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: Why there is no capital gain at maturity on a strip bond
Position: The difference between the amount received on redemption and the amount that was paid on its acquisition will have been included in income as interest and therefore included in the cost of the strip bonds. In this particular case, since the proceeds of disposition are equal to the adjusted cost base no capital gain will result.
Reasons: The strip bond is considered to be a prescribed debt obligation and for the purposes of subsection 12(9), an amount determined under Regulation 7000(2) is deemed to accrue to the taxpayer as interest in each taxation year. The amounts included in income as interest would then be added to the cost of the strip bond under subsection 52(1) such that on its redemption at maturity the proceeds will be equal to the adjusted cost base and there would be no capital gain under subsection 39(1).
XXXXXXXXXX 2002-013531
B. Kerr
July 3, 2002
Dear XXXXXXXXXX:
Re: Reassessment of XXXXXXXXXX Income Tax Returns
XXXXXXXXXX
This is in response to your letter of January 23, 2002, sent to the Ottawa Tax Services Office that has been forwarded to us for reply concerning the determination of the interest income and capital gains with respect to the XXXXXXXXXX strip bond that you and your spouse jointly bought in XXXXXXXXXX and matured in XXXXXXXXXX.
We understand that the strip bond was purchased on XXXXXXXXXX for $XXXXXXXXXX and that the maturity value on XXXXXXXXXX was $XXXXXXXXXX. The accrued interest for each anniversary date was as follows:
XXXXXXXXXX.
As stated in our letter of January 7, 2002, a strip bond acquired by an individual is an "investment contract" pursuant to the definition in subsection 12(11) of the Income Tax Act (the "Act") and a "prescribed debt obligation" as defined in subsection 7000(1) of the Income Tax Regulations.
Subsection 12(4) of the Act requires a taxpayer, holding an interest in an investment contract on any anniversary day of the contract, to include in income for the year the interest that accrued to the end of that day to the extent that it has not already been included in computing the taxpayer's income for the year or any preceding year. Therefore you and your spouse would each have to report 50% of the accrued interest referred to above in your income for each particular taxation year.
The amount of interest so included in income is added in computing the cost to the individual investor of the debt obligation by virtue of subsection 52(1) of the Act. As a result of these additions the adjusted cost base of the strip bond will be equal to its redemption value, calculated as follows: the adjusted cost base at acquisition is the amount paid for the bond ($XXXXXXXXXX) plus the amount of interest included in your incomes ($XXXXXXXXXX) for a total of $XXXXXXXXXX.
Although, we agree with your view that the strip bond would be considered to be a Canadian security for the purposes of the election under subsection 39(4) of the Act, the purpose of the election is to ensure that in certain circumstances the security is considered to be a capital property such that any gain on its disposition is treated as being on account of capital rather than income. However, in your particular case there would be no capital gain on maturity under subsection 39(1) since the proceeds of disposition will be equal to the adjusted cost base of the strip bond (ie. proceeds of disposition of $XXXXXXXXXX minus adjusted cost base of $XXXXXXXXXX equals nil gain or loss).
We trust that these comments will be of assistance.
Yours truly,
Paul Lynch
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
cc Ottawa Tax Services Office
Shawinigan-Sud Taxation Centre
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