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.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
RULINGS DIRECTORATE
CORRESPONDENCE SUMMARY
Principal Issues:
Is an issue discount interest subject to the yearly accrual rules where a debt obligation carries a 1% interest rate when market interest is 5%.
Position TAKEN:
Yes. Accrual rules apply
Reasons FOR POSITION TAKEN:
Avoidance of Reg 7000
932840
XXXXXXXXXX C. Tremblay
Attention: XXXXXXXXXX
March 21, 1994
Dear Sirs:
Re: Discount realized by Investor
This is in reply to your letter of September 30, 1993, requesting our opinion on whether an investor who purchases a 10 year new issue bond from a securities dealer, intending to hold it to maturity, at a stated interest rate of 1% when the market value interest rate is 5% is required to include any amount other than the yearly 1% in his annual income. We assume that the 4% difference is the discount that arises where the issue price is less than the principal amount agreed to be repaid by the issuer. We apologize for the delay.
Our Opinion
The situation that is described appears to involve either a proposed transaction or a completed transaction. It is not our practice to give written opinions concerning proposed transactions, as indicated in Information Circular 70-6R2. If the transaction is a completed transaction, involving a specific taxpayer, your questions should be directed to your District Taxation Office which has the responsibility of determining the tax consequences of completed transactions and their implications to the specific taxpayers. Although we are unable to provide any opinion in respect of the specific transactions described in your letter, we have set out some general comments which may be of some assistance.
Where the rate of interest that is specified in an obligation is substantially below market rate at the date of issue, in our view, any discount is probably interest and consequently, the "investor" would be required to include a portion of the discount into income under subsection 12(4) of the Act on a yearly basis.
The forgoing represents our general views with respect to the subject matter of your letter, however, the facts of a particular situation may result in a different conclusion. As indicated, these opinions are not rulings and in accordance with the guidelines set forth in Information Circular 70-6R2 they are not binding on the Department.
We trust our comments will be of assistance to you.
Yours truly,
for Director
Financial Industries Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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