24 April 1995 External T.I. 9431245 - BOND ISSUED IN 1980

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:

Reporting of accrued interest on 1980 Ontario hydro bond

Position TAKEN:

General response on accrued interest

Reasons FOR POSITION TAKEN:

Reg 7000 applies

		943124
XXXXXXXXXX	C. Tremblay

Attention: XXXXXXXXXX

April 24, 1995

Dear Sirs:

Re: Ontario Hydro Bond issued in 1980

This is in reply to your letter of November 17, 1984 requesting our opinion concerning the reporting of a 13.25% Ontario Hydro bearer bond held by an individual. The bond was purchased by the individual at a cost of $15,000 on September 7, 1982, and is redeemable for $100,000 in May 2010. It was issued on May 14, 1980 and the interest coupons have been stripped to May, 1997.

The situation outlined in your letter appears to involve a completed transaction of a specific taxpayer. Completed transactions and their implications to specific taxpayers are the responsibility of the District Taxation Office. 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.

In our opinion, where a partially stripped bond was acquired by an individual after 1981, it is an investment contract pursuant to paragraph 12(11)(a) of the Act, and a "prescribed debt obligation" pursuant to subsection 7000(1) of the Regulations. An amount determined pursuant to subsection 7000(2) of the Regulations is deemed to be interest on the debt obligation. Subsection 12(9) of the Act deems the interest to accrue in each year for the purposes of subsections 12(3), 12(4), 12(11), 20(14) and 20(21) of the Act. Since the bond was acquired by the individual prior to 1989, subsection 12(4) of the Act will require the individual to include at each anniversary date starting with the day that is three years after the end of the calendar year of the issue of the contract and in every third successive year interval that follows, the interest income so calculated.

If an investment contract was last acquired after 1981 but was issued in 1980, the first "third anniversary" of that contract for purposes of subsection 12(4) of the Act will be the end of the day that is three years after the end of the calendar year of issue; i.e. December 31, 1983. Thus, with respect to that contract, the interest accrued from January 1, 1982 through December 31, 1983 would, to the extent that it was not previously included in income, be included in the owner's 1983 income. The subsequent reporting dates will cover the three calendar years ending in 1986, 1989, 1992, 1995, etc.

In our view, the bond is eligible for the capital gains exemption election, if the fair market value of the bond exceeds the cost base at February 22, 1994. Generally, the cost base would be the purchase price paid by the individual adjusted by any increase pursuant to subsection 52(1) of the Act to February 22, 1994. It should be noted, however, that the amounts added in computing the taxpayer's cost under subsection 52(1) include only those amounts that were actually included in computing the taxpayer's income otherwise than under section 7.

The above comments are only expressions of opinion on the application of the Income Tax Act generally and as such should not be construed as advance income tax rulings, nor are they binding on the Department.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch