15 June 1995 External T.I. 9508515 - COST AMOUNT OF STRIP BONDS, CSB'S

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

1) Is the discount earned included in the determination of the "cost amount" of stripped bonds for the purposes of Part XI tax?

2) Is cost of CSB amount paid with no provision for accrued interest or amount paid plus accrued interest?

Position TAKEN:

1) Yes

2) Generally, amount paid and no adjustment for interest

Reasons FOR POSITION TAKEN: Routine

950851
XXXXXXXXXX M.P. Sarazin

Attention: XXXXXXXXXX

June 15, 1995

Dear Sirs:

Re: Cost Amount of a Stripped Bond or Discount Note

This is in reply to your letter dated March 20, 1995 wherein you requested our comments regarding the calculation of the "cost amount" of a stripped bond or discount note and a compound interest security (e.g. Canada Savings Bonds) acquired by a Registered Retirement Savings Plan ("RRSP") for the purpose of subsection 206(2) of the Income Tax Act (the "Act").

Comments

The term "cost amount" is defined in subsection 248(1) of the Act. Where the property is a debt or a right to receive an amount, the property's amortized cost would represent its cost amount pursuant to paragraph (e) of the definition of "cost amount".

A debt's "amortized cost" is defined in subsection 248(1) of the Act and generally means a debt's actual cost where the debt is purchased at its face amount. As a general rule, a debt's amortized cost is not related to the amount of interest that must be accrued on the debt and does not increase as accruals of interest are made. This is because the amount paid for the debt generally represents the cost of a right to receive the principal element of the debt and a right to receive all future interest. In this respect, it should also be noted that although an RRSP trust is not generally taxable on its taxable income because of the application of subsection 146(4) of the Act, it may still have income in a year and this income will include any interest accrued to the trust following such provisions of the Act as may be applicable.

If a debt is purchased at a discount or premium the determination of its amortized cost is more complex. In these cases the debt's amortized cost is, in general terms, the debt's original cost plus or minus the amount of any discount or premium that must be included in its income for income tax purposes each year ending before that time, less any payments received in satisfaction of the debt. Accordingly, if a debt is purchased at a discount, the amortized cost of the property will account for the amount of the discount earned in each prior year and the amortized cost of the debt may change over time.

To summarize, for the purposes of calculating Part XI tax, accrued interest is not added to the adjusted cost base of the debt. However, if a debt property is acquired at a discount, special rules will apply to increase the cost amount of the property by the amount of the discount brought into income each year the debt is held. Therefore, since stripped bonds are normally sold at a discount, the amount of the discount brought into income must be added to determine the cost amount of the bonds at any particular time.

We trust the above comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch