Bill C-10

Foreign Investment Entities — Imputed Income

94.1 (1) The definitions in this subsection apply in this section and sections 94.2 to 94.4.

“arm’s length interest”, at any time in respect of a taxpayer, means a particular participating interest, of the taxpayer, in a non-resident entity, if the following conditions are met:

(a) it is reasonable to conclude that

(i) there are at least 150 persons each of which holds at that time participating interests in the non-resident entity that, at that time,

(A) are identical to the particular participating interest, and

(B) have a total fair market value of at least $500, or

(ii) participating interests, in the non-resident entity, that are identical to the participating interest are listed on a prescribed stock exchange, and those identical participating interests were traded on at least 10 consecutive trading days on that stock exchange in the period that begins 30 days before that time;

(b) the total of all amounts each of which is the fair market value, at that time, of the particular participating interest (or of a participating interest in the non-resident entity that is identical to the particular participating interest and that is held, at that time, by the taxpayer or an entity or individual with whom the taxpayer does not deal at arm’s length) does not exceed 10% of the total of all amounts each of which is the fair market value, at that time, of a participating interest in the non-resident entity that is held, at that time, by any entity or individual and that is identical to the particular participating interest; and

(c) it is reasonable to conclude that participating interests in the non-resident entity that are identical to the particular participating interest

(i) can normally be acquired by and sold by members of the public in the open market, or

(ii) can be acquired from and sold to the non-resident entity by members of the public.

“beneficiary” has, except for the purpose of paragraph 94.2(11)(e), the meaning assigned by subsection 94(1).

“carrying value”, at any time of property of a particular entity in respect of a taxpayer, means

(a) the fair market value at that time of the property, if

(i) the particular entity is an entity (referred to in this subparagraph as the “first entity”) in which the taxpayer holds at that time a participating interest or is another entity in which the first entity holds at that time a direct or indirect interest,

(ii) the taxpayer elects, by notifying the Minister in writing in the taxpayer’s return of income for the taxpayer’s taxation year that includes that time to have this paragraph apply to all of the particular entity’s property, and

(iii) the property is valued for the purpose of the particular entity’s financial statements as of that time; and

(b) in any other case, the amount at which the property is valued for the purpose of the particular entity’s financial statements as of that time.

“designated cost”, to a taxpayer at any time of a participating interest held, at that time, by the taxpayer in a non-resident entity, is the amount determined by the formula

A + B + C + D + E + F - G

where

A      is the cost amount to the taxpayer of the participating interest at that time (determined without reference to subsection 47(1), paragraphs 53(1)(m) and (q) and 53(2)(g) and (g.1) and section 143.2);

B      is an amount included in respect of the participating interest because of this section in computing the taxpayer’s income for a taxation year that ends after 2006 (or, where this definition applies to the taxpayer in respect of a taxation year of the taxpayer that ends before 2007, for a taxation year of the taxpayer that ends on or after the first day of the first such taxation year in respect of which this definition applies) and before that time;

C      is, if the participating interest was an offshore investment fund property (within the meaning assigned by this subsection as it read in its application to taxation years that began before 2007 or, where this definition applies in respect of a taxation year of the taxpayer that begins before 2007, as it read in its application to taxation years of the taxpayer that began before the first such taxation year) of the taxpayer at the end of the taxpayer’s last taxation year that began before 2007 (or, where this definition applies in respect of a taxation year of the taxpayer that began before 2007, at the end of the taxpayer’s last taxation year that began before the first such taxation year in respect of which this definition applies), the total of all amounts each of which is the amount determined, in respect of the offshore investment fund property for that last taxation year, for B, C or D in the definition “designated cost” in subsection (2) as it read in its application to that last taxation year;

D      is the amount, if any, by which the fair market value of the participating interest exceeds the cost amount to the taxpayer of the participating interest at the beginning of the first taxation year of the taxpayer in respect of which subsection (4) applied to the taxpayer in respect of the participating interest;

E      is, if one or more particular amounts has been made available by a person to another person after the last 2006 taxation year of the non-resident entity (or, where this definition applies in respect of a taxation year of the taxpayer that begins before 2007, after the last taxation year of the non-resident entity that begins before the first taxation year of the taxpayer in respect of which this definition applies) and before that time (whether by way of gift, loan, payment for a share, transfer of property at less than its fair market value or otherwise) in circumstances in which it can reasonably be concluded that one of the main reasons for making the particular amount available to the other person was to increase the value of the participating interest, the total of all amounts each of which is the amount, if any, by which each particular amount exceeds any increase in the cost amount to the taxpayer of the participating interest because of that particular amount;

F      is, if the participating interest is acquired by the taxpayer after 2006 (or, where this definition applies in respect of a taxation year of the taxpayer that begins before 2007, acquired on or after the first day of the first taxation year of the taxpayer in respect of which this definition applies), the amount, if any, by which the fair market value of the participating interest at the time it was so acquired exceeds the cost amount to the taxpayer of the participating interest at the time it was so acquired; and

G      is the amount, if any, by which the cost amount to the taxpayer of the participating interest exceeds the fair market value of the participating interest at the beginning of the first taxation year of the taxpayer in respect of which subsection (4) applied to the taxpayer in respect of the participating interest.

“entity” includes an association, a corporation, a fund, a joint venture, an organization, a partnership, a syndicate and a trust, but does not include a natural person.

“exempt business”, of an entity at any time, means a business — other than a business carried on by the entity principally with entities or individuals with whom the entity does not deal at arm’s length, a business carried on by a trust that is an exempt foreign trust because of paragraph (h) of the definition “exempt foreign trust” in subsection 94(1) and a business carried on by the entity as a member of a partnership, which entity is not a qualifying member of the partnership or would not be such a qualifying member if the entity were a person — that is carried on by the entity at that time and that, throughout the period (in its taxation year that includes that time) during which the business was carried on by the entity, is

(a) carried on by the entity as a foreign bank, a trust company, a credit union or an insurance corporation, the activities of which business are regulated under

(i) the laws of

(A) in the case of each country in which the business is carried on through a permanent establishment, as defined by regulation, that country, or a political subdivision of that country, and

(B) the country, or the political subdivision of a country, under whose laws the entity is governed, and any of exists, was (unless the entity was continued in any jurisdiction) formed or organized, or was last continued,

(ii) the laws of the country, or of a political subdivision of the country, in which country the business is principally carried on, or

(iii) the laws (referred to in clause (B) as the “regulating laws”) of a country that is a member of the European Union, or a political subdivision of that country, under whose laws another corporation is governed, and any of exists, was (unless the other corporation was continued in any jurisdiction) formed or organized, or was last continued, if

(A) the entity is a corporation that is related to the other corporation, and

(B) the business is principally carried on in a country, that is a member of the European Union, the laws of which, or the laws of a political subdivision of which, recognize the regulating laws; or

(b) a business the principal purpose of which is to derive income from

(i) the development and exploitation of Canadian resource property, of foreign resource property, of timber resource property or of any combination of them,

(ii) the leasing or licensing of property that the entity or another entity related to the entity manufactured, produced, developed or purchased and developed,

(iii) the leasing of machinery or equipment that is owned by the entity and that is used by the lessee principally for the purpose of manufacturing or processing goods,

(iv) the sale of real or immovable property developed by the entity, an entity related to the entity or a partnership of which the entity or the related entity is a qualifying member (or would be a qualifying member if the entity were a person),

(v) the rental of real or immovable property held by the entity or a partnership of which the entity is a qualifying member (or would be a qualifying member if the entity were a person), if the management, maintenance and other services in respect of the property are provided primarily by the employees of

(A) the entity,

(B) a corporation related to the entity,

(C) the partnership,

(D) a qualifying member (or an entity that would be a qualifying member if the entity were a person) of the partnership, or

(E) any combination of employers described in clauses (A) to (D), or

(vi) a combination of businesses described in subparagraphs (iv) and (v).

“exempt interest”, of a taxpayer in a non-resident entity at any time, means a participating interest of the taxpayer, in the non-resident entity, if

(a) the non-resident entity is throughout the period, in the non-resident entity’s taxation year that includes that time, during which the taxpayer held the participating interest,

(i) a controlled foreign affiliate of the taxpayer,

(ii) a qualifying entity that is a foreign affiliate (other than a controlled foreign affiliate) of the taxpayer in respect of which the taxpayer has a qualifying interest (within the meaning assigned by paragraph 95(2)(m)), or

(iii) a partnership;

(b) the taxpayer is, throughout its taxation year that includes that time, a financial institution (within the meaning assigned by subsection 142.2(1)) and the participating interest is, at that time,

(i) a mark-to-market property (within the meaning assigned by subsection 142.2(1)), or

(ii) a property described in an inventory of a business of the taxpayer, which inventory is valued, in computing the taxpayer’s income for that taxation year from the business, in accordance with section 1801 of the Income Tax Regulations;

(c) the participating interest is throughout the period, in the non-resident entity’s taxation year that includes that time, during which the taxpayer held the participating interest, a right

(i) under an agreement referred to in subsection 7(1), to acquire a share of the capital stock of the non-resident entity,

(ii) granted by the non-resident entity, or another entity with which the non-resident entity does not deal at arm’s length, and

(iii) acquired by the taxpayer, at a time when the taxpayer dealt at arm’s length with the entity that granted the right, solely because the taxpayer was an employee of an entity referred to in subparagraph (ii);

(d) both

(i) the non-resident entity is throughout the period, in the non-resident entity’s taxation year that includes that time, during which the taxpayer held the participating interest, an entity (other than a trust that is an exempt foreign trust because of paragraph (h) of the definition “exempt foreign trust” in subsection 94(1)) all or substantially all of the carrying value of the property of which is attributable to the carrying value of properties that are shares of the capital stock of a corporation (that is not a foreign investment entity) that employs the taxpayer or that is related to another corporation that employs the taxpayer, and

(ii) an amount that is all or substantially all of the non-resident entity’s payable net accounting income for its taxation year that includes that time becomes payable by it to its interest holders in that taxation year, or within 120 days after the end of that taxation year, and the taxpayer’s share of that amount is included in computing the taxpayer’s income for the taxpayer’s taxation year that includes the time at which it became payable;

(e) it is reasonable to conclude that the taxpayer has, at that time, no tax avoidance motive in respect of the participating interest, and

(i) throughout the period, in the non-resident entity’s taxation year that includes that time, during which the taxpayer held the participating interest,

(A) the participating interest is an arm’s length interest of the taxpayer,

(B) the non-resident entity is resident in a country in which there is a prescribed stock exchange, and

(C) participating interests, in the non-resident entity, that are identical to the participating interest are listed on a prescribed stock exchange, or

(ii) both

(A) throughout that period the non-resident entity

(I) is governed by the laws of

1. a country (other than a prescribed country) with which Canada has entered into a tax treaty, or

2. a political subdivision of a country described by sub-subclause 1,

(II) exists, was (unless the entity was continued in any jurisdiction) formed or organized, or was last continued, under those laws, and

(III) while it is governed by the laws of a country, or of a political subdivision of a country, is under the tax treaty with that country resident in that country, and

(B) either

(I) throughout that period the participating interest is an arm’s length interest of the taxpayer, or

(II) throughout that period the non-resident entity is, under the tax treaty with the United States of America, resident in the United States of America, and throughout the period, in the taxpayer’s taxation year that includes that time, during which the taxpayer is resident in Canada, the taxpayer is a citizen of the United States of America and is liable for and subject to income tax in the United States of America for that taxation year because of that citizenship;

(f) throughout the period, in the non-resident entity’s taxation year that includes that time, during which the taxpayer held the participating interest,

(i) the participating interest is a share of the capital stock of a corporation resident in Canada,

(ii) the participating interest would not be a participating interest, in the non-resident entity, if the definition “participating interest” were read without reference to paragraph (d) of that definition, and

(iii) the participating interest is convertible into, exchangeable for, or a right to acquire only property that, if the conversion, exchange or right were exercised by the taxpayer at that time, would be a share, of the capital stock of a non-resident corporation, that is at that time an exempt interest (determined without reference to this paragraph) of the taxpayer; or

(g) both

(i) the non-resident entity is throughout the period, in the non-resident entity’s taxation year that includes that time, during which the taxpayer held the participating interest, a testamentary trust that is an estate that arose on and as a consequence of the death of an individual, and

(ii) that time is no more than 12 months after the death (or, where written application has been made to the Minister by the taxpayer within 12 months after that death, within any longer period that the Minister considers reasonable in the circumstances).

“exempt property”, of a particular entity at any time, means, in determining whether a particular taxpayer’s interest in the particular entity is a participating interest in a foreign investment entity,

(a) a property, of the particular entity, that is at that time used or held principally in a business (other than a business that is at that time an investment business carried on by the particular entity or by another entity related, otherwise than by reason of a right referred to in paragraph 251(5)(b), to the particular entity) carried on by the particular entity or another entity related (otherwise than by reason of a right referred to in paragraph 251(5)(b)) to the particular entity;

(b) indebtedness owing by another entity (referred to in this paragraph as the “indebted entity”), if

(i) each of the particular entity and the indebted entity is, at that time,

(A) a foreign affiliate

(I) of the particular taxpayer, and

(II) in respect of which the particular taxpayer has a qualifying interest (within the meaning assigned by paragraph 95(2)(m)), or

(B) a foreign affiliate

(I) of another entity that is resident in Canada and of which the particular taxpayer is a controlled foreign affiliate, and

(II) in respect of which the other entity referred to in subclause (I) has a qualifying interest (within the meaning assigned by paragraph 95(2)(m)), and

(ii) the indebtedness would be excluded property (within the meaning of the definition “excluded property” in subsection 95(1)) of the particular entity, if

(A) the taxpayer referred to in that definition were the particular taxpayer and the foreign affiliate of the taxpayer referred to in that definition were the particular entity, or

(B) the taxpayer referred to in that definition were the other entity described in subclause (i)(B)(I) and the foreign affiliate of the taxpayer referred to in that definition were the particular entity; and

(c) a particular property, if

(i) the particular property (or other property for which the particular property is substituted) was acquired by the particular entity at any time within the 36-month period that ends at the particular time (or within any longer period that ends at the particular time that the Minister considers reasonable if the particular entity applies, in writing, to the Minister within 36 months after the property was acquired by the particular entity) because the particular entity

(A) issued a debt or a participating interest in the particular entity,

(B) disposed of property used principally in a business, other than an investment business, carried on by the particular entity or an entity related (otherwise than by reason of a right referred to in paragraph 251(5)(b)) to the particular entity,

(C) disposed of a participating interest in another entity all or substantially all of the fair market value of the property of which is attributable to property used principally in a business, other than an investment business, carried on by the other entity or an entity related (otherwise than by reason of a right referred to in paragraph 251(5)(b)) to the other entity, or

(D) accumulated income of the particular entity derived from a business, other than an investment business, carried on by the particular entity or an entity related (otherwise than by reason of a right referred to in paragraph 251(5)(b)) to the particular entity, and

(ii) the issuance, disposition or accumulation referred to in subparagraph (i) was made or amassed for the purpose of

(A) acquiring property to be used principally in, or making expenditures for the purpose of earning income from, a business, other than an investment business, carried on by the particular entity or an entity related (otherwise than by reason of a right referred to in paragraph 251(5)(b)) to the particular entity, or

(B) acquiring a participating interest that is a significant interest in another entity all or substantially all of the fair market value of the property of which is attributable to property used principally in a business, other than an investment business, carried on by the other entity.

“exempt taxpayer”, for a taxation year of the taxpayer, means

(a) a person whose taxable income for a period that ends at the end of the taxation year is exempt from tax under this Part because of subsection 149(1) (otherwise than because of paragraph 149(1)(q.1), (t) or (z));

(b) an eligible trust (in this paragraph, as defined in subsection 94(1)) that is resident in Canada at the end of the taxation year and under which

(i) the only beneficiaries that may for any reason receive, at any time and directly from the trust, any of the income or capital of the trust are persons that are qualifying investors (as defined in subsection 94(1)) in respect of the trust, and

(ii) each such beneficiary at each time in the taxation year is a person whose taxable income, for the period that includes all of those times in the taxation year, is exempt from tax under this Part because of subsection 149(1) (otherwise than because of paragraph 149(1)(q.1), (t) or (z)); and

(c) an individual (other than a trust) who, before the end of the taxation year, was resident in Canada for a period of, or periods the total of which is, not more than 60 months, but not including an individual who, before the end of the taxation year, was never non-resident.

“financial statements”, of a particular entity for a particular taxation year of the entity and in respect of a taxpayer, means

(a) the balance sheet and the statement of income of the particular entity, if

(i) the particular entity is an entity (referred to in this subparagraph as the “first entity”) in which the taxpayer holds, in the particular taxation year, a participating interest or is another entity in which the first entity has, in the particular taxation year, a direct or indirect interest,

(ii) the taxpayer elects (in the taxpayer’s return of income for the taxpayer’s taxation year in which the particular taxation year ends) to have this paragraph apply in respect of the particular entity and the participating interest, and

(iii) that balance sheet and statement of income would, but for any principles that require consolidation, be prepared in accordance with generally accepted accounting principles developed and established, or adopted, by the Accounting Standards Board of Canada for use in Canada for the particular year or in accordance with generally accepted accounting principles substantially similar to those principles; and

(b) in any other case, the balance sheet and statement of income of the particular entity, if that balance sheet and statement of income are prepared for the particular taxation year in accordance with generally accepted accounting principles developed and established, or adopted, by the Accounting Standards Board of Canada for use in Canada for the particular year or in accordance with generally accepted accounting principles substantially similar to those principles.

“foreign bank” has the meaning assigned by subsection 95(1).

“foreign investment entity”, at any time, means an entity that is, at that time, a non-resident entity unless,

(a) at the end of its taxation year that includes that time, it is an exempt foreign trust (as defined in subsection 94(1)) because of any of paragraphs (a) to (g) of that definition;

(b) at the end of that taxation year, the carrying value of all of its investment property is not greater than one-half of the carrying value of all of its property; or

(c) throughout that taxation year, its principal undertaking was the carrying on of a business that is not an investment business.

“investment business”, of an entity at any time, means a business (other than a business that is at that time an exempt business) carried on by the entity (including, for greater certainty, a business carried on by the entity as a member of a partnership) at that time, the principal purpose of which is to derive income or profits described in any of the following paragraphs:

(a) income (including interest, dividends, rents, royalties or any similar return on investment or any substitute for such a return) from property;

(b) income from the insurance or reinsurance of risks;

(c) income from the factoring of trade accounts receivable; or

(d) profits from the disposition of investment property.

“investment property”, of a particular entity at any time, includes property of the particular entity that is at that time

(a) a share of the capital stock of a corporation,

(b) an interest as a member of a partnership,

(c) an interest as a beneficiary under a trust,

(d) an interest in any other entity,

(e) indebtedness,

(f) an annuity,

(g) a commodity (or commodity future) purchased or sold, directly or indirectly in any manner whatever, on a commodities or commodities futures exchange,

(h) real or immovable property,

(i) a Canadian resource property or a foreign resource property,

(j) currency,

(k) intellectual property within the meaning of article 2 of the Convention Establishing the World Intellectual Property Organization done at Stockholm on July 14, 1967, as amended from time to time,

(l) a derivative financial product, or

(m) an interest, an option or a right in respect of property that is investment property because of any of paragraphs (a) to (l),

but does not include

(n) except for the purpose of applying the definition “investment business” in this subsection or the definition “tracking entity” in subsection 94.2(1), property that is at that time exempt property of the particular entity,

(o) except for the purpose of applying the definition “qualifying entity”, property that is at that time

(i) a share of the capital stock of the particular entity,

(ii) a share of the capital stock of a corporation that is, throughout the period, in the particular entity’s taxation year that includes that time, during which the particular entity holds the share, a qualifying entity if the particular entity has at that time a significant interest in that qualifying entity or that qualifying entity has at that time a significant interest in the particular entity,

(iii) an interest in a partnership that is, throughout the period, in the particular entity’s taxation year that includes that time, during which the particular entity is a member of the partnership, a qualifying entity if the particular entity has at that time a significant interest in that qualifying entity or that qualifying entity has at that time a significant interest in the particular entity, or

(iv) indebtedness owing by an entity that is, throughout the period, in the particular entity’s taxation year that includes that time, during which the particular entity holds the indebtedness, a qualifying entity if the particular entity has at that time a significant interest in that qualifying entity or that qualifying entity has at that time a significant interest in the particular entity,

(p) a commodity (referred to in this paragraph and paragraph (q) as an “exempt commodity”) that is manufactured, produced, grown, extracted or processed by the par- ticular entity or a person related (otherwise than because of a right referred to in paragraph 251(5)(b)) to the particular entity,

(q) a commodity future in respect of an exempt commodity, and

(r) property that is, at that time, owned by a corporation resident in Canada.

“net accounting income”, of an entity for a taxation year of the entity, means its net income, before income taxes and extraordinary items, for the year reported in its financial statements for the year.

“non-resident entity”, at any time, means

(a) a corporation or trust that is non-resident at that time; and

(b) any entity (other than a corporation or trust) that at that time

(i) exists, was (unless the entity was continued in any jurisdiction) formed or organized, or was last continued under the laws of a country or a political subdivision of a country other than Canada, or

(ii) is governed under the laws of a country or a political subdivision of a country other than Canada.

“participating interest”, of a particular entity or individual in a non-resident entity, means a property that is

(a) if the non-resident entity is a corporation with share capital, a share of the capital stock of the corporation;

(b) if the non-resident entity is a trust, a specified interest in the trust;

(c) if the non-resident entity is not a corporation with share capital or a trust, an interest in the non-resident entity; and

(d) under a contract, in equity or otherwise, either immediately or in the future and either absolutely or contingently, convertible into, exchangeable for, or a right to acquire, directly or indirectly,

(i) a property described in any of paragraphs (a) to (c), or

(ii) a property (other than money) the fair market value of which is determined primarily by reference to the fair market value of a property described in any of paragraphs (a) to (c).

