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:
Why must the total amount earned and received upon maturity of a 3 year equity-indexed GIC be reported in full in the taxation year in which the GIC matured and not apportioned over the three year term of the GIC?
Position TAKEN:
Where the terms and conditions of the interest on the debt obligation depend on a contingency existing after the year (e.g. an equity-linked investment) paragraph 7000(1)(d) of the Regulations would apply to cause the debt obligation to become a prescribed debt obligation, such that an amount of interest as calculated pursuant to paragraph 7000(2)(d) of the Regulations is deemed to accrue to the taxpayer for the purpose of subsection 12(9) of the Act.
The amount of interest deemed to accrue in each taxation year pursuant to paragraph 7000(2)(d) for a debt obligation identified in paragraph 7000(1)(d) is the maximum amount of interest thereon that could be payable thereunder in respect of that year.
However, since the return on the equity-linked investment was not known with certainty until the maturity date, no amount could be deemed to accrue under the rules set out in paragraph 7000(2)(d) of the Regulations until the maturity date.
Reasons FOR POSITION TAKEN:
Consistent with the CCRA's interpretation of the relevant provisions as set out in various opinion letters and advance income tax rulings.
XXXXXXXXXX 2001-007987
P. Diguer
June 27, 2001
Dear XXXXXXXXXX:
Re: Subsection 12(9) of the Income Tax Act (Canada) (the "Act") and Regulation 7000
This is in reply to your letter dated March 30, 2001, in which you request our views on the application of the Act in regards to amounts received by an individual in a taxation year upon the maturity of an investment in an equity-linked investment certificate (GIC) issued by a Canadian bank.
In particular you describe a situation where an individual has invested in a GIC offered by a bank. The primary features are as follows:
(a) 3 year term
(b) interest is calculated by reference to an increase in the value of a particular stock or stock index and no guaranteed annual interest
(c) interest paid at maturity
The individual received a T-5 information slip from the bank for the taxation year in which the GIC matured reporting the total amount earned as interest on the GIC and paid in the taxation year. At issue is the fact that the amount must be reported in one lump sum for the taxation year in which the GIC matured.
In particular you ask:
Can the interest be apportioned over the three year term of the GIC?
If yes, will any interest and penalties apply to the prior years on the unreported investment income?
Owing to the uncertainty of any interest being earned should the income received be characterized as a capital gain?
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular IC-70-6R4 dated January 29, 2001. Where the particular transaction is completed, the inquiry should be addressed to the relevant Tax Services Office. Although we are unable to provide any opinion in respect of the specific transactions described in your letter, we have set out some general comments which we hope are of assistance to you.
Typically, an equity-linked deposit by an individual, such as the one described in your letter, involves an investment in which the return is based on the return achieved by a notional index such as the TSE 300, the S&P 500 indices or a specific stock or group of stocks. In such a case the certificate holder owns no part of the stocks that comprise the underlying index. The return which may include stipulated interest and a bonus or bonus only is generally contingent upon the performance of the particular stock index or particular stock over a specified term and the amount of the return is not determined until a lock-in date selected by the holder or until maturity. Thus, the return on the equity-linked investment is contingent upon the performance of the notional index or stocks, as the case may be, and the results are not known until or near the lock-in date or maturity date, as the case may be.
Paragraph 7000(1)(d) of the Income Tax Regulations ("the Regulations"), describes a prescribed debt obligation as a particular debt obligation in respect of which the amount of interest to be paid in respect of any taxation year is, under the terms and conditions of the obligation, dependent on a contingency after the year.
An equity-linked investment by an individual such as the one described in your letter is generally considered a prescribed debt obligation pursuant to paragraph 7000(1)(d) of the Regulations such that an amount of interest as calculated pursuant to paragraph 7000(2)(d) of the Regulations is deemed to accrue to the taxpayer for the purpose of subsection 12(9) of the Act.
The amount of interest deemed to accrue in each taxation year pursuant to paragraph 7000(2)(d) for a debt obligation described in paragraph 7000(1)(d) of the Regulation is the maximum amount of interest thereon that could be payable thereunder in respect of that year.
However, since the return on the equity-linked investment held by an individual as described in your letter was not known until the maturity date, no amount could be deemed to accrue under the rules set out in paragraph 7000(2)(d) of the Regulations until the maturity date. Accordingly, the entire return on the investment is calculated and reported for income tax purposes in the taxation year into which such maturity date falls. There is no provision in the Act which would in this case, permit the interest amount determined in paragraph 7000(2)(d) of the Regulations to be apportioned over multiple taxation years.
It is our view that the return on this type of investment is on income account. You may wish to direct your comments on the merits of characterizing the amounts earned on equity-indexed investments as capital gains to the Department of Finance as they relate to tax policy.
We trust our comments will be of assistance to you. .
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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