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: Does a bond purchased on the open market at a premium result in a capital loss when the bond matures or is the premium a reduction of the interest income in that year?
Position: Capital loss in the year bond matures or is disposed.
Reasons: Position in IT-114
2006-018022
XXXXXXXXXX C. Tremblay, CMA
(613) 957-2139
June 29, 2006
Dear XXXXXXXXXX,
This is in reply to your e-mail of April 6, 2006, wherein you asked us to comment on your views concerning the reporting of certain bonds and notes ("debt obligations") for income tax purposes. As an example, you submit the following:
In 2003, an individual purchased a $90,000 face value note (the "Note") @ 109.5454. The Note is due in 2007 and has a 6.75% annual yield. However, the cost was $98,590 and provides a 4.047% yield. During each year, the individual receives the 6.75% interest payment and reports it as interest income on their income tax return.
In the year the Note matures, that is in 2007, you question whether the difference between the purchase price of $98,590 of the debt obligation and the amount to be received at maturity, that is the $90,000 face value, can be deducted from the interest earned during that year.
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 (the "CRA").
In a situation where a taxpayer purchases a debt obligation on the open market as an investor and pays a premium over its face amount, it is the CRA's view that where the taxpayer holds the debt obligation as a capital property (i.e., the taxpayer is not a trader or dealer), the amount of any loss caused by having paid a premium for the investment is a capital loss in the year of maturity or in the year of disposition and, accordingly, this amount cannot be deducted as interest in the year the debt obligation matures.
We trust the following comments are of assistance.
Yours truly,
R. Albert, CA
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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