11 February 1993 Income Tax Severed Letter 9230835 - Non-resident-owned Canada Savings Bond

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

923083
XXXXXXXXXX L. Holloway
(613) 957-8953

Attention: XXXXXXXXXX

February 11, 1993

Dear Sirs:

Re: Canada Savings Bonds held while an individual is non- resident

This is in reply to your letter of October 5, 1992, requesting a technical interpretation of subsection 12(4) and paragraph 12(1)(c) of the Income Tax Act (the "Act") as they apply to interest income earned on Canada Savings Bonds by non-residents.

The three scenarios presented in your letter and your analysis follow:

Scenario 1

• 1. Individual buys an interest in either a Compound Interest CSB or a Regular CSB while resident in Canada.
• 2. The individual ceases to be a resident of Canada for Canadian tax purposes.
3. While not a resident of Canada:
• (a) an anniversary day of his Compound CSB's passes (as defined in paragraph 12(11)(b)); or
• (b) an amount of interest related to his Regular Interest CSB becomes payable

Scenario 2

• 1. Individual acquires an interest in either a Compound Interest CSB or a Regular Interest CSB while he is resident in Canada.
• 2. The individual ceases to be resident in Canada for Canadian tax purposes for a period of time, after which he returns and once again becomes resident in Canada.
3. After he regains his status as a resident in Canada either:
• (a) an anniversary day of his Compound Interest CSB passes; or
• (b) an amount of interest related to his Regular Interest CSB becomes payable as the case may be.

Scenario 3

• 1. The individual ceases to resident in Canada for Canadian tax purposes.
• 2. While not resident in Canada, the individual acquires an interest in either a Compound Interest CSB or a Regular Interest CSB (assuming this is possible).
• 3. The individual returns to Canada and regains his status as resident in Canada.
4. After regaining his status as resident in Canada, either:
• (a) an anniversary day of his Compound Interest CSB passes; or
• (b) an amount of interest related to his Regular Interest CSB becomes payable as the case may be.

Your Analysis

Scenario 1:

With respect to the period throughout which the individual is resident in Canada (that is, from the last anniversary day to the day on which the individual becomes non- resident), there is no provision which brings into income any interest accrued during this period. Subsection 12(4) would otherwise operate to bring the accrued interest into income in the taxation year in which the anniversary day occurs while the individual is not resident. There is no provision apparent in section 115 which would cause subsection 12(4) to operate while the individual is not resident in Canada. Neither would section 114 invoke subsection 12(4), as during the period throughout which the individual is not resident in Canada section 114 only requires income inclusion of amount required by section 115 to be included in income.

The apparent result in Scenario 1 is that in the year in which the individual becomes a non-resident, none of the interest accrued from the last applicable anniversary day is included in income subject to tax under Part I. Furthermore, given that the debt instrument is a CSB, the interest will be exempt from withholding tax under Part XIII.

Scenarios 2 & 3

With respect to the period throughout which the individual is not resident in Canada, section 115 is applicable but does not provide for the inclusion in income of any interest accrued during this period.

Subsection 12(4) would operate to include in income on the anniversary day (which occurs while the individual is resident in Canada) any interest accrued to that day while the individual is resident in Canada however, because of the application of section 115, any interest accrued while the individual is not resident in Canada would not be included in income.

The apparent result in both Scenario 2 and Scenario 3 is that any interest accrued while the individual is resident in Canada is taxable under Part I; however, any interest accrued to that day while the individual is not resident in Canada is neither taxable under Part I nor under Part XIII.

Our Comments

We agree with your comments under the first scenario. Section 115, which defines taxable income earned in Canada by a non-resident does not operate to include amounts accrued under section 12 in income while the individual is not resident. Investment income paid by a Canadian source and received by a non-resident would normally be subject to withholding tax of 25% under Part XIII of the Act unless reduced by tax conventions. However, this withholding tax does not apply to bonds of or guaranteed by the Government of Canada under subsection 212(1)(b)(v). Canada Savings Bonds are covered by this exclusion, thus any interest earned would be exempt from Part XIII withholding tax.

We have informally confirmed with the Bank of Canada that the Regulations governing Canada Savings Bonds do not allow non-residents to purchase such instruments; however there is nothing in these regulations to prevent a former resident from taking such investments (purchased while a resident of Canada) out of the country. Therefore in the case of the second scenario, the taxpayer reentering the country with accrued interest receivable on Canada Savings Bonds would be subject to an income inclusion under paragraph 12(1)(c). Paragraph 12(1)(c) of the Act requires that interest received or receivable by the taxpayer must be included in income "to the extent that such interest was not included in computing his income for a preceding taxation year." Therefore interest income from Canadian source bonds, received upon a taxpayer's return to Canada, must be reported when received even though the majority of the interest may have been earned while the taxpayer was non resident.

We trust that these comments will be of assistance. Yours truly,

for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch