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: Whether a T5 need be issued for a convertible debenture prior to an interest payment date.
Position: Depends on the terms of the debenture.
Reasons: A T5 need be issued in respect of accrued but unpaid interest only if the debenture is an "investment contract".
XXXXXXXXXX
2014-051988
Lara G. Friedlander
June 19, 2014
Dear XXXXXXXXXX:
Re: T5 Reporting
This is in response to your email of February 4, 2014 concerning the issuance of T5 slips.
Canco is a taxable Canadian corporation. In Year 1, Canco issued unsecured convertible debentures (the "Debentures") with a term of one year, maturing in Year 2. The Debentures carry a stipulated interest rate. Interest is payable at maturity only.
You have asked whether the Debentures could be "investment contracts" and, if so, whether Canco must issue a T5 in Year 1.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Also, where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. Nonetheless, we have provided some general comments below.
Our Comments
The obligation of an issuer to provide a T5 slip is set out in section 201 of the Income Tax Regulations (the "Regulations"). Paragraph 201(1)(b) of the Regulations provides that a T5 must be issued when certain types of interest, including interest on a fully registered bond or debenture, have been paid. Accordingly, generally, for fully registered bonds or debentures, a T5 must be issued only when interest is actually paid. However, subsection 201(4) of the Regulations provides different reporting rules for a debt obligation in respect of which subsection 12(4) of the Income Tax Act (the "Act") (relating to investment contracts) and paragraph 201(1)(b) of the Regulations apply. Where the issuer of such a debt obligation is indebted under the obligation in a calendar year, a T5 must be issued in respect of the amount that would, if the calendar year were a taxation year of the taxpayer, be included as interest in respect of the debt obligation in computing the taxpayer's income for the year.
Generally, the rules relating to "investment contracts" require taxpayers who would ordinarily include interest in income only to the extent that the interest is received or receivable to include accrued interest in their income. Specifically, subject to the rules for impaired debt obligations in subsection 12(4.1), a taxpayer (other than a corporation, partnership, unit trust or any trust of which a corporation or partnership is a beneficiary) who holds an interest (or, for civil law, a right) in an "investment contract" on any "anniversary day" is required under subsection 12(4) of the Act to include in income any interest that has accrued to the taxpayer to the end of that day to the extent that the interest was not otherwise included in computing the taxpayer's income for the year or a previous taxation year.
Under the definition of "investment contract" in subsection 12(11) of the Act, a debt obligation will not be an investment contract of a taxpayer if the taxpayer has (otherwise than because of the interest accrual rules in subsection 12(4) of the Act), at periodic intervals of not more than one year, included in computing the taxpayer's income throughout the period in which the taxpayer held an interest (or for civil law a right) in the obligation the income accrued on it for those intervals.
If a Debenture matures exactly in one year or less after issuance and the interest on the Debenture is payable on maturity, then the taxpayer will include in income all the interest accrued on the Debenture within the requisite one year period, and therefore the Debenture will not be an investment contract. In this case, a T5 needs to be issued only in respect of interest that has been paid, which we understand would occur on maturity in the Year 2.
If a Debenture matures more than one year after issuance (and all the interest accrued on the Debenture is paid at maturity) then the Debenture will be an investment contract unless one of the other exceptions in subsection 12(11) of the Act applies. We do not have sufficient information to provide any further guidance on this point.
The T5 Guide (see http://www.cra-arc.gc.ca/E/pub/tg/t4015/t4015-13e.pdf) summarizes the reporting requirements relating to investment contracts. It states that a T5 slip must be issued every year in respect of investment contracts even if no interest has been paid. The T5 slip must report the total of all interest accrued to each "anniversary day". Interest that has been reported previously need not be reported again.
We trust that these comments will be of assistance.
Yours truly,
G. Moore
For Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2014
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2014
Email this Content