12 July 1989 Ruling 58233 F - Stripped Bonds and Separate Coupons as Qualified Investments for Deferred Income Plans

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.

July 12, 1989

Dear Sirs:

This is in reply to your letter dated June 21, 1989, in which you requested our views whether certain stripped bonds and their separate coupons would be qualified investments under subparagraph 4900(1)(i)(iii) of the Income Tax Regulations ("Regulations").

We are to assume the following:

1.     A corporation that satisfies the requirements to subparagraph 4900(1)(i)(iii) of the Regulations issues debentures with a 10 year term and having interest coupons attached.  The debentures bear interest at a commercial rate, and interest will be paid at the end of each year on the coupon that matures that year.

2.     After the issuance of each debenture, its initial holder will strip the coupons from the principal portion (residue) of the debenture.  The coupons and the residue will be sold separately by the initial holder to arm's length purchasers.

3.     Actual payments of each coupon and residue will be made only when each matures.  For example, interest will be payable to the holder of the year one coupon, and to the holder of the year two coupon, on the respective dates that the coupons mature.  All residues will mature and payments will be made at the end of the 10 year term.

In our view bond coupons detached from debentures that are qualified investments under subparagraph 4900(1)(i)(iii) of the Regulations could be obligations similar to the debentures to which they were originally attached, and be qualified investments under paragraph 4900(1)(i).  However, in each case it would be a question of fact whether such bond coupons could be considered to be obligations similar to the debentures and thereby be qualified investments since the coupons may be subject to condition different from the conditions attaching to the debentures, for example, they may not have a specified maturity date and may be redeemed only if the issuer has sufficient funds to discharge this obligation.

Where coupons are a qualified investment, both matured and unmatured coupons are treated as such.

We trust that our comments will be of assistance to you.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate