17 May 1995 External T.I. 9501805 - COST AMOUNT 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.

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:Determinationof cost amount of stripped bonds

Position TAKEN:General review of law

Reasons FOR POSITION:Routine interpretation

XXXXXXXXXX		5-950180

May 17, 1995

Dear Sir:

Re: Canadian and Foreign Content Rules for Property held by Registered Retirement Savings Plans (RRSP)

This is in reply to your letter of January 12, 1995, concerning the calculation of the "cost amount" of property held in an RRSP for the purpose of subsection 206(2) of the Income Tax Act (the "Act").

Since you are concerned with the actual calculation of Part XI tax in respect of existing investments held in your RRSP, we can not provide any comments that relate specifically to your particular situation at this time. In such circumstances, we can only respond where the case is presented to us as a referral from a District Taxation Office and complete details of all transactions are provided.

While we can not provide specific comments at this time, we can provide the following general comments which you may find adequate for your purposes.

Property acquired by an RRSP must be recorded at its "cost amount" for the purpose of calculating Part XI tax. The term "cost amount" is defined in subsection 248(1) of the Act and for property held in RRSPs, usually means:

1. the property's adjusted cost base where the property is non-depreciable capital property;

2. the property's amortized cost where the property is a debt or a right to receive an amount; and

3. the property's cost to the extent it has not been deducted in computing income where the property is not otherwise specifically referred to elsewhere in the definition.

The definition of "cost amount" also refers to several other classes of property which are not usually held in RRSPs and are not included in the above list.

A debt's "amortized cost" is defined in subsection 248(1) of the Act and generally means a debt's actual cost where the debt is purchased at its face amount. As a general rule, a debt's amortized cost is not related to the amount of interest that must be accrued on the debt and does not increase as accruals of interest are made. This is because the amount paid for the debt generally represents the cost of a right to receive the principal element of the debt and a right to receive all future interest. In this respect, it should also be noted that although an RRSP trust is not generally taxable on its taxable income because of the application of subsection 146(4) of the Act, it may still have income in a year and this income will include any interest accrued to the trust following such provisions of the Act as may be applicable.

If a debt is purchased at a discount or premium the determination of its amortized cost is more complex. In these cases the debt's amortized cost is, in general terms, the debt's original cost plus or minus the amount of any discount or premium that must be included in its income for income tax purposes for each year ending before that time, less any payments received in satisfaction of the debt. Accordingly, if a debt is purchased at a discount, the amortized cost of the property will account for the amount of the discount earned in each prior year and the amortized cost of the debt may change over time.

To summarize, for the purposes of calculating Part XI tax, accrued interest is not added to the ACB of the debt. However, if a debt property is acquired at a discount, special rules will apply to increase the cost amount of the property by the amount of the discount brought into income each year the debt is held. Therefore, since stripped bonds are normally sold at a discount, the amount of the discount brought into income must be added to determine the cost amount of the bonds at any particular time.

If your RRSP trust is holding any bonds issued at a discount which may not have been valued correctly for the purposes of calculating your Part XI tax, you may wish to contact your local Taxation Services Office to discuss what actions may be taken to redetermine the tax payable. Should the Tax Services Office then request our assistance, we will be pleased to cooperate with them to resolve any problems that may arise.

We trust these comments will be of assistance.

Yours truly,

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