“payable net accounting income”, of an entity for a taxation year of the entity, means its net income, after income taxes and extraordinary items, for the year reported in its financial statements for the year.

“qualifying entity”, in a period, means a particular entity that is a corporation or partnership all or substantially all of the carrying value of the property of which is, throughout the period, attributable to the carrying value of particular property that is, throughout the portion of the period that the particular property is property of the particular entity,

(a) property other than investment property;

(b) investment property that is a participating interest in or debt issued by another entity if, throughout the portion of the period that the participating interest or debt is property of the particular entity,

(i) the principal undertaking of the other entity is the carrying on of a business that is not an investment business, and

(ii) either

(A) the particular entity has a significant interest in the other entity, or

(B) the particular entity

(I) actively participates in or exercises significant influence over the governance or the management of that other entity, directly or indirectly, by reason of its status as a holder of a significant number of participating interests in that other entity (when compared to the number of participating interests held by each other holder of interests in the corporation) or by reason of an agreement in writing between the particular entity and one or more other holders of a significant number of participating interests in that other entity, or

(II) carries out a plan of action that it has established for the purpose of obtaining its objective of actively participating in or exercising significant influence over the governance or the management of that other entity, directly or indirectly, by reason of its status as a holder of a significant number of participating interests in that other entity (when compared to the number of participating interests held by each other holder of interests in the particular entity) or by reason of an agreement in writing between the particular entity and one or more other holders of a significant number of participating interests in that other entity;

(c) investment property in respect of which the particular entity establishes that the property or proceeds from the disposition of the property is to be used by the particular entity for the purpose of acquiring property described in paragraph (a) or (b); or

(d) investment property that is a particular property held by the particular entity if

(i) the particular property (or other property for which the particular property is substituted property) was last acquired by the particular entity within 36 months before the end of the period (or within any greater number of months that the Minister considers reasonable if the par- ticular entity applies, in writing, to the Minister within 36 months after the property was acquired by the particular entity),

(ii) the particular property was so acquired by the particular entity because it

(A) issued a debt, or a participating interest in it,

(B) disposed of property described in any of paragraphs (a) to (c), or

(C) accumulated its income, and

(iii) the issuance, disposition or accumulation referred to in subparagraph (ii) was made or amassed for the purpose of acquiring property that, if owned by the particular entity, would be property described in any of paragraphs (a) to (c).

“significant interest”, of a particular entity in another entity at any particular time, means

(a) if the other entity is a corporation, a share of the capital stock of the corporation, if at the particular time the particular entity or the particular entity together with entities related (otherwise than by reason of a right referred to in paragraph 251(5)(b)) to the particular entity holds shares of the capital stock of the corporation

(i) that would give the particular entity, or the particular entity together with those related entities, 25% or more of the votes that could be cast under all circumstances at an annual meeting of shareholders of the corporation if the meeting were held at the particular time, and

(ii) that have a fair market value of 25% or more of the fair market value of all of the issued and outstanding shares of the corporation;

(b) if the other entity is a partnership, an interest of the particular entity as a member of the partnership, if at the particular time the particular entity, or the particular entity together with entities related (otherwise than by reason of a right referred to in paragraph 251(5)(b)) to the particular entity, holds interests as a member of the partnership that have a fair market value of 25% or more of the fair market value of all membership interests in the partnership; and

(c) if the other entity is a trust, an interest as a beneficiary under the trust, where at the particular time

(i) the only beneficiaries that may for any reason receive, at any time and directly from the trust, any of the income or capital of the trust are persons that are qualifying investors (as defined in subsection 94(1)) in respect of the trust, and

(ii) the particular entity, or the particular entity together with entities related (otherwise than by reason of a right referred to in paragraph 251(5)(b)) to the particular entity, holds such interests under the trust that have a fair market value of 25% or more of the fair market value of all the interests as beneficiaries under the trust.

“specified interest”, at any time of an entity or individual in a trust, means an interest of the entity or individual as a beneficiary under the trust if

(a) the trust is at that time an exempt foreign trust because of paragraph (h) of the definition “exempt foreign trust” in subsection 94(1); or

(b) the entity or individual may for any reason receive as a beneficiary under the trust, at or after that time, any of the income or capital of the trust directly from the trust, unless

(i) the entity or individual would at that time be a successor beneficiary (as defined in subsection 94(1)) under the trust if the reference in the definition “successor beneficiary” in that subsection to a contributor did not include each contributor whose total amount of contributions to the trust is 10% or less of the total of all amounts each of which was the amount, at the time it was received by the trust, of a contribution made to the trust, or

(ii) every amount of income and capital of the trust that the entity or individual may receive at or after that time depends at and after that time on the exercise — after that time, in favour of the entity or individual, and by any other entity or individual — of a discretionary power.

“specified party” in respect of a particular individual or particular entity, as the case may be, means another individual or other entity that does not deal at arm’s length with the particular individual or the particular entity, as the case may be.

“taxation year”, of a non-resident entity that is not a corporation or an individual, means

(a) in respect of a business or property of the non-resident entity for which the accounts of the non-resident entity are ordinarily made up, the period that would be determined under section 249.1 in respect of the non-resident entity if the non-resident entity were a corporation; and

(b) in any other case, a calendar year.

“trust” includes, for greater certainty, an estate.

(2) For the purposes of applying this section and sections 94.2 to 94.4 in respect of a particular participating interest, in a particular non-resident entity, held by a taxpayer in a particular taxation year of the taxpayer (and in respect of any other participating interests, in the particular non-resident entity, that are identical to the particular participating interest and that are held by the taxpayer in the particular taxation year),

(a) in determining whether the particular non-resident entity is a foreign investment entity, if the financial statements of an entity (referred to in this paragraph as the “first entity”) for a taxation year (referred to in this paragraph as the “specified year”) of the first entity reflect property, indebtedness, income or losses of another entity,

(i) the business and non-business activities for the specified year carried on by the other entity, the net accounting income for the specified year determined for the other entity from those activities and the property and indebtedness for the specified year owned by or owed by, as the case may be, the other entity are deemed for the specified year to be carried on by, determined for, owned by or owed by, as the case may be, the first entity, and

(ii) an exempt business of the other entity at any time in the specified year is, if it is a business the activities of which are deemed by subparagraph (i) to be carried on by the first entity, deemed to be an exempt business of the first entity at that time in the specified year;

(b) for greater certainty, generally accepted accounting principles as developed and established by either the Financial Accounting Standards Board of the United States of America or the International Accounting Standards Board, for use for a particular year, are substantially similar to those developed and established, or adopted, by the Accounting Standards Board of Canada for use in Canada for the particular year;

(c) in determining the designated cost to the taxpayer of the participating interest at any time in the particular taxation year, where the particular participating interest is an interest in a trust that is not an exempt foreign trust (as defined in subsection 94(1)), the designated cost to the taxpayer of the particular participating interest is deemed to be the greater of

(i) the designated cost, determined without reference to this paragraph, at that time to the taxpayer of the particular participating interest, and

(ii) the total of all amounts each of which is

(A) the fair market value, at that time, of a restricted property (within the meaning assigned by section 94) held by the trust to the extent that it is reasonable to consider that the restricted property is held, at that time, by the trust for the purpose of satisfying the rights (whether immediate or in the future, whether absolute or contingent or whether conditional on or subject to the discretion by any entity) of the taxpayer in respect of the participating interest, or

(B) the amount that would be the cost amount (as determined under paragraph (b) of the definition “cost amount” in subsection 108(1)) at that time to the taxpayer of the participating interest if

(I) a reference to property in the description of A in the formula in that definition were read without reference to property that is restricted property to which clause (A) applies,

(II) the value of B in the formula in that definition were nil,

(III) the value of C in the formula in that definition were 1, and

(IV) the value of D in the formula in that definition were the number of persons resident in Canada that hold a participating interest in the trust and that are identified in prescribed form filed by the taxpayer with the taxpayer’s return of income for the particular taxation year;

(d) the reference in subsections (4) and 94.3(4) to “as income from property from a property that is the participating interest” is to be read as a reference to “as income from property from a property that is a source outside Canada that is the participating interest”, if the taxpayer is a trust and the portion of the net accounting income of the particular non-resident entity, from sources outside Canada, for its last taxation year that ends in the particular taxation year exceeds 90% of the total net accounting income of the particular non-resident entity for that last taxation year;

(e) in determining whether the principal undertaking of an entity is, in a taxation year of the entity, the carrying on of a business that is not an investment business,

(i) subject to subparagraphs (ii) and (iii), that determination is to be by reference to all the facts and circumstances that relate to the undertakings of the entity and that are within the knowledge of the taxpayer or knowledge of which would, upon diligent inquiry by the taxpayer, be obtainable by the taxpayer,

(ii) subject to subparagraph (iii), where the taxpayer has, by notifying the Minister in writing in the taxpayer’s return of income for the particular taxation year, elected to have either clause (A) or (B) apply in respect of the entity,

(A) the principal undertaking of the entity for the taxation year of the entity is deemed to be the carrying on of a business that is

(I) an investment business if the total net accounting income of the entity, for the entity’s taxation year, derived from investment property (other than investment property used or held in the course of carrying on an investment business) and from investment businesses is equal to or greater than the total net accounting income of the entity for the entity’s taxation year derived from businesses (other than investment businesses), and

(II) not an investment business if the total net accounting income of the entity for the entity’s taxation year derived from investment property (other than investment property used or held in the course of carrying on an investment business) and from investment businesses is less than the total net accounting income of the entity for the entity’s taxation year derived from businesses (other than investment businesses) carried on by the entity in the entity’s taxation year, or

(B) the principal undertaking of the entity for the taxation year of the entity is deemed to be the carrying on of a business that is

(I) an investment business if the total gross revenue of the entity, for the entity’s taxation year, derived from investment property (other than investment property used or held in the course of carrying on an investment business) and from investment businesses is equal to or greater than the total gross revenue of the entity for the entity’s taxation year derived from businesses (other than investment businesses), and

(II) not an investment business if the total gross revenue of the entity for the entity’s taxation year derived from investment property (other than investment property used or held in the course of carrying on an investment business) and from investment businesses is less than the total gross revenue of the entity for the entity’s taxation year derived from businesses (other than investment businesses) carried on by the entity in the entity’s taxation year, and

(iii) if the Minister sends a written demand to the taxpayer requesting additional information for the purpose of enabling the Minister to determine whether the principal undertaking of the entity is in the entity’s taxation year the carrying on of an investment business, and information that may reasonably be considered to be sufficient to make the determination is not received by the Minister within 120 days (or within any longer period that is acceptable to the Minister) after the Minister sends the demand, the principal undertaking of the entity is deemed to be the carrying on of an investment business;

(f) in determining whether an entity or natural person and another entity or natural person are related to each other or deal at arm’s length with each other, a person referred to in section 251 includes an entity;

(g) in applying subparagraph (e)(i) of the definition “exempt interest” in subsection (1), if the particular non-resident entity is not a corporation, a partnership or a trust, it is deemed not to be resident in a particular country, unless

(i) the particular country is a country other than a prescribed country,

(ii) the particular non-resident entity is governed, and any of exists, was (unless the entity was continued in any jurisdiction) formed or organized, or was last continued, under the laws of the particular country or of a political subdivision of the particular country, and

(iii) the particular non-resident entity is liable, under the laws of the particular country, to pay an income or profits tax imposed by the government of the par- ticular country on all of the particular non-resident entity’s income, profits or gains;

(h) subject to paragraph (i), a non-resident entity is deemed to be a controlled foreign affiliate of the taxpayer throughout the period that begins at the earliest time at which the non-resident entity is a foreign affiliate of the taxpayer, in the taxpayer’s taxation year in the return of income for which the taxpayer elects in prescribed form to treat the non-resident entity as a controlled foreign affiliate of the taxpayer (referred to in this paragraph as the “taxpayer’s election year”), and that ends at the earliest subsequent time at which it is not a foreign affiliate of the taxpayer, if

(i) at any time in the taxpayer’s election year,

(A) the taxpayer holds a participating interest in the non-resident entity and a taxation year of the non-resident entity ends (or the first taxation year of the non-resident entity begins), or

(B) a controlled foreign affiliate of the taxpayer holds a participating interest in the non-resident entity, a taxation year of the controlled foreign affiliate ends and a taxation year of the non-resident entity ends (or the first taxation year of the non-resident entity begins) in that taxation year of the controlled foreign affiliate,

(ii) the non-resident entity is, at the end of its taxation years referred to in clause (i)(A) or (B), a foreign affiliate of the taxpayer in respect of which the taxpayer has a qualifying interest (within the meaning assigned by paragraph 95(2)(m)), and

(iii) the taxpayer has not made any other election under this paragraph in respect of the non-resident entity;

(i) an election made by the taxpayer (or where the taxpayer is a partnership, by an entity that was at any time a member of the taxpayer) under paragraph (h) is, other than for the purposes of applying this paragraph and subparagraph (h)(iii), deemed never to have been made, if

(i) the Minister sends a written demand to the taxpayer requesting additional information for the purpose of enabling the Minister to determine an amount that would, if this Act were read without reference to this paragraph, be required to be added or deducted (otherwise than under subsection 104(13)) in computing the taxpayer’s income for the year because of the application of section 91 and an election under paragraph (h) in respect of a foreign affiliate, and

(ii) information that may reasonably be considered to be satisfactory to make the determination is not received by the Minister within 120 days (or within any longer period that is acceptable to the Minister) after the Minister sends the demand;

(j) if the taxpayer has, by notifying the Minister in writing in the taxpayer’s return of income for the particular taxation year, elected to have this paragraph apply in respect of the particular participating interest, the taxpayer files with that return of income prescribed information in prescribed form, an entity (referred to in this paragraph as the “specified entity”) has a significant interest in another entity that is a corporation, partnership or trust, the particular non-resident entity is the specified entity or has, directly or indirectly, an interest in the specified entity, and the financial statements of the specified entity do not reflect property or indebtedness of the other entity, in determining only whether the particular non-resident entity is a foreign investment entity, and where the taxpayer so stipulates in that election, whether the particular non-resident entity is a qualifying entity

(i) each of the following is deemed to be nil:

(A) the carrying value of each

(I) participating interest held, at the time (referred to in this paragraph as the “specified time”) that is the end of the particular non-resident entity’s last taxation year that ends in the partic- ular taxation year, by the specified entity in the other entity, and

(II) debt owing at the specified time to the specified entity by the other entity (other than a debt acquired in the ordinary course of a business that is not at the specified time an investment business carried on by the specified entity), and

(B) the net accounting income of the specified entity at the specified time derived from property of the specified entity the carrying value of which is deemed to be nil under clause (A),

(ii) each property that is (or that is deemed by this subparagraph in respect of the particular participating interest to be) at the specified time property of the other entity (other than a debt owing to the other entity by the specified entity where the other entity and the specified entity are related to each other at the specified time) and that is valued for the purpose of the other entity’s financial statements for its taxation year that includes the specified time (or deemed by this subparagraph to have a carrying value to the other entity) is deemed to be at the specified time property of the specified entity and is deemed to have at the specified time a carrying value to the specified entity equal to the amount determined by the formula

A × B/C

where

A      is the carrying value at the specified time to the other entity of the property,

B      is the total of all amounts each of which is

(A) the fair market value at the specified time of a participating interest in the other entity held at the specified time by the specified entity, and

(B) the fair market value at the specified time of a debt (other than a debt acquired in the ordinary course of a business that is not an investment business carried on by the specified entity) that the other entity owes at the specified time to the specified entity, and

C      is the total of all amounts each of which is

(A) the fair market value at the specified time of a participating interest in the other entity held at the specified time by an individual or an entity, and

(B) the fair market value at the specified time of a debt owing at the specified time by the other entity to a holder of a participating interest in the other entity (other than a debt acquired in the ordinary course of a business that is not an investment business carried on by a holder of a participating interest in the other entity),

(iii) the specified entity is deemed

(A) to have carried on the proportion obtained for the formula B/C in subparagraph (ii) (in respect of the specified entity and the other entity) of the activities carried on at the specified time by the other entity in which it used the property referred to in subparagraph (ii), and

(B) to have that proportion of the net accounting income of the other entity for the period in the taxation year of the other entity ending at the specified time that was derived from the activities referred to in clause (A), and

(iv) an exempt business of the other entity at any time in the particular non-resident entity’s last taxation year that ends in the particular taxation year is, to the extent that its activities are deemed by subparagraph (iii) to be carried on by the specified entity, deemed to be an exempt business of the specified entity at that time in that last year;

(k) subject to paragraphs (m) and (n), the taxpayer has a tax avoidance motive in respect of the particular participating interest (and any participating interests of the taxpayer in the particular non-resident entity that are identical to the particular participating interest), only if it is reasonable to conclude that the main reasons for the taxpayer acquiring, holding or having the particular participating interest include

(i) the derivation of a benefit the value of which can reasonably be attributed principally, directly or indirectly, to income derived from investment property, to profits or gains from the disposition of investment property or to an increase in value of investment property, and

(ii) the deferral or reduction of the amount of tax payable on that income or those profits or gains;

(l) in applying paragraph (k) in respect of the particular participating interest, the factors to be considered in determining the existence of a tax avoidance motive include

(i) the nature, organization and operation of

(A) the particular non-resident entity,

(B) any foreign investment entity in which the particular non-resident entity or a specified party in respect of the particular non-resident entity has a direct or indirect interest, and

(C) any foreign investment entity in which the taxpayer or a specified party in respect of the taxpayer has a direct or indirect interest,

(ii) the form of, and the terms and the conditions governing, the direct or indirect interests referred to in subparagraph (i),

(iii) the extent to which and the time at which the particular non-resident entity, or an entity in which a direct or indirect interest referred to in subparagraph (i) is held, is subject to an income or profits tax on its income, profits and gains,

(iv) the extent to which and the time at which the taxpayer, or an entity or individual that holds a direct or indirect interest referred to in subparagraph (i), is subject to an income or profits tax on the taxpayer’s or entity’s, as the case may be, share of the income, profits and gains of the entity in which the direct or indirect interest is held, and

(v) the amount of tax that would have been payable by the taxpayer under this Part had the taxpayer earned the income or realized the profits or gains in respect of the investment property referred to in subparagraph (k)(i) at the time that the income was earned, or the profits or gains were realized, by the entities that owned or held the investment property;

(m) the taxpayer does not have a tax avoidance motive in respect of the particular participating interest held by the taxpayer at any time in the particular taxation year if an amount that is all or substantially all of the payable net accounting income

(i) of the particular non-resident entity for each of its taxation years that ends in the particular taxation year becomes payable by it to its interest holders in, or within 120 days after, that taxation year of the particular non-resident entity, and the taxpayer’s share of that amount is included in computing the taxpayer’s income for the taxpayer’s taxation year that includes the time at which the amount became payable, and

(ii) of each other foreign investment entity, in which the particular non-resident entity has a direct or indirect interest, for each of the other entity’s taxation years that ends in the particular taxation year becomes payable by the other entity to its interest holders in, or within 120 days after, that taxation year of the other entity, and the particular non-resident entity’s share of that amount is included in computing its payable net accounting income for its taxation year that includes the time at which the amount became payable;

(n) the taxpayer does not have a tax avoidance motive in respect of the particular participating interest, if throughout the period, in the particular taxation year, during which the taxpayer held the participating interest the particular non-resident entity was a “Regulated Investment Company” for the purposes of sections 851(b) and 852(a) of the United States Internal Revenue Code of 1986 or a “Real Estate Investment Trust” for the purposes of sections 856(c) and 857(b) of that Code and the taxpayer includes, in computing the taxpayer’s income for the particular taxation year, the amount of payable net accounting income that became payable by the particular non-resident entity to the taxpayer in the particular taxation year;

(o) in applying paragraph (d) of the definition “exempt interest” in subsection (1), paragraphs (m) and (n), the definition “mark-to-market formula” in subsection 94.2(1), and subsection 94.4(2), an amount is deemed not to have become payable at any time to an entity or individual, as the case may be, unless it was paid on or before that time to the entity or individual, as the case may be, or the entity or individual, as the case may be, was entitled on or before that time to enforce payment of it;

(p) the definition “exempt property” in subsection (1) does not apply in respect of a property of the particular non-resident entity if the Minister sends a written demand to the taxpayer requesting additional information for the purpose of enabling the Minister to determine whether property is an exempt property, and information that may reasonably be considered to be sufficient to make the determination is not received by the Minister within 120 days (or within any longer period that is acceptable to the Minister) after the Minister sends the demand;

(q) paragraphs (a) to (c) of the definition “foreign investment entity” in subsection (1) do not apply in respect of the particular non-resident entity if the Minister sends a written demand to the taxpayer requesting additional information for the purpose of enabling the Minister to determine whether the particular non-resident entity is a foreign investment entity, and information that may reasonably be considered to be sufficient to make the determination is not received by the Minister within 120 days (or within any longer period that is acceptable to the Minister) after the Minister sends the demand;

(r) the definition “qualifying entity” in subsection (1) does not apply if the Minister sends a written demand to the taxpayer requesting additional information for the purpose of enabling the Minister to determine whether an entity is a qualifying entity, and information that may reasonably be considered to be sufficient to make the determination is not received by the Minister within 120 days (or within any longer period that is acceptable to the Minister) after the Minister sends the demand;

