Income Tax Act

Marginal note:Definitions

• 18.1 (1) The definitions in this subsection apply in this section.

  matchable expenditure

  dépense à rattacher

  matchable expenditure of a taxpayer means the amount of an expenditure that is made by the taxpayer to

  • (a) acquire a right to receive production,

  • (b) fulfil a covenant or obligation arising in circumstances in which it is reasonable to conclude that a relationship exists between the covenant or obligation and a right to receive production, or

  • (c) preserve or protect a right to receive production,

  but does not include an amount for which a deduction is provided under section 20 in computing the taxpayer’s income. (dépense à rattacher)

  right to receive production

  droit aux produits

  right to receive production means a right under which a taxpayer is entitled, either immediately or in the future and either absolutely or contingently, to receive an amount all or a portion of which is computed by reference to use of property, production, revenue, profit, cash flow, commodity price, cost or value of property or any other similar criterion or by reference to dividends paid or payable to shareholders of any class of shares where the amount is in respect of another taxpayer’s activity, property or business but such a right does not include an income interest in a trust, a Canadian resource property or a foreign resource property. (droit aux produits)

  tax benefit

  avantage fiscal

  tax benefit means a reduction, avoidance or deferral of tax or other amount payable under this Act or an increase in a refund of tax or other amount under this Act. (avantage fiscal)

  tax shelter

  abri fiscal

  tax shelter means a property that would be a tax shelter (as defined in subsection 237.1(1)) if

  • (a) the cost of a right to receive production were the total of all amounts each of which is a matchable expenditure to which the right relates; and

  • (b) subsections 18.1(2) to 18.1(13) did not apply for the purpose of computing an amount, or in the case of a partnership a loss, represented to be deductible. (abri fiscal)

  taxpayer

  contribuable

  taxpayer includes a partnership. (contribuable)

• Marginal note:Limitation on the deductibility of matchable expenditure

  (2) In computing a taxpayer’s income from a business or property for a taxation year, no amount of a matchable expenditure may be deducted except as provided by subsection 18.1(3).

• Marginal note:Deduction of matchable expenditure

  (3) If a taxpayer’s matchable expenditure would, but for subsection 18.1(2) and this subsection, be deductible in computing the taxpayer’s income, there may be deducted in respect of the matchable expenditure in computing the taxpayer’s income for a taxation year the amount that is determined under subsection 18.1(4) for the year in respect of the expenditure.

• Marginal note:Amount of deduction

  (4) For the purpose of subsection 18.1(3), the amount determined under this subsection for a taxation year in respect of a taxpayer’s matchable expenditure is the amount, if any, that is the least of

  • (a) the total of

    • (i) the lesser of

      • (A) 1/5 of the matchable expenditure, and

      • (B) the amount determined by the formula

        (A/B) × C

        where

        A

        is the number of months that are in the year and after the day on which the right to receive production to which the matchable expenditure relates is acquired,

        B

        is the lesser of 240 and the number of months that are in the period that begins on the day on which the right to receive production to which the matchable expenditure relates is acquired and that ends on the day the right is to terminate, and

        C

        is the amount of the matchable expenditure, and

    • (ii) the amount, if any, by which the amount determined under this paragraph for the preceding taxation year in respect of the matchable expenditure exceeds the amount of the matchable expenditure deductible in computing the taxpayer’s income for that preceding year,

  • (b) the total of

    • (i) all amounts each of which is included in computing the taxpayer’s income for the year (other than any portion of such amount that is the subject of a reserve claimed by the taxpayer for the year under this Act) in respect of the right to receive production to which the matchable expenditure relates, and

    • (ii) the amount by which the amount determined under this paragraph for the preceding taxation year in respect of the matchable expenditure exceeds the amount of the matchable expenditure deductible in computing the taxpayer’s income for that preceding year, and

  • (c) the amount, if any, by which

    • (i) the total of all amounts each of which is an amount of the matchable expenditure that would, but for this section, have been deductible in computing the taxpayer’s income for the year or a preceding taxation year

    exceeds

    • (ii) the total of all amounts each of which is an amount of the matchable expenditure deductible under subsection 18.1(3) in computing the taxpayer’s income for a preceding taxation year.

• Marginal note:Special rules

  (5) For the purpose of this section,

  • (a) where a taxpayer’s matchable expenditure is made before the day on which the related right to receive production is acquired by the taxpayer, the expenditure is deemed to have been made on that day;

  • (b) where a taxpayer has one or more rights to renew a particular right to receive production to which a matchable expenditure relates for one or more additional terms, after the term that includes the time at which the particular right was acquired, the particular right is deemed to terminate on the latest day on which the latest possible such term could terminate if all rights to renew the particular right were exercised;

  • (c) where a taxpayer has 2 or more rights to receive production that can reasonably be considered to be related to each other, the rights are deemed to be one right; and

  • (d) where the term of a taxpayer’s right to receive production is for an indeterminate period, the right is deemed to terminate 240 months after it is acquired.

• Marginal note:Proceeds of disposition considered income

  (6) Where in a taxation year a taxpayer disposes of all or part of a right to receive production to which a matchable expenditure relates, the proceeds of the disposition shall be included in computing the taxpayer’s income for the year.

• Marginal note:Arm’s length disposition

  (7) Subject to subsections 18.1(8) to 18.1(10), where in a taxation year a taxpayer disposes (otherwise than in a disposition to which subsection 87(1) or 88(1) applies) of all of the taxpayer’s right to receive production to which a matchable expenditure (other than an expenditure no portion of which would, if this section were read without reference to this subsection, be deductible under subsection 18.1(3) in computing the taxpayer’s income) relates, or the taxpayer’s right expires, the amount deductible in respect of the expenditure under subsection 18.1(3) in computing the taxpayer’s income for the year is deemed to be the amount, if any, determined under paragraph 18.1(4)(c) for the year in respect of the expenditure.

• Marginal note:Non-arm’s length disposition

  (8) Subsection 18.1(10) applies where

  • (a) a taxpayer’s particular right to receive production to which a matchable expenditure (other than an expenditure no portion of which would, if this section were read without reference to subsections 18.1(7) and 18.1(10), be deductible under subsection 18.1(3) in computing the taxpayer’s income) relates has expired or the taxpayer has disposed of all of the right (otherwise than in a disposition to which subsection 87(1) or 88(1) applies);

  • (b) during the period that begins 30 days before and ends 30 days after the disposition or expiry, the taxpayer or a person affiliated, or who does not deal at arm’s length, with the taxpayer acquires a right to receive production (in this subsection and subsection 18.1(10) referred to as the “substituted property”) that is, or is identical to, the particular right; and

  • (c) at the end of the period, the taxpayer or a person affiliated, or who does not deal at arm’s length, with the taxpayer owns the substituted property.

• Marginal note:Special case

  (9) Subsection 18.1(10) applies where

  • (a) a taxpayer’s particular right to receive production to which a matchable expenditure (other than an expenditure no portion of which would, if this section were read without reference to subsections 18.1(7) and 18.1(10), be deductible under subsection 18.1(3) in computing the taxpayer’s income) relates has expired or the taxpayer has disposed of all of the right (otherwise than in a disposition to which subsection 87(1) or 88(1) applies); and

  • (b) during the period that begins at the time of the disposition or expiry and ends 30 days after that time, a taxpayer that had an interest, directly or indirectly, in the right has another interest, directly or indirectly, in another right to receive production, which other interest is a tax shelter or a tax shelter investment (as defined by section 143.2).

• Marginal note:Amount of deduction if non-arm’s length disposition

  (10) Where this subsection applies because of subsection 18.1(8) or 18.1(9) to a disposition or expiry in a taxation year or a preceding taxation year of a taxpayer’s right to receive production to which a matchable expenditure relates,

  • (a) the amount deductible under subsection 18.1(3) in respect of the expenditure in computing the taxpayer’s income for a taxation year that ends at or after the disposition or expiry of the right is the least of the amounts determined under subsection 18.1(4) for the year in respect of the expenditure; and

  • (b) the least of the amounts determined under subsection 18.1(4) in respect of the expenditure for a taxation year is deemed to be the amount, if any, determined under paragraph 18.1(4)(c) in respect of the expenditure for the year where the year includes the time that is immediately before the first time, after the disposition or expiry,

    • (i) at which the right would, if it were owned by the taxpayer, be deemed by section 128.1 or subsection 149(10) to have been disposed of by the taxpayer,

    • (ii) that is immediately before control of the taxpayer is acquired by a person or group of persons, if the taxpayer is a corporation,

    • (iii) at which winding-up of the taxpayer begins (other than a winding-up to which subsection 88(1) applies), if the taxpayer is a corporation,

    • (iv) if subsection 18.1(8) applies, at which a 30-day period begins throughout which neither the taxpayer nor a person affiliated, or who does not deal at arm’s length, with the taxpayer owns

      • (A) the substituted property, or

      • (B) a property that is identical to the substituted property and that was acquired after the day that is 31 days before the period began, or

    • (v) if subsection 18.1(9) applies, at which a 30-day period begins throughout which no taxpayer who had an interest, directly or indirectly, in the right has an interest, directly or indirectly, in another right to receive production if one or more of those direct or indirect interests in the other right is a tax shelter or tax shelter investment (as defined by section 143.2).

• Marginal note:Partnerships

  (11) For the purpose of paragraph 18.1(10)(b), where a partnership otherwise ceases to exist at any time after a disposition or expiry referred to in subsection 18.1(10), the partnership is deemed not to have ceased to exist, and each taxpayer who was a member of the partnership immediately before the partnership would, but for this subsection, have ceased to exist is deemed to remain a member of the partnership until the time that is immediately after the first of the times described in subparagraphs 18.1(10)(b)(i) to 18.1(10)(b)(v).

• Marginal note:Identical property

  (12) For the purposes of subsections (8) and (10), a right to acquire a particular right to receive production (other than a right, as security only, derived from a mortgage, hypothec, agreement of sale or similar obligation) is deemed to be a right to receive production that is identical to the particular right.

• Marginal note:Application of section 143.2

  (13) For the purpose of applying section 143.2 to an amount that would, if this section were read without reference to this subsection, be a matchable expenditure any portion of the cost of which is deductible under subsection 18.1(3), the expenditure is deemed to be a tax shelter investment and that section shall be read without reference to subparagraph 143.2(6)(b)(ii).

• Marginal note:Debt obligations

  (14) Where the rate of return on a taxpayer’s right to receive production to which a matchable expenditure (other than an expenditure no portion of which would, if this section were read without reference to this subsection, be deductible under subsection 18.1(3) in computing the taxpayer’s income) relates is reasonably certain at the time the taxpayer acquires the right,

  • (a) the right is, for the purposes of subsection 12(9) and Part LXX of the Income Tax Regulations, deemed to be a debt obligation in respect of which no interest is stipulated to be payable in respect of its principal amount and the obligation is deemed to be satisfied at the time the right terminates for an amount equal to the total of the return on the obligation and the amount that would otherwise be the matchable expenditure that is related to the right; and

  • (b) notwithstanding subsection 18.1(3), no amount may be deducted in computing the taxpayer’s income in respect of any matchable expenditure that relates to the right.

• Marginal note:Non-application — risks ceded between insurers

  (15) Subsections (2) to (13) do not apply to a taxpayer’s matchable expenditure in respect of a right to receive production if

  • (a) the expenditure is in respect of commissions, or other expenses, related to the issuance of an insurance policy for which all or a portion of a risk has been ceded to the taxpayer; and

  • (b) the taxpayer and the person to whom the expenditure is made, or is to be made, are both insurers who are subject to the supervision of

    • (i) the Superintendent of Financial Institutions, if the taxpayer or that person, as the case may be, is an insurer who is required by law to report to the Superintendent of Financial Institutions, or

    • (ii) the Superintendent of Insurance, or other similar officer or authority, of the province under whose laws the insurer is incorporated, in any other case.

• Marginal note:Non-application — no rights, tax benefits or shelters

  (16) Subsections (2) to (13) do not apply to a taxpayer’s matchable expenditure in respect of a right to receive production if

  • (a) no portion of the matchable expenditure can reasonably be considered to have been paid to another taxpayer, or to a person or partnership with whom the other taxpayer does not deal at arm’s length, to acquire the right from the other taxpayer;

  • (b) no portion of the matchable expenditure can reasonably be considered to relate to a tax shelter or a tax shelter investment (within the meaning assigned by subsection 143.2(1)); and

  • (c) none of the main purposes for making the matchable expenditure can reasonably be considered to have been to obtain a tax benefit for the taxpayer, a person or partnership with whom the taxpayer does not deal at arm’s length, or a person or partnership that holds, directly or indirectly, an interest in the taxpayer.

• Marginal note:Revenue exception

  (17) Paragraph (4)(a) does not apply in determining the amount for a taxation year that may be deducted in respect of a taxpayer’s matchable expenditure in respect of a right to receive production if

  • (a) before the end of the taxation year in which the matchable expenditure is made, the total of all amounts each of which is included in computing the taxpayer’s income for the year (other than any portion of any of those amounts that is the subject of a reserve claimed by the taxpayer for the year under this Act) in respect of the right to receive production that relates to the matchable expenditure exceeds 80% of the matchable expenditure; and

  • (b) no portion of the matchable expenditure can reasonably be considered to have been paid to another taxpayer, or to a person or partnership with whom the other taxpayer does not deal at arm’s length, to acquire the right from the other taxpayer.