Income Tax Act — I-3.3 18.4
ent. Structured arrangements — exception (5) If subsection (4) or 12.7(3) would, in the absence of this subsection, apply in respect of a payment in computing a taxpayer’s income from a business or property for a taxation year, that subsection does not apply in respect of the payment if (a) there would be no hybrid mismatch arrangement in respect of the payment if the payment did not arise under, or in connection with, a structured arrangement; (b) at the time that the taxpayer entered into, or acquired an interest in any part of a transaction that is, or is part of, the structured arrangement, it was not reasonable to expect that any of the following entities were aware of the deduction/non-inclusion mismatch arising from the payment: (i) the taxpayer, (ii) an entity with which the taxpayer does not deal at arm’s length, or (iii) a specified entity in respect of the taxpayer; and (c) none of the entities described in subparagraphs (b)(i) to (iii) shared in the value of any economic benefit resulting from the deduction/non-inclusion mismatch. Deduction/non-inclusion mismatch — conditions (6) For the purposes of this section and section 12.7, a payment gives rise to a deduction/non-inclusion mismatch if (a) the following condition is met: A > B where A is the total of all amounts, each of which would, in the absence of this section and subsections 18(4) and 18.2(2), be deductible in respect of the payment, in computing the income of a taxpayer from a business or property under this Part for a taxation year (referred to in this paragraph as the “relevant year”), and B is the total of all amounts each of which, in respect of the payment, (i) can reasonably be expected to be — and actually is — foreign ordinary income of an entity for a foreign taxation year that begins on or before the day that is 12 months after the end of the relevant year, or (ii) is Canadian ordinary income of a taxpayer for a taxation year that begins on or before the day that is 12 months after the end of the relevant year; or (b) the following condition is met: C > D where C is the total of all amounts, each of which, in the absence of any foreign expense restriction rule, would be — or would reasonably be expected to be — deductible, in respect of the payment, in computing relevant foreign income or profits of an entity for a foreign taxation year (referred to in this paragraph as the “relevant foreign year”), and D is the total of all amounts, each of which, in respect of the payment, (i) would, in the absence of section 12.7, be Canadian ordinary income of a taxpayer for a taxation year that begins on or before the day that is 12 months after the end of the relevant foreign year, or (ii) can reasonably be expected to be — and actually is — foreign ordinary income of another entity for a foreign taxation year that begins on or before the day that is 12 months after the end of the relevant foreign year. Deduction/non-inclusion mismatch — application (7) For the purposes of this section and section 12.7, if a payment gives rise to a deduction/non-inclusion mismatch, (a) the amount, if any, determined for A in paragraph (6)(a) in respect of the payment is the deduction component of the deduction/non-inclusion mismatch; (b) the amount, if any, determined for C in paragraph (6)(b) in respect of the payment is the foreign deduction component of the deduction/non-inclusion mismatch; and (c) the amount of the deduction/non-inclusion mismatch arising from the payment is determined by the formula A − B where A is (i) if paragraph (6)(a) applies in respect of the payment, the deduction component of the deduction/non-inclusion mismatch, or (ii) if paragraph (6)(b) applies in respect of the payment, the foreign deduction component of the deduction/non-inclusion mismatch, and B is (i) if subparagraph (i) of the description of A applies, (A) where the amount determined for B in paragraph (6)(a) in respect of the payment is equal to 10% or less of the amount determined