(s) if at any time a taxpayer has a participating interest in a particular foreign investment entity and the taxpayer has at that time a participating interest (referred to in this paragraph as the “indirect participating interest”) in another non-resident entity solely because the particular foreign investment entity has at that time a participating interest in that other non-resident entity, then the indirect participating interest is deemed (other than in applying this paragraph) not to be a participating interest of the taxpayer at that time;

(t) if the taxpayer is an authorized foreign bank, the taxpayer is deemed for the purposes of subsection (4) and of subsections 94.2(5) to (8) and (12), 94.3(4) and 94.4(2) to be resident in Canada throughout the particular taxation year;

(u) the dispositions, if any, in the particular taxation year of the particular participating interest and any participating interests of the taxpayer in the particular non-resident entity that are identical to the particular participating interest are deemed to occur in the order in which those participating interests were acquired (determined without reference to any other provision of this Act) by the taxpayer;

(v) if it can reasonably be considered that one of the main reasons that an entity or individual holds at any time a participating interest in a non-resident entity is to cause the condition in paragraph (a) of the definition “arm’s length interest” in subsection (1) to be met at that time in respect of the participating interest or an identical participating interest held by any entity or individual, the condition is deemed not to have been satisfied at that time in respect of the participating interest or identical participating interest; and

(w) where the particular non-resident entity is a partnership, subparagraph (a)(iii) of the definition “exempt interest” in subsection (1) does not apply in respect of the taxpayer and the particular participating interest if

(i) the Minister sends a written demand to the taxpayer requesting additional information for the purpose of enabling the Minister to determine the application of this section and sections 94.2 to 94.4 to the partnership in respect of a participating interest of the partnership, and information that may reasonably be considered to be sufficient to make the determination is not received by the Minister within 120 days (or within any longer period that is acceptable to the Minister) after the Minister sends the demand, or

(ii) the taxpayer has elected — by notifying the Minister in writing in the taxpayer’s return of income for the particular taxation year or for a preceding taxation year of the taxpayer — that subparagraph (a)(iii) of the definition “exempt interest” in subsection (1) not apply in respect of the particular participating interest or an identical participating interest held by the taxpayer at any time when the taxpayer held an identical participating interest to which the election applies.

(3) This subsection applies to a taxpayer for a particular taxation year of the taxpayer in respect of a participating interest in a non-resident entity if

(a) the taxpayer is not an exempt taxpayer for the particular taxation year;

(b) the participating interest is held by the taxpayer at the end of a taxation year of the non-resident entity that ends in the particular taxation year;

(c) at the end of that taxation year of the non-resident entity it is a foreign investment entity; and

(d) at the end of that taxation year of the non-resident entity the taxpayer’s participating interest is not an exempt interest of the taxpayer.

(4) If subsection (3) or 94.2(9) applies to a taxpayer resident in Canada for a taxation year of the taxpayer in respect of a participating interest and subsections 94.2(3) and 94.3(3) do not apply to the taxpayer for the taxation year in respect of the participating interest, then this subsection applies to the taxpayer for the taxation year in respect of the participating interest and there shall be included (as income from property from a property that is the participating interest) in computing the taxpayer’s income for that taxation year the total of all amounts each of which is the amount, in respect of each month in that taxation year, at the end of which month the taxpayer holds the participating interest, determined by the formula

A × B

where

A      is the designated cost, to the taxpayer of the participating interest, at the end of the month; and

B      is the quotient obtained when the rate of interest prescribed, in respect of amounts required by this Act to be paid by the Minister, for the quarterly period that includes that month is divided by 12.

(5) Notwithstanding any other provision of this Act, if, at a particular time in a particular taxation year, a taxpayer disposes of a participating interest of the taxpayer and subsection (4) applied to the taxpayer in respect of the participating interest to include an amount in computing the taxpayer’s income for any taxation year of the taxpayer that began on or before the particular time

(a) there may be deducted in computing the taxpayer’s income for the particular taxation year the lesser of

(i) the amount, if any, by which

(A) the total of all amounts each of which is an amount included in respect of the participating interest because of subsection (4) in computing the taxpayer’s income for

(I) the particular taxation year, or

(II) any taxation year, of the taxpayer, that ends before the particular taxation year and after the taxpayer last acquired the participating interest

exceeds

(B) the total of all amounts each of which is an amount in respect of the participating interest that is deductible under paragraph 94.4(2)(a) in computing the taxpayer’s income for any of those taxation years, and

(ii) the greater of

(A) the amount that would, if this Act were read without reference to this par- agraph and subparagraph 40(2)(g)(i), be determined to be the capital loss of the taxpayer for the particular taxation year from the disposition of the participating interest, and

(B) where the participating interest is an interest in a trust that is not an exempt foreign trust (as defined in subsection 94(1)), the amount that would be determined, at the time of the disposition, to be the capital loss of the taxpayer for the particular taxation year from the disposition of the participating interest if, at the time of the disposition,

(I) the cost to the taxpayer of the participating interest were equal to the amount determined by the formula

A/B × C

where

A      is the amount, if any, by which

(a) the total of all amounts each of which is the cost amount, immediately before the disposition by the taxpayer of the participating interest in the trust, to the trust of a property (referred to in this subclause as a “distributed property”) that was distributed by the trust to the taxpayer as consideration for the disposition by the taxpayer of the participating interest in the trust,

exceeds

(b) the total of all amounts each of which is an amount of a debt or obligation of the trust that was assumed by the taxpayer because a distributed property was distributed to the taxpayer by the trust as consideration for the disposition by the taxpayer of the participating interest in the trust,

B      is the amount, if any, by which

(a) the total of all amounts each of which is the cost amount to the trust of a property held by the trust immediately before the time of the disposition of the taxpayer’s participating interest in the trust,

exceeds

(b) the total of all amounts each of which is an amount of a debt or obligation of the trust immediately before the time of the disposition of the taxpayer’s participating interest in the trust, and

C      is the total of all amounts each of which was the cost amount, immediately after the time the property was acquired by the trust because of the contribution, to the trust of a property that was contributed to the trust at any time before the time of the disposition of the taxpayer’s participating interest in the trust; and

(II) this Act were read without reference to this paragraph and subparagraph 40(2)(g)(i); and

(b) the taxpayer’s capital loss for the taxation year from the disposition of the participating interest is the amount, if any, by which

(i) the amount that would, if this Act were read without reference to this paragraph and subparagraph 40(2)(g)(i), be the taxpayer’s capital loss for the particular taxation year from the disposition of the participating interest

exceeds

(ii) the amount in respect of the participating interest deducted by the taxpayer under paragraph (a) in computing the taxpayer’s income for the particular taxation year.

Foreign Investment Entities — Mark-to-Market

94.2 (1) The definitions in subsection 94.1(1), and the definitions in this subsection, apply in this section.

“deferral amount”, of a taxpayer in respect of a participating interest in an entity, means, subject to subsections (6) and (14) to (18), the positive or negative amount determined by the formula

A × (B - C)

where

A      is

(a) if, immediately before the beginning of the taxpayer’s first taxation year that began after 2006 (or, where this definition applies in respect of a taxation year of the taxpayer that begins before 2007, immediately before the beginning of the first taxation year of the taxpayer in respect of which this definition applies), the interest was capital property held by the taxpayer, 1/2, and

(b) in any other case, 1;

B      is

(a) the fair market value of the interest at the first time in a particular taxation year of the taxpayer at which the taxpayer was resident in Canada where

(i) the taxpayer held the interest at the end of the preceding taxation year,

(ii) at the end of that preceding year, the taxpayer was resident in Canada or the interest was taxable Canadian property,

(iii) subsection (4) did not apply to the taxpayer for the purpose of computing the taxpayer’s income in respect of the interest for any preceding taxation year, and

(iv) subsection (4) applies to the taxpayer for the purpose of computing the taxpayer’s income in respect of the interest for the particular year, and

(b) in any other case, nil ; and

C      is

(a) if paragraph (a) of the description of B applies in respect of the interest, the cost amount of the property immediately before the first time in the particular year at which the taxpayer was resident in Canada, and

(b) in any other case, nil.

“gross-up factor”, for a particular deferral amount, means

(a) if the amount determined for A in the definition “deferral amount” in respect of the particular deferral amount is 1/2, 2; and

(b) in any other case, 1.

“mark-to-market formula”, for a taxation year of a taxpayer in respect of a participating interest of the taxpayer in a non-resident entity, means the formula

(A + B + C + D) - (E + F + G)

where

A      is the total of all amounts each of which is the taxpayer’s proceeds of disposition from a disposition of the participating interest in the taxation year (other than from a disposition deemed to arise because of subsection 128.1(4) or 149(10));

B      is

(a) if the taxpayer held the participating interest at the end of the taxation year, the fair market value (determined before taking into account any amount payable at the end of the taxation year by the non-resident entity in respect of the participating interest) at that time of the participating interest, and

(b) in any other case, nil;

C      is the total of all amounts (other than an amount to which the description of A applies) each of which is an amount received by the taxpayer in the taxation year from the non-resident entity in respect of the participating interest;

D      is

(a) the taxpayer’s deferral amount in respect of the participating interest, if

(i) the deferral amount is a positive amount,

(ii) the participating interest was not disposed of by the taxpayer in the taxation year, and

(iii) the taxpayer so elects in respect of the participating interest in prescribed form filed with the Minister not later than the taxpayer’s filing-due date for the taxation year,

(b) the taxpayer’s deferral amount in respect of the participating interest if

(i) the taxpayer disposed of the participating interest in the taxation year, and

(ii) no election was made under paragraph (a) in respect of the participating interest by the taxpayer for a preceding taxation year, and

(c) in any other case, nil;

E      is the total of all amounts each of which is

(a) the cost (other than an amount described in paragraph (b)) at which the taxpayer acquired the participating interest in the taxation year (otherwise than because of an acquisition deemed to arise under subsection 128.1(4) or 149(10)), or

(b) if the participating interest is an interest in a life insurance policy, the cost at which the taxpayer is deemed under paragraph (11)(f) to acquire in the taxation year a part of the interest in the policy;

F      is

(a) if the taxpayer did not acquire the participating interest in the year and the taxpayer held the participating interest at a time that is the beginning of the taxation year, the fair market value at that time of the participating interest (determined before taking into account any amount payable at that time by the non-resident entity in respect of the participating interest), and

(b) in any other case, nil; and

G      is

(a) if the participating interest was deemed by paragraph (11)(b) to be a participating interest in an entity for the preceding taxation year of the taxpayer, the amount that would be deductible under subparagraph (4)(a)(ii) in computing the taxpayer’s income for the taxpayer’s preceding taxation year in respect of the participating interest if that subparagraph were read without reference to clause (4)(a)(ii)(A), and

(b) in any other case, nil.

“proceeds of disposition”, from a disposition of a participating interest, includes

(a) where the participating interest is an interest in a life insurance policy, subject to paragraph (11)(e), proceeds of the disposition within the meaning assigned by subsection 148(9); and

(b) in any other case, proceeds of disposition within the meaning assigned by section 54.

