2 June 1994 External T.I. 9403925 - RECONSTITUTED SECURITIES

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.

Principal Issues:

How should the income from reconstituted securities to form a new marketable security be reported.

Position TAKEN:

Depends on facts

Reasons FOR POSITION TAKEN:

Not sufficient information to determine the issues.

		940392
XXXXXXXXXX	J.P. Dunn

Attention: XXXXXXXXXX

June 2, 1994

Dear Sirs:

Re: Reconstituted Securities

We are writing in response to your correspondence of February 7, 1994 regarding "synthetic bonds" which was addressed to Mr. Rick Seguin of the Information Returns Division of the Department. Mr. Seguin has forwarded your letter to this division for reply. We apologize for the lengthy delay in our response.

We would note that the Department provides advance income tax rulings only with respect to proposed transactions and that, generally, inquiries regarding ongoing transactions such as the case at hand should be directed to the local district taxation office.

We are prepared, however, to offer the following comments regarding the "synthetic bonds" described in your letter. It is not clear from the information included with your correspondence whether the investor has any interest, beneficial or otherwise, in the securities underlying the synthetic bond instrument or if the investor holds some type of debt obligation of the firm which has packaged and marketed the synthetic security. This determination could be made only after a thorough analysis of the relationships among the investor, the marketer and the depository corporation.

In the event that the "synthetic bond" is a secured or unsecured obligation of the marketing firm, that security would, in our view, constitute an interest in a "prescribed debt obligation" to the holder as defined in subsection 7000(1) of the Income Tax Regulations for the purpose of subsection 12(9) of the Income Tax Act. The amount deemed to accrue to the holder of the as interest on the obligation would depend on the terms of the obligation.

In the event that the investor holds an interest in the underlying security, the amount of interest to be included in the income of the holder in any taxation year would be determined with reference to the relevant terms and conditions of that underlying security such as whether there was a stated rate of interest payable and the frequency of the interest payments. Such a security may or may not be a "prescribed debt obligation" as described in subsection 7000(1) of the Income Tax Regulations depending upon those terms and conditions.

Although we trust that our comments are of assistance, we caution that they do not constitute an advance income tax ruling and are, accordingly, not binding upon the Department with respect to any particular transaction.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch