21 July 1993 External T.I. 9316625 F - RRSP Qualified Investments, Bonds Stripped 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.

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Attention:  XXXXXXXXXX

Dear Sir:

RE:  Canada Savings Bonds, Stripped Bonds and GICs held by Registered Retirement Savings Plans

This is in reply to your facsimile transmission dated May 16 1993, addressed to the Audit Division of Revenue Canada and referred to us for reply.

Your letter primarily concerns a factual situation of one of your clients. Specific comments may only be provided by us in respect of actual situations only if the situation is presented to us by a referral from the District Office of the taxpayer involved and only if complete details of the transaction are provided including the name of the persons involved. We therefore can not address your concerns on your clients situation at this time. We can, however, provide the following general comments.

When property is transferred to an RRSP by an annuitant of the RRSP it must be transferred at its fair market value. This is discussed in detail in the Department's Interpretation Bulletin IT-320R2, a copy of which is attached. Your attention is directed to paragraph 4 of the Bulletin which discusses Canada savings Bonds.

A transfer of a property to an RRSP includes both a sale of a property and a transfer in satisfaction of a contribution to the RRSP.

When a debt instrument is transferred with accrued interest, the debt instrument itself is generally a capital property as defined by section 54(b) of the Income Tax Act (the "Act") to both the transferor and transferee. The right to receive the accrued interest on the instrument is also a separate property. However, by definition, this property is not a capital property since any gains derived from its disposition will be on income account.

The cost of the right to receive the accrued interest is equal to the amount paid to acquire the right. When a right to receive accrued interest income is disposed of or is satisfied by receipt of the income the interest must be included in income. Paragraph 20(14)(a) of the Act provides for the income inclusion on a disposition. Paragraph 20(14)(b) of the Act also provides that when a transferee includes the interest in income, the cost of the right may be deducted. Whether or not deducted, the cost of the right is reduced to nil on receipt of the income.

To summarize, if a debt instrument with accrued interest is transferred by an annuitant to an RRSP, the RRSP will acquire the debt instrument as a capital property with a cost equal to its fair market value and the accrued interest at a cost equal to its fair market value. If and when the RRSP receives the accrued interest it will report it as income and deduct the cost of the right. At that time the value of the right will be reduced to nil. If the RRSP accrues subsequent interest amounts they will also be properties but they will have a cost of nil to the RRSP.

For the purposes of the foreign property rules in section 206 of the Act the "cost amount" of each property must be determined. Cost Amount is defined in subsection 248(1).

The cost amount for most debt instruments acquired by RRSPs will be the cost of the property while the cost amount of any accrued interest will be its cost at the time the determination is being made. Certain properties such as stripped bonds, however, have special rules that must be followed to determine their cost amounts. These rules can primarily be found in sections 12(9) and (9.1) of the Act and Part LXX of the Income Tax Regulations. IT-396R and IT-410R also discuss these provisions.

We trust these comments will be of assistance to you.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate