7 January 2002 External T.I. 2001-0099275 - INTEREST INCOME ON STRIP BONDS

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 CCRA.

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

Principal Issues:

Tax treatment of strip bonds

Position TAKEN:

Strip bonds are prescribed debt obligations pursuant to Regulation 7000.

Reasons FOR POSITION TAKEN:

For the purpose of subsection 12(9) of the Act, an amount determined in a prescribed manner under Regulation 7000(2) is deemed to accrue to a taxpayer as interest on the prescribed debt obligation in each of the taxation years during which the taxpayer holds an interest in the obligation.

XXXXXXXXXX 		2001-009927
B. Kerr
January 7, 2002

Dear XXXXXXXXXX:

Re: Tax treatment of strip bonds

This is in reply to your letter of August 22, 2001, concerning the tax treatment of strip bonds that you owned. You have requested our views on whether the differential between the initial cost of the bonds and their maturity date value is characterized as a capital gain or interest income.

You were of the view that the differential between the initial cost of the strip bonds and the amount to be received at maturity could be reported as a capital gain by making an election under subsection 39(4) of the Income Tax Act (the "Act"). However, you have recently read some information that suggests it should be reported as interest income on an annual basis.

Our Comments

The situation outlined in your letter involves a completed transaction. Although we are unable to provide any comments in respect of the specific transactions described in your letter without a complete review of all facts, documentation and circumstances of the particular situation, we can provide the following general comments.

In our view a strip bond acquired by an individual is considered to be an investment contract pursuant to the definition in subsection 12(11) of the Act and a prescribed debt obligation as defined in subsection 7000(1) of the Income Tax Regulations (the "Regulations"). As a result, the provisions of subsection 12(9) of the Act apply which provide that for the purposes of subsection 12(4), an amount determined in a prescribed manner under subsection 7000(2) of the Regulations is deemed to accrue to the taxpayer as interest on the prescribed debt obligation in each of the taxation years during which the taxpayer holds an interest in the obligation. Subsection 12(4) requires a taxpayer, holding an interest in an investment contract on any anniversary day of the contract, to include in income for the year the interest that accrued to the end of that day to the extent that it has not already been included in the taxpayer's income for the year or any preceding taxation year.

The amount of interest so included in income is added in computing the cost to the individual investor of the debt obligation by virtue of subsection 52(1) of the Act. On the disposition of a strip bond, a capital gain could result if the proceeds of disposition are greater than the adjusted cost base of the security (adjusted by any increase under subsection 52(1) of the Act). If the proceeds of disposition of a strip bond are less than the adjusted cost base (adjusted by any increase under subsection 52(1) of the Act), a capital loss will normally result.

The above comments are an expression of opinion only and, as explained in paragraph 22 of Information Circular 70-6R4, are not binding on the Canada Customs and Revenue Agency.

We hope that these comments will be of assistance.

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