Income Tax Act — I-3.3 18.4
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 financial instrument, or (iii) if the transferor were the recipient of the underlying return, or, if subparagraph (d)(ii) applies, a distribution under the financial instrument, (A) an amount in respect of the underlying return or distribution, as the case may be, would reasonably be expected to be foreign ordinary income for a foreign taxation year or Canadian ordinary income for a taxation year, as the case may be, of the transferor, (B) the underlying return or distribution, as the case may be, would arise under a hybrid mismatch arrangement, or (C) a foreign hybrid mismatch rule would reasonably be expected to apply in respect of the underlying return or distribution, as the case may be; and (h) one of the following entities is not resident in Canada: (i) the transferor, (ii) the transferee, (iii) a recipient of the payment, (iv) a payer of the payment, (v) the issuer of the financial instrument, (vi) a recipient of the underlying return, and (vii) if an entity described in any of subparagraphs (i) to (vi) is a partnership, a member of that entity. Substitute payment arrangement — amount (15) For the purposes of this section and section 12.7, if a payment arises under a substitute payment arrangement, (a) the amount of the substitute payment mismatch, in respect of the payment, is the lesser of (i) the amount of the deduction/non-inclusion mismatch arising from the payment, (A) if the condition in subparagraph (14)(f)(i) applies, determined based on the assumption in that subparagraph, or (B) if the condition in subparagraph (14)(f)(ii) applies, determined based on the assumption in that subparagraph, and (ii) the amount of the payment, or the portion of the payment, as the case may be, described in paragraph (14)(d); (b) the deduction component, if any, of the deduction/non-inclusion mismatch is the deduction component of the substitute payment arrangement in respect of the payment; (c) the foreign deduction component, if any, of the deduction/non-inclusion mismatch is the foreign deduction component of the substitute payment arrangement in respect of the payment; and (d) if the condition in subparagraph (14)(f)(ii) is met in respect of the payment, 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 that meets the conditions in clauses 14(f)(ii)(A) and (B) is deemed to be deductible by the transferee in respect of the payment for the purposes of applying subsections (3) and (4) and section 12.7. Substituted instruments (16) For the purposes of this section and section 12.7, any financial instrument that is substituted for a particular financial instrument is deemed to be the particular financial instrument. Specified entity — deeming rules (17) For the purposes of the definition specified entity in subsection (1), the following rules apply: (a) in determining the equity interests owned, directly or indirectly, by any entity (in this paragraph referred to as the “first entity”) in any other entity at any time, (i) the rights of the first entity, and any entities with which it does not deal at arm’s length, that are rights referred to in the portion of the definition specified shareholder in subsection 18(5) after paragraph (b) of that definition or in paragraph (a) or (b) of the definition specified beneficiary in that subsection, or that are similar rights in respect of partnerships or any other entity, are deemed to be immediate and absolute and to have been exercised at that time, and (ii) paragraph (c) of the definition specified beneficiary in subsection 18(5) is deemed to apply at that time and the references in that definition to “particula