreign merger

(2) Where an entrant bank was formed as the result of a qualifying foreign merger, after February 11, 1999, of two or more corporations (referred to in this subsection as ``predecessors''), and at the time immediately before the merger, there were one or more Canadian corporations (referred to in this subsection as ``predecessor affiliates''), each of which at that time would have been a Canadian affiliate of a predecessor if the predecessor were an entrant bank at that time,

    (a) for the purpose of the definition ``Canadian affiliate'' in subsection (1),

      (i) each predecessor affiliate is deemed to have been affiliated with the entrant bank throughout the period that began on February 11, 1999 and ended at the time of the merger,

      (ii) the expression ``entrant bank'' in subparagraph (b)(iii) of the definition is deemed to include a predecessor, and

      (iii) if two or more of the predecessor affiliates are amalgamated or merged at any time after February 11, 1999 to form a new corporation, the new corporation is deemed to have been affiliated with the entrant bank throughout the period that began on February 11, 1999 and ended at the time of the amalgamation or merger of the predecessor affiliates; and

    (b) if at least one of the predecessors complied with the terms of subsection (11)(a), the entrant bank is deemed to have complied with those terms.

Branch-establi shment rollover

(3) If a Canadian affiliate of an entrant bank transfers an eligible property to the entrant bank, the entrant bank begins immediately after the transfer to use or hold the transferred property in its Canadian banking business and the Canadian affiliate and the entrant bank jointly elect, in accordance with subsection (11), to have this subsection apply in respect of the transfer, subsections 85(1) (other than paragraph (e.2)), (1.1), (1.4) and (5) apply, with any modifications that the circumstances require, in respect of the transfer, except that the portion of subsection 85(1) before paragraph (a) shall be read as follows:

``85. (1) Where a taxpayer that is a Canadian affiliate of an entrant bank (within the meanings assigned by subsection 142.7(1)) has, in a taxation year, disposed of any of the taxpayer's property to the entrant bank (referred to in this subsection as the ``corporation''), if the taxpayer and the corporation have jointly elected under subsection 142.7(3), the following rules apply:''.

Deemed fair market value

(4) If a Canadian affiliate of an entrant bank and the entrant bank make an election under subsection (3) in respect of a transfer of property by the Canadian affiliate to the entrant bank, for the purposes of subsections 15(1), 52(2), 69(1), (4) and (5), 246(1) and 247(2) in respect of the transfer, the fair market value of the property is deemed to be the amount agreed by the Canadian affiliate and the entrant bank in their election.

Specified debt obligations

(5) If a Canadian affiliate of an entrant bank transfers a specified debt obligation to the entrant bank in a transaction in respect of which an election is made under subsection (3), the Canadian affiliate is a financial institution in its taxation year in which the transfer is made, and the amount that the Canadian affiliate and the entrant bank agree on in their election in respect of the obligation is equal to the tax basis of the obligation within the meaning assigned by subsection 142.4(1), the entrant bank is deemed, in respect of the obligation, for the purposes of sections 142.2 to 142.4 and 142.6, to be the same corporation as, and a continuation of, the Canadian affiliate.

Mark-to-mark et property

(6) If a Canadian affiliate of an entrant bank described in paragraph (11)(a) transfers at any time within the period described in paragraph (11)(c) to the entrant bank a property that is, for the Canadian affiliate's taxation year in which the property is transferred, a mark-to-market property of the Canadian affiliate,

    (a) for the purposes of subsections 112(5) to (5.21) and (5.4), the definition ``mark-to-market property'' in subsection 142.2(1) and subsection 142.5(9), the entrant bank is deemed, in respect of the property, to be the same corporation as and a continuation of, the Canadian affiliate; and

    (b) for the purpose of applying subsection 142.5(2) in respect of the property, the Canadian affiliate's taxation year in which the property is transferred is deemed to have ended immediately before the time the property was transferred.

Reserves

(7) If

    (a), at a particular time,

      (i) a Canadian affiliate of an entrant bank transfers to the entrant bank property that is a loan or lending asset, or a right to receive an unpaid amount in respect of a disposition before the particular time of property by the affiliate, or

      (ii) the entrant bank assumes an obligation of the Canadian affiliate that is an instrument or commitment described in paragraph 20(1)(l.1) or an obligation in respect of goods, services, lands or chattels described in subparagraph 20(1)(m)(i), (ii) or (iii),

    (b) the property is transferred or the obligation is assumed for an amount equal to its fair market value at the particular time,

    (c) the entrant bank begins immediately after the particular time to use or hold the property or owe the obligation in its Canadian banking business, and

    (d) the Canadian affiliate and the entrant bank jointly elect in accordance with subsection (11) to have this subsection apply in respect of the transfer or assumption,

then

    (e) in applying paragraphs 20(1)(l), (l.1), (m), (n) and (p) in respect of the obligation or property, the taxation year of the affiliate that would, but for this paragraph, include the particular time is deemed to end immediately before the particular time, and

    (f) in computing the income of the Canadian affiliate and the entrant bank for taxation years that end on or after the particular time,

      (i) any amount deducted under paragraph 20(1)(l), (l.1), (m) or (n) by the Canadian affiliate in respect of the property or obligation in computing its income for its taxation year that ended immediately before the particular time, or under paragraph 20(1)(p) in computing its income for that year or for a preceding taxation year (to the extent that the amount has not been included in the affiliate's income under paragraph 12(1)(i)), is deemed to have been so deducted by the entrant bank in computing its income for its last taxation year that ended before the particular time and not to have been deducted by the Canadian affiliate,

      (ii) in applying paragraph 20(1)(m), an amount in respect of the goods, services, land or chattels that was included under paragraph 12(1)(a) in computing the Canadian affiliate's income from a business is deemed to have been so included in computing the entrant bank's income from its Canadian banking business for a preceding taxation year,

      (iii) in applying paragraph 20(1)(n) in respect of a property described in subparagraph (a)(i) and paragraphs (b), (c) and (d) sold by the Canadian affiliate in the course of a business, the property is deemed to have been disposed of by the entrant bank (and not by the Canadian affiliate) at the time it was disposed of by the Canadian affiliate, and the amount in respect of the sale that was included in computing the Canadian affiliate's income from a business is deemed to have been included in computing the entrant bank's income from its Canadian banking business for its taxation year that includes the time at which the property was so disposed of, and

      (iv) in applying paragraph 40(1)(a) or 44(1)(e) in respect of a property described in subparagraph (a)(i) and paragraphs (b), (c) and (d) disposed of by the Canadian affiliate, the property is deemed to have been disposed of by the entrant bank (and not by the Canadian affiliate) at the time it was disposed of by the Canadian affiliate, the amount determined under subparagraph 40(1)(a)(i) or 44(1)(e)(i) in respect of the Canadian affiliate is deemed to be the amount determined under that subparagraph in respect of the entrant bank, and any amount claimed by the Canadian affiliate under subparagraph 40(1)(a)(iii) or 44(1)(e)(iii) in computing its gain from the disposition of the property for its last taxation year that ended before the particular time is deemed to have been so claimed by the entrant bank for its last taxation year that ended before the particular time.

Assumption of debt obligation

(8) If a Canadian affiliate of an entrant bank described in paragraph (11)(a) transfers at any time within the period described in paragraph (11)(c) property to the entrant bank, and any part of the consideration for the transfer is the assumption by the entrant bank in respect of its Canadian banking business of a debt obligation of the Canadian affiliate,

    (a) where the Canadian affiliate and the entrant bank jointly elect in accordance with subsection (11) to have this paragraph apply,

      (i) both

        (A) the value of that part of the consideration for the transfer of the property, and

        (B) for the purpose of determining the consequences of the assumption of the obligation and any subsequent settlement or extinguishment of it, the value of the consideration given to the entrant bank for the assumption of the obligation,

      are deemed to be an amount (in this paragraph referred to as the ``assumption amount'') equal to the amount outstanding on account of the principal amount of the obligation at that time, and

      (ii) the assumption amount shall not be considered a term of the transaction that differs from that which would have been made between persons dealing at arm's length solely because it is not equal to the fair market value of the obligation at that time;

    (b) where the obligation is denominated in a foreign currency, and the Canadian affiliate and the entrant bank jointly elect in accordance with subsection (11) to have this paragraph apply,

      (i) the amount of any income, loss, capital gain or capital loss in respect of the obligation due to the fluctuation in the value of the foreign currency relative to Canadian currency realized by

        (A) the Canadian affiliate on the assumption of the obligation is deemed to be nil, and

        (B) the entrant bank on the settlement or extinguishment of the obligation shall be determined based on the amount of the obligation in Canadian currency at the time it became an obligation of the Canadian affiliate, and

      (ii) for the purpose of an election made in respect of the obligation under paragraph (a), the amount outstanding on account of the principal amount of the obligation at that time is the total of all amounts each of which is an amount that was advanced to the Canadian affiliate on account of principal, that remains outstanding at that time, and that is determined using the exchange rate that applied between the foreign currency and Canadian currency at the time of the advance; and

    (c) for the purpose of applying paragraphs 20(1)(e) and (f) in respect of the debt obligation, the obligation is deemed not to have been settled or extinguished by virtue of its assumption by the entrant bank and the entrant bank is deemed to be the same corporation as, and a continuation of, the Canadian affiliate.

Branch-establi shment dividend

(9) Notwithstanding any other provision of this Act, the rules in subsection (10) apply if

    (a) a dividend is paid by a Canadian affiliate of an entrant bank to the entrant bank or to a person that is affiliated with the Canadian affiliate and that is resident in the country in which the entrant bank is resident, or

    (b) a dividend is deemed to be paid for the purposes of this Part or Part XIII (other than by paragraph 214(3)(a)) as a result of a transfer of property from the Canadian affiliate to such a person,

and the Canadian affiliate and the entrant bank jointly elect in accordance with subsection (11) to have subsection (10) apply in respect of the dividend.

Treatment of dividend

(10) If the conditions in subsection (9) are met,

    (a) the dividend is deemed (except for the purposes of subsections 112(3) to (7)) not to be a taxable dividend; and

    (b) there is added to the amount otherwise determined under paragraph 219(1)(g) in respect of the entrant bank for its first taxation year that ends after the time at which the dividend is paid, the amount of the dividend less, where the dividend is paid by means of, or arises as a result of, a transfer of eligible property in respect of which the Canadian affiliate and the entrant bank have jointly elected under subsection (3), the amount by which the fair market value of the property transferred exceeds the amount the Canadian affiliate and the entrant bank have agreed on in their election.

Elections

(11) An election under subsection (3) or (7), paragraph (8)(a) or (b) or subsection (10), (12) or (14) is valid only if

    (a) the entrant bank by which the election is made has, on or before the day that is 6 months after the day on which the Income Tax Amendments Act, 2000 receives royal assent, complied with paragraphs 1.1(b) and (c) of the ``Guide to Foreign Bank Branching'' in respect of the establishment and commencement of business of a foreign bank branch in Canada issued by the Office of the Superintendent of Financial Institutions, as it read on December 31, 2000;

    (b) the election is made in prescribed form on or before the earlier of the filing-due date of the Canadian affiliate and the filing-due date of the entrant bank, for the taxation year that includes the time at which

      (i) in the case of an election under subsection (3) or (7), paragraph (8)(a) or (b) or subsection (10), the dividend, transfer or assumption to which the election relates is paid, made or effected, or

      (ii) in the case of an election under subsection (12), the dissolution order was granted or the winding up commenced; and

    (c) in the case of an election under subsection (3) or (7), paragraph (8)(a) or (b) or subsection (10), the dividend, transfer or assumption to which the election relates is paid, made or effected within the period that

      (i) begins on the day on which the Superintendent makes an order in respect of the entrant bank under subsection 534(1) of the Bank Act, and

      (ii) ends on the later of

        (A) the earlier of

          (I) the day that is one year after the day referred to subparagraph (i), and

          (II) the day that is three years after the day on which the Income Tax Amendments Act, 2000 receives royal assent, and