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: Taxation of amount received on maturity of stock-index linked GIC.
Position: The amount is interest included in computing income by virtue of subsections 12(4) and 12(9) of the Act and section 7000 of the Regulations.
Reasons: A stock-index linked GIC is a prescribed debt obligation as described in paragraph 7000(1)(d) of the Regulations. Subsection 7000(3) of the Regulations deems the stock-index linked return to be interest on the obligation for the purposes of section 7000. Paragraph 7000(2)(d) prescribes the amount of interest for the purposes of subsection 12(9) that will be deemed to accrue to the taxpayer as interest, each year the obligation is held, for the purposes of the interest accrual rule in subsection 12(4). Paragraph 7000(2)(d) prescribes the amount to be the maximum amount of interest that could be payable on the obligation in respect of the particular year. In the years prior to the stock-index linked bonus or premium being determinable, the prescribed amount under paragraph 7000(2)(d) would be nil as no event that would trigger an amount being payable has taken place in the year. In the year the amount of the bonus or premium is determinable (e.g. year of maturity), the event triggering an amount payable has taken place and the bonus or premium is then included in income as interest.
XXXXXXXXXX 2001-007626
Alison Campbell
August 9, 2001
Dear XXXXXXXXXX:
Re: Taxation of Return on Stock Index Linked GIC
This is in your reply to your letter of March 15, 2001 wherein you requested a technical interpretation on the taxation of an amount received on the maturity of a stock-index linked guaranteed investment certificate ("GIC"), in excess of the principal amount of the investment. As explained in Information Circular 70-6R4, it is not this Directorate's practice to comment on situations involving a specific taxpayer and a completed transaction. However, we can provide the following general comments on the taxation of amounts received in connection with GIC investments.
There are various types of GIC's available in the marketplace, but typically they consist of a guarantee given by the issuing financial institution (the "GIC issuer") to return the principal amount originally given to it by the holder of the GIC (the "GIC holder") at a fixed maturity date. The GIC issuer also agrees to pay to the GIC holder, some form of compensation for being allowed to use the GIC holder's funds for the period of time covered by the GIC contract. The compensation may be in the form of a stated minimum rate of return, a bonus amount to be determined by applying all or a portion of the percentage increase in a stock-index over the period covered by the GIC to the principal amount of the GIC, or a combination of a minimum rate of return and a stock-index linked bonus. In general, GIC investments are considered to be debt obligations, as opposed to equity investments, because there is a legal enforceable right under the GIC contract for the GIC holder to force the issuer of the GIC to repay to the holder of the GIC, the full amount of the principal that was invested by the GIC holder at a fixed maturity date.
The Legislation
Many debt obligations, including GIC's are "investment contracts" as that term is defined in subsection 12(11) of the Income Tax Act (the "Act"). The term "anniversary day" is also defined in subsection 12(11) of the Act, to mean:
a) the day that is one year from the day immediately before the issue date of the contract (e.g. a five-year contract with issue day of June 1, 2000 will have an anniversary day of May 31, 2001),
b) the day that occurs at every successive one year interval from the day determined under (a) above (e.g. the contract in the example in (a) will have anniversary day's on each of May 31, 2002, May 31, 2003, and May 31, 2004), and
c) the day on which the contract is disposed of. (This would include the maturity date of the contract described in (a) on May 31, 2005).
Subsection 12(4) of the Act, requires that for each taxation year, in which a taxpayer holds an interest in an investment contract on the anniversary day of the contract, the taxpayer must include in computing his or her income for the year, the interest that accrued to the taxpayer at the end of the anniversary day of the contract in that taxation year, to the extent the amount has not otherwise been included in the taxpayer's income for the year or a preceding year. Where an investment has a fixed annual rate of interest, one year's interest will generally be required to be included in income by virtue of subsection 12(4) each year that the taxpayer holds the investment, even though the taxpayer may not be entitled to receive any interest until the investment contract matures.
There are some investment contracts which do not have fixed annual rates of return and the rules regarding the reporting of income on these investments is generally provided for in subsection 12(9) of the Act. Subsection 12(9) of the Act provides that where the debt obligation is a "prescribed debt obligation" an amount determined in a prescribed manner shall be deemed to accrue to the taxpayer as interest on the obligation for the purposes of subsection 12(4).
Section 7000 of the Regulations to the Act ("Regulations") deems certain debt obligations to be "prescribed debt obligations" and deems income on these investments to be interest for the purposes of the interest accrual rules in subsections 12(4) and 12(9) of the Act. Paragraph 7000(1)(d) of the Regulations deems any debt obligation that a taxpayer holds at any time in a taxation year to be a prescribed debt obligation where the amount of interest to be paid in respect of any taxation year is based on a contingency that exists after the end of the year. Paragraph 7000(2)(d) of the Regulations, deems the amount of interest that must be accrued into income in a year in which a taxpayer holds and interest in a prescribed debt obligation as described in paragraph 7000(1)(d) to be the maximum amount of interest thereon that could be payable thereunder in respect of that year. Subsection 7000(3) of the Regulations, deems the amount of any bonus or premium payable under a debt obligation to be interest payable under the obligation for the purpose of the rules in section 7000 of the Regulations.
Application of the Legislation to Stock-Index Linked GIC's
Based on the foregoing, it is our view that the stock-index linked return on a GIC investment is a bonus or premium payable in respect of the obligation, as it is an amount over and above the amount of interest stipulated to be payable under the contract. The amount of the stock-index linked return is therefore deemed to be interest payable under the GIC for the purposes of section 7000 of the Regulations, by virtue of subsection 7000(3) of the Regulations. Because the amount of the deemed interest depends on a contingency that exists after the end of each year in which the GIC is held (i.e. the stock-index level at maturity), it is our view that a stock-index linked GIC is a prescribed debt obligation described in paragraph 7000(1)(d) of the Regulations.
As a prescribed debt obligation described in paragraph 7000(1)(d) of the Regulations, for each year that the taxpayer holds the stock index linked GIC, the taxpayer must include in computing income pursuant to subsection 12(4) of the Act, the amount of interest that is deemed to accrue by virtue of subsection 12(9) of the Act and paragraph 7000(2)(d) of the Regulations. In this regard, where the amount of the stock-index linked return is based solely on the level of the relevant stock-index at the maturity date, for each taxation year that a taxpayer holds a stock-index linked GIC on an anniversary day of the GIC prior to the year of maturity the maximum amount of interest that could be payable in the year with regard to the deeming provision in subsection 7000(3) of the Regulations is unknown and therefore no amount is required to be accrued into income in each of these years. In the year the contract matures and the amount of the stock-index linked return is known, it is our view that, the full amount of the stock-index linked return is the maximum amount of interest that could be payable under the GIC in the year of maturity for the purposes of paragraph 7000(2)(d). Therefore, in the year of maturity of the contract, the full amount of the stock-index linked return on the GIC is deemed to be interest accrued on the obligation and must be included in the taxpayer's income for the year in which the contract matures pursuant to subsection 12(4) of the Act.
We hope our comments will be of assistance to you.
Yours truly,
F. Lee Workman
Manager
Financial Institutions Section
Income Tax Rulings Directorate
Policy and Legislation Brach
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2001
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2001
Email this Content