24 August 1989 Ministerial Letter 58388 F - Discounts on Bonds

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.

August 24, 1989

19(1)

Re:  Discounts on Bonds

This is in reply to your letter dated July 13, 1989, in which you asked for clarification of our assessing policy on corporate bonds.

The Deferred Income Plans and Trust Section of this Division has recently received two queries from you relating to the situation described in your letter of July 13.  This indicates that your inquiry relates to a proposed transaction.  Accordingly your inquiry should take the form of a request for an advance income tax income tax ruling.  While we are unable to deal with the specifics of your query, the following general comments may be of assistance to you.

Interpretation Bulletin IT-114 sets out the Department's assessing policy on discounted debt obligations.  As noted in paragraph 3 of that Bulletin, original-issue discount may qualify as interest in specific circumstances (for example, if the discounted debt does not carry a stated rate of interest).  To the extent that a discount qualifies as interest in this manner, it is deductible under the general rules set out in paragraphs 20(1)(c) and 9(d) of the Income Tax Act (Canada) (the "Act") and is not subject to the restrictions contained in paragraphs 18(1)(f) and 20(1)(f). In calculating the amount of the annual interest deduction claimable under paragraph 20(1)(c), the Department generally uses the simple-compound method.  In accordance with paragraph 20(1)(d), the compound interest element of the discount is deductible only when paid.

During the 1989 Revenue Canada Round Table, the Department indicated that IT-114 may be revised due to a concern that original-issue discount does not come within the common-law concept of interest.  Consideration of this matter is not yet complete, however.  As indicated during the Round Table discussion, the Department currently considers that the income tax treatment of original-issue discount is ultimately a question of fact.  The character of the discount must be determined for each debt.

The comments in this letter are of general nature only and do not take into account considerations that might arise in connection with a specific transaction or event.  In accordance with paragraph 24 of Information Circular 70-6R, the comments expressed herein do not constitute advance income tax rulings and consequently are not binding on the Department.

Yours truly,

for DirectorFinancial Industries DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch