25 July 1990 External T.I. 900450 F - Early Redemption of Guaranteed Investment Certificates

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 25, 1990

Dear Sirs:

Re:  Early Redemption of Guaranteed Investment Certificates

This is in reply to your letter of April 10, 1990, wherein you requested our opinion on the income tax treatment of a "pre-redeemed" guaranteed investment certificate ("GIG") in the following situation.

A taxpayer has invested in a 5-year compound interest GIG and has elected to recognize interest income on an annual basis pursuant to subsection 12(8) of the Income Tax Act (the "Act").  Shortly after two years has passed, the taxpayer requests, and is granted, a pre-redemption of the GIG.  The "interest adjustment" is such that applying   the 2-year rate of interest for the period the GIG was in place will result in total interest paid over the term being less that the interest income previously recognized in the taxpayer's income tax returns by  virtue of subsection 12(8) of the Act.

You have requested our opinion on the proper method of reporting the interest income in this situation.  You have also requested our opinion in a situation where the individual has been reporting the interest income pursuant to subsection 12(4) of the Act and the pre-redemption occurs shortly after the "third anniversary" date.

With respect to both situations where the taxpayer reports the interest income pursuant to subsections 12(4) or 12(8) of the Act, we offer the following comments.  Where a taxpayer has accrued and reported interest income on a debt obligation and has at any particular time disposed of that obligation for consideration equal to its fair market value at the time of disposition, the taxpayer may, by virtue of subsection 20(21) of the Act, deduct in computing income for the year of disposition, the amount, if any, by which the aggregate of the amounts of interest from that debt obligation that was included in the taxpayer's income for the year of disposition and all previous years exceeds the total interest actually received thereon.

We trust our comments are of assistance to you.

Yours truly,

for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch