Income Tax Act — I-3.3 18.4
d)(i) or (ii); (b) the deduction component, if any, of the deduction/non-inclusion mismatch is the deduction component of the hybrid transfer arrangement in respect of the payment; and (c) the foreign deduction component, if any, of the deduction/non-inclusion mismatch is the foreign deduction component of the hybrid transfer arrangement in respect of the payment. Substitute payment arrangement — conditions (14) For the purposes of this section and section 12.7, a payment arises under a substitute payment arrangement if (a) the payment arises under, or in connection with, an arrangement under which all or a portion of a financial instrument is loaned or disposed of or otherwise transferred by an entity to another entity (referred to in this subsection as the “transferor” and “transferee”, respectively); (b) the transferee, or an entity that does not deal at arm’s length with the transferee, is a payer of the payment; (c) the transferor, or an entity that does not deal at arm’s length with the transferor, is a recipient of the payment; (d) all or a portion of the payment can reasonably be considered to represent or otherwise reflect, or be determined by reference to (i) another payment (referred to in this subsection and subsection (15) as the “underlying return”) that arises under, or in connection with, the financial instrument, or (ii) revenue, profit, cash flow, commodity price or any other similar criterion; (e) any of the following conditions is satisfied: (i) at any time during that series of transactions that includes the arrangement, (A) a payer of the payment does not deal at arm’s length with, or is a specified entity in respect of, a recipient of the payment, or (B) the transferor does not deal at arm’s length with, or is a specified entity in respect of, the transferee, or (ii) the payment arises under, or in connection with, a structured arrangement; (f) the payment (i) would give rise to a deduction/non-inclusion mismatch if any Canadian ordinary income of a taxpayer for a taxation year and any foreign ordinary income of an entity for a foreign taxation year, in respect of the payment, were limited to the portion of those amounts that can reasonably be considered to relate to the portion of the payment that is described in paragraph (d), or (ii) if the condition in subparagraph (i) is not met, would meet the condition in that subparagraph if any amount that, in the absence of this section, subsections 18(4) and 18.2(2) or any foreign expense restriction rule, would be — or would reasonably be expected to be — deductible by the transferee in respect of the underlying return were instead considered to be deductible in respect of the payment, to the extent that the amount (A) would be — or would reasonably be expected to be — deductible by the transferee in computing its income from a business or property for a taxation year or its relevant foreign income or profits for a foreign taxation year, as the case may be, and (B) would be — or would reasonably be expected to be — so deductible because the underlying return accrued (or is considered to accrue) for a period before the transfer; (g) one of the following conditions is satisfied: (i) the transferee or an entity that does not deal at arm’s length with the transferee is a recipient of the underlying return — or, if subparagraph (d)(ii) applies, a distribution under the financial instrument — and the amount of the underlying return or the distribution, as the case may be, exceeds the total of all amounts, in respect of the underlying return or the distribution, as the case may be, each of which can reasonably be expected to be — and actually is — foreign ordinary income for a foreign taxation year or Canadian ordinary income for a taxation year, as the case may be, of the recipient, (ii) the condition in subparagraph (i) would be satisfied if the transferee were the recipient of the underlying return, or, if subparagraph (d)(ii) applies, a distribution under the fi