“readily obtainable fair market value”, if any, at any time of a particular participating interest in a non-resident entity held at that time by a taxpayer, means the fair market value at that time of the participating interest if

(a) in respect of the particular participating interest

(i) the particular participating interest would, at that time, be an arm’s length interest of the taxpayer if the definition “arm’s length interest” in subsection 94.1(1) were read without reference to paragraph (b) of that definition,

(ii) participating interests that are identical to the particular participating interest are listed on a prescribed stock exchange throughout the period, in the taxpayer’s taxation year that includes that time, during which the taxpayer held the particular participating interest,

(iii) the identical participating interests were traded on at least 10 consecutive trading days on that stock exchange in the period that begins 30 days before that time, and

(iv) the amount (or the average of the amounts) at which the identical participating interests were last traded on each trading day that is included in the latest of the 10 consecutive trading days in the period that begins 30 days before that time is published for public use; or

(b) in respect of the particular participating interest

(i) the participating interests in the non-resident entity that are identical to the particular participating interest have, throughout the period, in the taxpayer’s taxation year that includes that time, during which the taxpayer held the particular participating interest, conditions attached that require the non-resident entity to accept at the demand of the holders of the participating interests (or that require the holders of the participating interests to accept, at the demand of the non-resident entity), at a price determined and payable in accordance with the conditions, the surrender in whole or in part of the participating interests, and

(ii) that price

(A) is determined by reference to the fair market value, at the time the participating interest is surrendered (or such other time that is set out in the terms of the participating interest at the time it was issued and that is within 60 days of the time that the participating interest is surrendered), of the property of the non-resident entity, and

(B) would have been acceptable to entities dealing at arm’s length with one another.

“reconciliation amount”, at a particular time in a taxation year of a taxpayer in respect of a participating interest of the taxpayer, means the amount (including a negative amount) determined at the particular time by the formula

A - B

where

A      is the amount determined by the formula

C - D

where

C      is the amount that would be the cost at the particular time of the participating interest to the taxpayer if this Act were read without reference to this section, and

D      is the taxpayer’s proceeds of disposition from the taxpayer’s last disposition of the participating interest in the taxation year; and

B       is the amount determined by the formula

E + F - G

where

E      is the total of all amounts each of which is an amount, in respect of the participating interest, that is deducted, or that would — if this Act were read without reference to subsection (20) — have been deducted, under subsection (4) in computing the taxpayer’s income for the taxation year or a preceding taxation year,

F      is the total of all amounts each of which is an amount, in respect of the participating interest, deducted under paragraph 94.4(2)(a) in computing the taxpayer’s income for the taxation year or a preceding taxation year, and

G      is the total of all amounts each of which is an amount, in respect of the participating interest, that is included, or that would — if this Act were read without reference to subsection (20) — have been included, under subsection (4) in computing the taxpayer’s income for the taxation year or a preceding taxation year.

“tracking entity”, in respect of a particular participating interest of a taxpayer in a particular non-resident entity at a particular time, means the particular non-resident entity if

(a) the tracked properties described in paragraph (9)(d) in respect of the participating interest are at that time owned by the particular non-resident entity, and

(i) the total fair market value at that time of those tracked properties is less than 90% of the total fair market value at that time of all property owned at that time by the particular non-resident entity, and

(ii) the total fair market value at that time of those tracked properties that are at that time investment property exceeds 50% of the total fair market value at that time of those tracked properties; or

(b) any tracked property described in paragraph (9)(d) in respect of the participating interest is not at that time owned by the particular non-resident entity, the particular non-resident entity (or an entity with which the particular non-resident entity does not deal at arm’s length) owns property that is at that time investment property, and it is reasonable to conclude that that investment property (or property that may be substituted for that investment property) may be used, or give rise to property used, to satisfy, directly or indirectly, the right referred to in paragraph (9)(d) in respect of the particular participating interest.

“trading day”, of a participating interest on a prescribed stock exchange, means a day on which the participating interest trades on that stock exchange.

(2) In this section,

(a) subsection 94.1(2) applies;

(b) in applying paragraph (a) of the definition “readily obtainable fair market value” in subsection (1) in respect of a particular participating interest, in a non-resident entity, held by a taxpayer in a taxation year, where participating interests, in the non-resident entity, that are identical to the particular participating interest are listed on more than one prescribed stock exchange, the references in that paragraph to a prescribed stock exchange shall be read as references to

(i) if the taxpayer so elects, by notifying the Minister in writing in the taxpayer’s return of income for that taxation year or a preceding taxation year, the prescribed stock exchange identified by the taxpayer in that election, and

(ii) if the taxpayer has not filed an election in accordance with subparagraph (i) or if participating interests that are identical to the particular participating interest are no longer listed on the stock exchange identified in the election referred to in that subparagraph, the prescribed stock exchange chosen by the Minister;

(c) paragraph (3)(b) does not apply to a taxpayer for a particular taxation year in respect of a participating interest, in a non-resident entity, held in the particular taxation year by the taxpayer if

(i) subsection (3) applied, because of an election under paragraph (3)(b), for a taxation year (referred to in this paragraph as the “preceding taxation year”) that ended before the particular taxation year of the taxpayer in respect of the participating interest (or in respect of any other participating interests, in the non-resident entity, that are identical to the participating interest), and

(ii) subsection (3) did not apply for a taxation year of the taxpayer that was after the preceding taxation year and before the particular taxation year in respect of the participating interest (or in respect of any of the other participating interests);

(d) paragraph (3)(b) does not apply to a taxpayer for a particular taxation year in respect of a participating interest, in a non-resident entity, held in the particular taxation year by the taxpayer if the Minister sends a written demand to the taxpayer requesting additional information for the purpose of enabling the Minister to determine whether the participating interest has a readily obtainable fair market value and information that may reasonably be considered to be satisfactory to make the determination is not received by the Minister within 120 days (or within any longer period that is acceptable to the Minister) after the Minister sends the demand;

(e) in applying subparagraph (4)(a)(i) to a taxpayer, that is a trust, for a particular taxation year of the taxpayer and in respect of a participating interest of the taxpayer in a non-resident entity, the reference in that subparagraph to “as income from property from a property that is the participating interest” is to be read as a reference to “as income from property that is a source outside Canada that is the participating interest”, if the portion of the net accounting income of the non-resident entity, from sources outside Canada, for its last taxation year that ends in the particular taxation year exceeds 90% of the total net accounting income of the non-resident entity for that last taxation year; and

(f) in applying subparagraph (4)(b)(i) to a taxpayer, that is a trust, for a particular taxation year of the taxpayer and in respect of a participating interest of the taxpayer in a non-resident entity, the reference in that subparagraph to “a capital gain for the year” is to be read as a reference to “a capital gain for the year from a source outside Canada”, if the portion of the net accounting income of the non-resident entity, from sources outside Canada, for its last taxation year that ends in the particular taxation year exceeds 90% of the total net accounting income of the non-resident entity for that last taxation year.

(3) Subject to paragraphs (2)(c) and (d) and (5)(b), this subsection applies to a taxpayer for a particular taxation year of the taxpayer in respect of a participating interest held in the particular taxation year by the taxpayer

(a) if paragraph (11)(a) applies to the taxpayer for the particular taxation year in respect of the participating interest; or

(b) if

(i) subsection (9) or 94.1(3) applies to the taxpayer for the particular taxation year in respect of the participating interest,

(ii) the participating interest has, at all times in the particular taxation year at which the taxpayer held the participating interest, a readily obtainable fair market value,

(iii) either

(A) this subsection applied in respect of an identical participating interest that was held by the taxpayer at any time when the taxpayer held the participating interest, or

(B) the taxpayer has elected that this subsection apply in respect of the participating interest by notifying the Minister in writing in the taxpayer’s return of income filed on or before the taxpayer’s filing due-date for the first taxation year of the taxpayer for which

(I) subsection (9) or 94.1(3), as the case may be, applies to the taxpayer in respect of the participating interest, or

(II) subsection 94.1(3) applies to the taxpayer in respect of the participating interest and that immediately follows a taxation year of the taxpayer for which subsection (9) applied to the taxpayer in respect of the participating interest, and

(iv) subsection 94.3(3) has never applied to the taxpayer for a taxation year in respect of the participating interest or in respect of an identical participating interest that was held by the taxpayer at any time when the taxpayer held the participating interest.

(4) If subsection (3) applies to a taxpayer for a taxation year of the taxpayer in respect of a participating interest in a non-resident entity, this subsection applies and in computing the taxpayer’s income for the taxation year in respect of the participating interest

(a) where subsection (20) does not apply for the taxation year in respect of the participating interest,

(i) there shall be added, as income from property from a property that is the participating interest, the positive amount, if any, determined by the mark-to-market formula for the taxation year in respect of the participating interest, and

(ii) there may be deducted, as a loss from property from a property that is the participating interest,

(A) if the participating interest was deemed by paragraph (11)(b) to be a participating interest in an entity for the year, nil, and

(B) in any other case, the absolute value of the negative amount, if any, determined by the mark-to-market formula for the taxation year in respect of the participating interest; and

(b) where subsection (20) applies for the taxation year in respect of the participating interest,

(i) the taxpayer is deemed to have a capital gain for the year from the disposition of capital property, that is the participating interest, in the taxation year equal to the amount, if any, by which the total of

(A) the positive amount, if any, determined by the mark-to-market formula for the taxation year in respect of the participating interest, and

(B) the positive amount, if any, that is the amount determined for D in applying the definition “mark-to-market formula” in subsection (1) for the taxation year in respect of the participating interest (where the gross-up factor for the deferral amount in respect of the participating interest is 2)

exceeds

(C) the absolute value of the negative amount, if any, that is the amount determined for D in applying the definition “mark-to-market formula” in subsection (1) for the taxation year in respect of the participating interest (where the gross-up factor for the deferral amount in respect of the participating interest is 2), and

(ii) the taxpayer is deemed to have a capital loss for the taxation year from the disposition of capital property, that is the participating interest, in the taxation year equal to the amount, if any, by which the total of

(A) the absolute value of the negative amount, if any, determined by the mark-to-market formula for the taxation year in respect of the participating interest, and

(B) the absolute value of the negative amount, if any, that is the amount determined for D in applying the definition “mark-to-market formula” in subsection (1) for the taxation year in respect of the participating interest (where the gross-up factor for the deferral amount in respect of the participating interest is 2)

exceeds

(C) the positive amount, if any, that is the amount determined for D in applying the definition “mark-to-market formula” in subsection (1) for the taxation year in respect of the participating interest (where the gross-up factor for the deferral amount in respect of the participating interest is 2).

(5) If a taxpayer is non-resident at any time in a taxation year of the taxpayer

(a) in applying subsection (4) and the definition “mark-to-market formula” in subsection (1) (other than the description of D in that definition) in respect of a participating interest of the taxpayer, the taxation year is deemed to be the period, if any, that begins at the first time in the taxation year at which the taxpayer is resident in Canada and ends at the last time in the taxation year at which the taxpayer is resident in Canada;

(b) except for the purposes of paragraph (c) and subsection (4), subsection (3) does not apply to the taxpayer at that time; and

(c) where the taxpayer is an individual (other than a trust) who was non-resident throughout a particular period that is within a taxation year (determined under paragraph (a)) of the taxpayer, at any time in the particular period the individual holds a participating interest in a non-resident entity, and subsection (3) applies to the individual throughout the particular period in respect of the participating interest,

(i) for the purpose of section 114, the income or loss of the individual in respect of the participating interest for the par- ticular period shall be determined without reference to this section, and

(ii) in computing the amount determined under paragraph 114(a) in respect of the individual for the taxation year

(A) there shall be deducted any amount that would be included under subparagraph (4)(a)(i) in computing the individ- ual’s income in respect of the participating interest for the particular period if

(I) the amount determined for D in applying the definition “mark-to-market formula” in subsection (1) for the taxation year in respect of the participating interest were nil, and

(II) the particular period were a taxation year, and

(B) there shall be added any amount that would be deductible under subparagraph (4)(a)(ii) in computing the individual’s income in respect of the participating interest for the particular period if

(I) the amount determined for D in applying the definition “mark-to-market formula” in subsection (1) for the taxation year in respect of the participating interest were nil, and

(II) the particular period were a taxation year.

(6) If, at a particular time in a fiscal period of a partnership, a person resident in Canada becomes a member of the partnership, or a person who is a member of the partnership becomes resident in Canada, and immediately before the particular time no member of the partnership is resident in Canada,

(a) all amounts determined under this section shall be determined as if that fiscal period began at the first time in that fiscal period (determined without reference to this paragraph) at which a member of the partnership was resident in Canada;

(b) for the purpose of the definition “deferral amount” in subsection (1), as it applies in respect of dispositions that occur after the particular time and before the first subsequent time to which this subsection applies in respect of the partnership, subsection (4) is deemed not to have applied to the partnership for any preceding fiscal period; and

(c) where a negative deferral amount would, if this Act were read without reference to this paragraph, be determined in respect of a participating interest held by the partnership immediately before the particular time, the deferral amount in respect of the interest is deemed to be nil.

(7) If, at a particular time in a fiscal period of a partnership, a person resident in Canada ceases to be a member of the partnership, or a person who is a member of the partnership ceases to be resident in Canada and immediately after the particular time no member of the partnership is resident in Canada, all amounts determined under this section shall be determined as if that fiscal period ended at the last time in that fiscal period (determined without reference to this subsection) at which a member of the partnership was resident in Canada.

(8) In subsections (6) and (7) and this subsection,

(a) if it can reasonably be considered that one of the main reasons that a member of a partnership is resident in Canada is to avoid the application of subsection (6) or (7), the member is deemed not to be resident in Canada; and

(b) if a particular partnership is a member of another partnership at any time,

(i) each person or partnership that is at that time a member of the particular partnership is deemed to be at that time a member of the other partnership,

(ii) each person or partnership that becomes at that time a member of the particular partnership is deemed to become at that time a member of the other partnership, and

(iii) each person or partnership that ceases at that time to be a member of the particular partnership is deemed to cease at that time to be a member of the other partnership.

(9) This subsection applies to a taxpayer (other than an exempt taxpayer) for a particular taxation year of the taxpayer in respect of a particular participating interest, in a non-resident entity, held in the particular taxation year by the taxpayer (and in respect of any other participating interests that are identical to the particular participating interest and that are held by the taxpayer in the particular taxation year) only if

(a) subsection 94.1(3) does not apply to the taxpayer for the particular taxation year in respect of the particular participating interest;

(b) at the end of a taxation year of the non-resident entity that ends in the particular taxation year, the particular participating interest

(i) is held by the taxpayer, and

(ii) either

(A) is not an exempt interest in the non-resident entity, or

(B) would not be such an exempt interest if the definition “exempt interest” in subsection 94.1(1) were read without reference to subparagraph (a)(i) or (ii) of that definition;

(c) at the end of that taxation year of the non-resident entity, it is a tracking entity in respect of the particular participating interest;

(d) at any time in the particular taxation year, the amount of any payment under a right (whether immediate or future, whether absolute or contingent or whether conditional on or subject to the exercise of any discretion by any entity or individual) to receive, in any manner whatever and from any entity, amounts in respect of the particular participating interest or any identical interests, or the value of such a right, is, directly or indirectly, determined primarily by one or more of the following criteria in respect of one or more properties (such property or properties together referred to, in this subsection and the definition “tracking entity” in subsection (1), as “tracked property” or “tracked properties”):

(i) production from the property, use of the property, gains from the disposition of the property, profits from the disposition of the property or fair market value of the property,

(ii) income from the property, profits from the property, revenue from the property or cash flow from the property, or

(iii) any other criterion similar to a criterion referred to in subparagraph (i) or (ii); and

(e) throughout each taxation year of the non-resident entity that ends in the particular taxation year, all or substantially all of the fair market value of all the tracked properties in respect of the particular participating interest cannot be attributed, either directly or indi- rectly, to the fair market value of all tracked properties in respect of the particular participating interest (throughout the period that those properties are tracked properties in respect of the particular participating interest) that

(i) are shares of the capital stock of a particular foreign affiliate of the taxpayer that would, if those shares were held by the taxpayer throughout the period (referred to in this subparagraph as the “tracked property period”) that those shares are tracked properties in respect of the par- ticular participating interest, be

(A) throughout the tracked property period, a qualifying interest (within the meaning assigned by paragraph 95(2)(m)) of the taxpayer in the par- ticular foreign affiliate, and

(B) throughout the tracked property period, a participating interest of the taxpayer in a qualifying entity, and

(ii) are not tracked properties in respect of a participating interest in a non-resident entity of an entity that is not related to the taxpayer.

(10) This subsection applies to a taxpayer for a particular taxation year of the taxpayer in respect of an interest in an insurance policy if

(a) the taxpayer is not an exempt taxpayer for the particular taxation year;

(b) the taxpayer holds, at any time in the particular taxation year, an interest in the insurance policy; and

(c) the insurance policy is not an insurance policy issued by an insurer in the course of carrying on an insurance business in Canada the income from which business is subject to tax under this Part.

(11) If subsection (10) applies to a taxpayer for a particular taxation year of the taxpayer in respect of an interest in an insurance policy

(a) subject to paragraph (c), this paragraph applies to the taxpayer for the particular taxation year in respect of the interest, and no amount shall be included or deducted, as the case may be, under section 12.2, paragraphs 56(1)(d) and (j) and 60(a) and (s) and sections 138.1 and 148 in respect of the interest for the purpose of computing the taxpayer’s income for the particular taxation year;

(b) subject to paragraph (c), in applying subsections (1) to (3), paragraph (4)(a) and paragraph (d.1) of the definition “specified foreign property” in subsection 233.3(1) to the taxpayer in respect of the interest for the particular taxation year,

(i) the interest is deemed at each time in the particular taxation year that it is held by the taxpayer to be a participating interest in a non-resident entity, and

(ii) the amount determined for D in applying the definition “mark-to-market formula” in subsection (1) for the particular taxation year in respect of the interest is deemed to be nil;

(c) paragraphs (a) and (b) do not apply to the taxpayer for the particular taxation year in respect of the interest if

(i) the taxpayer has no rights (whether immediate or future, whether absolute or contingent or whether conditional on or subject to the exercise of any discretion by any entity) to receive an amount under the policy, other than rights to receive an amount of

(A) benefits payable as a consequence of the occurrence of risks insured under the policy,

(B) an experience-rated refund of premiums for a year, or

(C) a return of premiums previously paid upon the surrender, cancellation or termination of the insurance policy, or

(ii) the taxpayer can establish to the satisfaction of the Minister that

(A) the interest in the policy was, on the anniversary day of the policy that occurs in the particular taxation year,

(I) an exempt policy, or

(II) a prescribed annuity contract, or

(B) the taxpayer has included in computing the taxpayer’s income for the particular taxation year the amount, if any, required under section 12.2 to be included in computing the taxpayer’s income for the particular taxation year in respect of the interest;

(d) for the purpose of subsections (1) and (4), where the interest is held by the taxpayer at a particular time that is the beginning of the particular taxation year, subsection (4) applies for the purpose of computing the taxpayer’s income for the particular taxation year in respect of the interest, and subsection (4) did not apply for the purpose of computing the taxpayer’s income for the taxpayer’s preceding taxation year in respect of the interest, the taxpayer is deemed to have acquired the interest at the particular time at a cost equal to

A + B

where

A      is the fair market value at the particular time of the interest, and

B      is, where the taxpayer elects in prescribed form filed with the taxpayer’s return of income under this Part for the particular taxation year, the amount determined by the formula

C - D

where

C      is the total of all amounts each of which is a premium paid before the particular time in respect of the interest by the taxpayer, to the extent that the premium was paid at a time when the taxpayer was resident in Canada and not an exempt taxpayer, cannot be refunded (otherwise than on termination or cancellation of the policy) and was not paid in respect of a benefit described in any of subparagraphs (c)(i) to (vii) of the definition “premium” in subsection 148(9), and

D      is the total of

(i) the fair market value at the particular time of the interest, and

(ii) the total of all amounts each of which is an amount received before the particular time in respect of the interest by the taxpayer at a time when the taxpayer was resident in Canada and not an exempt taxpayer;

(e) for the purposes of this subsection and subsections (1) and (4), each of the following amounts in respect of the interest is to be determined without reference to benefits under the policy that are paid, payable or anticipated to be payable as a consequence only of the occurrence of the risks insured under the policy:

(i) the fair market value of the interest,

(ii) the proceeds of disposition of the interest, and

(iii) each amount paid to a beneficiary in respect of the interest;

(f) for the purposes of subsections (1) and (4),

(i) a payment of a premium under the policy by the taxpayer in the particular taxation year — to the extent that the premium cannot be refunded (otherwise than on termination or cancellation of the policy) and is not a premium in respect of a benefit described in any of subparagraphs (c)(i) to (vii) of the definition “premium” in subsection 148(9) — is deemed to be an acquisition in the particular taxation year by the taxpayer of a part of the interest in the policy at a cost equal to the amount so paid,

(ii) a payment made by the taxpayer in the particular taxation year in respect of the principal amount of a loan made under the policy in the particular taxation year (or a preceding taxation year of the taxpayer) — to the extent that the loan was included in the amount in respect of the interest determined for C in applying the definition “mark-to-market formula” in subsection (1) for the taxation year in which the loan was made — is deemed to be an acquisition in the particular taxation year by the taxpayer of a part of the interest in the policy at a cost equal to the amount so paid, and

(iii) an amount (other than an amount described in subparagraph (i) or (ii)) paid by the taxpayer in the particular taxation year, to an entity or individual other than the insurer that issued the policy, to acquire in the particular taxation year an interest in the policy from the entity or individual, is deemed to be an acquisition in the particular taxation year by the taxpayer of a part of the interest in the policy at a cost equal to the amount so paid;

(g) for the purposes of subsections (1) and (4), if paragraph (d) deems the taxpayer to have acquired the interest at a particular time in the particular taxation year or an earlier taxation year, in computing the taxpayer’s proceeds of disposition from the taxpayer’s first disposition of the interest after the particular time, the taxpayer is deemed — in addition to any other proceeds of disposition from the disposition of the interest — to be entitled to receive an amount of proceeds from the disposition of the interest equal to the amount determined by the formula

A - B

where

A      is the total of

(i) the fair market value at the par- ticular time of the interest, and

(ii) the total of all amounts each of which is an amount received before the particular time in respect of the interest by the taxpayer at a time when the taxpayer was resident in Canada and not an exempt taxpayer, and

B      is the total of all amounts each of which is a premium paid before the particular time in respect of the interest by the taxpayer, to the extent that the premium was paid at a time when the taxpayer was resident in Canada and not an exempt taxpayer, cannot be refunded (otherwise than on termination or cancellation of the policy) and was not paid in respect of a benefit described in any of subparagraphs (c)(i) to (vii) of the definition “premium” in subsection 148(9); and

(h) if the interest is held by the taxpayer at a time that is the end of the particular taxation year, subsection (4) applies for the purpose of computing the taxpayer’s income for the particular taxation year in respect of the interest, and subsection (4) does not apply for the purpose of computing the taxpayer’s income for the taxpayer’s following taxation year (in this paragraph referred to as “the following taxation year”) in respect of the interest, the cost to the taxpayer of the interest shall be determined at or after the particular time that is the beginning of the following taxation year as if the taxpayer had acquired the interest at the particular time at a cost equal to the amount determined by the formula

A + B - C

where

A      is the fair market value at the end of the particular taxation year of the interest,

B      is the amount that would be determined under subparagraph (4)(a)(ii) in respect of the interest for the particular taxation year if that subparagraph were read without reference to clause (A) of that subparagraph, and

C      is the amount that would, if paragraph (g) had applied at the end of the particular taxation year in respect of the interest, be determined at the end of the particular taxation year in respect of the interest by the formula under that paragraph.

(12) If a participating interest in a non-resident entity is held by a taxpayer at the end of a particular taxation year of the taxpayer, subsection (4) applies for the purpose of computing the taxpayer’s income for the particular taxation year in respect of the participating interest, and that subsection does not apply (otherwise than solely because the taxpayer became an exempt taxpayer or ceased to reside in Canada) for the purpose of computing the taxpayer’s income for the taxpayer’s following taxation year (in this paragraph referred to as “the following taxation year”) in respect of the participating interest

(a) the taxpayer’s cost of the participating interest at any time after the end of the particular taxation year is deemed to be the amount determined by the formula

A + B - C

where

A      is the amount that would, if this Act were read without reference to this section, be determined to be the taxpayer’s cost of the participating interest at the end of the particular taxation year,

B      is the amount, if any, by which the amount determined under subparagraph 94.4(2)(a)(ii) in respect of the taxpayer in respect of the participating interest for the particular taxation year exceeds the amount determined under paragraph 94.4(2)(a) in respect of the taxpayer in respect of the participating interest for the particular taxation year, and

C      is the amount, if any, by which

(i) the total of

(A) the amount determined under paragraph 94.4(2)(a) in respect of the taxpayer in respect of the participating interest for the particular taxation year, and

(B) the amount determined under clause 94.4(2)(a)(ii)(B) in respect of the taxpayer in respect of the participating interest for the particular taxation year,

exceeds

(ii) the amount determined under clause 94.4(2)(a)(ii)(A) in respect of the taxpayer in respect of the participating interest for the particular taxation year; and

(b) in computing, at any time after the end of the particular taxation year, the adjusted cost base to the taxpayer of the participating interest, paragraph 94.4(2)(b) shall not apply to the taxpayer in respect of the participating interest.

(13) If a taxpayer’s participating interest in a non-resident entity is disposed of by the taxpayer at a particular time in a taxation year (other than a disposition deemed to arise because of subsection 128.1(4) or 149(10)) and subsection (4) applies for the purpose of computing the taxpayer’s income for the taxation year in respect of the participating interest, the taxpayer’s cost of the participating interest immediately before the particular time is deemed to be (except for the purpose of this section) its fair market value at the particular time.

(14) Subject to subsections (15) to (18), if a taxpayer disposes of a participating interest in an entity at any time in a taxation year of the taxpayer and subsection (4) applies for the purpose of computing the taxpayer’s income for the year in respect of the participating interest, in applying subsection (4) to a disposition after that time by the taxpayer of the participating interest, the deferral amount of the taxpayer in respect of the participating interest is nil.

(15) If subsection (12) has applied to determine the cost at any particular time after the end of a particular taxation year to a taxpayer of a participating interest, in applying subsection (4) for the purpose of computing the taxpayer’s income in respect of the participating interest for a taxation year that is after the particular taxation year, the deferral amount of the taxpayer in respect of the participating interest shall be determined

(a) for the purpose of subparagraph (a)(iii) of the description of B in the definition “deferral amount” in subsection (1), as if subsection (4) had not applied to the taxpayer in respect of the participating interest for taxation years that began before the particular time; and

(b) without reference to the application of subsection (14) with regard to dispositions that occurred before the particular time.

(16) If a taxpayer ceases at a particular time to be resident in Canada, in applying subsection (4) to a disposition after the particular time by the taxpayer of a participating interest and to an election made after the particular time by the taxpayer under subparagraph (a)(iii) of the description of D in the definition “mark-to-market formula” in subsection (1) for a taxation year in respect of the participating interest, the deferral amount of the taxpayer in respect of the participating interest shall be determined

(a) for the purpose of subparagraph (a)(iii) of the description of B in the definition “deferral amount” in subsection (1), as if subsection (4) had not applied to the taxpayer in respect of the participating interest for taxation years that began before the particular time; and

(b) without reference to the application of subsection (14) with regard to dispositions that occurred before the particular time.

(17) If a taxpayer is an exempt taxpayer for a particular taxation year of the taxpayer because of the application of paragraph (a) or (b) of the definition “exempt taxpayer” in subsection 94.1(1), and the taxpayer was not an exempt taxpayer for the taxation year of the taxpayer that preceded the particular taxation year, in applying subsection (4) to a disposition after the particular taxation year by the taxpayer of a participating interest and to an election made after the particular taxation year by the taxpayer under subparagraph (a)(iii) of the description of D in the definition “mark-to-market formula” in subsection (1) for a taxation year in respect of the participating interest, the deferral amount of the taxpayer in respect of the participating interest shall be determined

(a) for the purpose of subparagraph (a)(iii) of the description of B in the definition “deferral amount” in subsection (1), as if subsection (4) had not applied to the taxpayer in respect of the participating interest for taxation years that ended before the particular taxation year; and

(b) without reference to the application of subsection (14) with regard to dispositions that occurred before the particular taxation year.

(18) If a taxpayer disposes of a participating interest, the deferral amount in respect of the participating interest would otherwise be a negative amount, and the disposition would, if the participating interest were a capital property and a loss arose on the disposition, give rise to a superficial loss (within the meaning that would be assigned by section 54 if the definition “superficial loss” in that section were read without the reference to subsection 40(3.4) in paragraph (h) of that definition),

(a) except for the purpose of applying paragraph (b) in respect of the disposition, the deferral amount of the taxpayer in respect of the participating interest is deemed to be nil; and

(b) the deferral amount of the taxpayer in respect of the property that would be the substituted property referred to in that definition if the assumptions described in this subsection applied is deemed to be equal to the deferral amount of the taxpayer in respect of the participating interest.

(19) If an amount has been included or deducted under paragraph (4)(a) in computing the income of a corporation resident in Canada for a taxation year in respect of a participating interest, in computing the capital dividend account of the corporation

(a) the corporation is deemed to have

(i) a capital gain from a disposition at the end of the taxation year of property equal to twice the amount of the taxable capital gain determined under subparagraph (ii), and

(ii) a taxable capital gain from the disposition at the end of the taxation year of property equal to the lesser of

(A) the positive amount, if any, that is the amount determined for D in applying the definition “mark-to-market formula” in subsection (1) for the taxation year in respect of the participating interest (where the gross-up factor for the deferral amount in respect of the participating interest is 2), and

(B) the amount included in computing the income of the corporation for the taxation year under subsection (4); and

(b) the corporation is deemed to have

(i) a capital loss from a disposition at the end of the taxation year of property equal to twice the amount of the allowable capital loss determined under subparagraph (ii), and

(ii) an allowable capital loss from the disposition at the end of the taxation year of property equal to the lesser of

(A) the absolute value of the negative amount, if any, that is the amount determined for D in applying the definition “mark-to-market formula” in subsection (1) for the taxation year in respect of the participating interest (where the gross-up factor for the deferral amount in respect of the participating interest is 2), and

(B) the amount deducted in computing the income of the corporation for the taxation year under subsection (4).

(20) This subsection applies for a taxation year of a taxpayer in respect of a participating interest, in a particular non-resident entity, held in the taxation year by the taxpayer, if

(a) the participating interest would, if paragraph 39(1)(a) and the definition “inventory” in subsection 248(1) were read without reference to this section, be a capital property of the taxpayer at the last time in the taxation year at which the taxpayer held the participating interest; and

(b) all or substantially all of the amount determined under the “mark-to-market formula” for the taxation year in respect of the participating interest can be attributed to

(i) capital gains or capital losses from the disposition of capital property (other than a participating interest in a foreign investment entity) by the particular non-resident entity or by any foreign investment entity in which the particular non-resident entity has a direct or indirect interest, and

(ii) increases or decreases in the fair market value of capital property (other than a participating interest in a foreign investment entity) of the particular non-resident entity or of any foreign investment entity in which the particular non-resident entity has a direct or indirect interest.

(21) If a taxpayer’s participating interest in a non-resident entity is disposed of by the taxpayer at a particular time in a particular taxation year, and subsection (4) applies for the purpose of computing the taxpayer’s income for the particular taxation year in respect of the participating interest, in computing that income

(a) where subsection (20) does not apply for the particular taxation year, and has never applied for a preceding taxation year, in respect of the participating interest,

(i) there may be deducted, as a loss from property from a property that is the participating interest, the positive reconciliation amount, if any, at that time in respect of the participating interest, and

(ii) there shall be included, as income from property from a property that is the participating interest, the absolute value of the negative reconciliation amount, if any, at that time in respect of the participating interest; and

(b) in any other case,

(i) the taxpayer is deemed to have a capital loss for the particular taxation year from the disposition of capital property that is the participating interest in the particular taxation year equal to the positive recon- ciliation amount, if any, at that time in respect of the participating interest, and

(ii) the taxpayer is deemed to have a capital gain for the particular taxation year from the disposition of capital property that is the participating interest in the particular taxation year equal to the absolute value of the negative reconciliation amount, if any, at that time in respect of the participating interest.