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.
Principal Issues: How is interest reported on an escalating Term deposit
Position: Yield to maturity basis.
Reasons: Paragraph 7000(2)(c.1)
2004-006802
XXXXXXXXXX C. Tremblay, CMA
(613) 957-2139
April 5, 2004
Dear XXXXXXXXXX,
This is in reply to your electronic letter of March 22, 2004, wherein you asked us how interest should be reported on the T-5's for two escalator Term Deposit products that the XXXXXXXXXX offers.
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 advanced income tax ruling request and submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, any inquiries should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following general comments that may be of assistance to you. Please note that these comments are general in nature and are not binding on the Canada Revenue Agency.
Where it can be determined, at the time the taxpayer acquired an interest therein, that the maximum amount of interest payable thereon in a year ending after that time is less than the maximum amount of interest payable thereon in a subsequent year (for example, an escalating Term Deposit), the rules under paragraph 7000(1)(c) of the Income Tax Regulations (the "Regulations") apply. Those types of debt obligations are "prescribed debt obligations" for purposes of subsection 12(9) of the Income Tax Act (the "Act") and specific accrual rules are mandated for such instruments. Accordingly, the rules apply to products that provide for increasing yearly interest payments, such as your XXXXXXXXXX Term Deposit and your XXXXXXXXXX Term Deposit. The special rules result in the calculation of deemed accrued interest, which requires that interest is calculated on a yield to maturity basis according to paragraph 7000(2)(c.1) of the Regulations and not on the amount paid on the contract basis. The rule can be considered a "levelling" of the interest rates over the term of the instrument.
If the debt obligation is held to maturity, the total interest actually paid on the investment and the total interest reported for income tax purposes will be the same. Where the obligation is not held to maturity or if the taxpayer dies before maturity of the obligation, it is possible that interest income reported for income tax purposes will exceed the interest income actually paid. In such cases the excess interest income reported for tax purposes can be deducted under subsection 20(21) of the Act.
There is no difference whether the interest is paid annually or paid at maturity; the yield to maturity basis as described in paragraph 7000(2)(c.1) of the Regulations is used to calculate the annual amount required on the T-5 slip.
We trust that these comments will be of assistance.
Yours truly,
Steve Tevlin
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch
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