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:
1. Whether a discount on a bond is interest?
2. Whether an individual may make the election provided in 110.6(19) in respect of Treasury Bills, stripped bond and bonds issued at discount?
Position TAKEN:
1. Question of fact.
2. Yes
Reasons FOR POSITION TAKEN:
1. It is a question of fact which can only be determined after a review of all the relevant facts and documentation. Subsection 16(3) may apply. Subsection 12(9) and reg 7000 may apply if the debt obligation is a prescribed debt obligation.
2. See 5-942833.
May 1, 1995
OTTAWA TAX SERVICES HEADQUARTERS
Robert Gagnon
Attention: Kira Peskett (613) 957-8953
Client Assistance
7-951065
Discounts on Bonds
We are writing in response to your memorandum of April 18, 1995, wherein you requested our comments concerning the tax treatment of discounts on bonds.
The determination of whether or not a discount represents interest where a bond is issued for an amount less than the bond's principal, is a question of fact which can only be determined after a review of all the relevant facts and documentation, including all the pertinent terms of a specific bond. In our view, a discount on a bond does not in general have the characteristics of interest where the effective rate of interest on the bond is similar to the rate of interest on similar obligations at the time of issue.
Where a taxpayer holds a bond issued at discount which is a capital property and the discount is not interest, the amount of any realized discount is treated as a capital gain.
It is our view that the discount on Treasury Bills issued by the Government of Canada represents interest (see Edward D. O'Neil 91 DTC 692 (TCC)).
For an amount to be considered interest, the position of the Department is that it must meet all three of the following criteria:
(1) it must represent compensation for the use of a principal sum or a right to a principal sum;
(2) it must be calculated by reference to a principal sum or a right to a principal sum; and
(3) it must be calculated on a daily accrual basis.
Where a discount on a bond is not interest, certain provisions of the Act may apply in order to include the discount in the income of the holder.
Subsection 16(3) provides rules relating to the taxation of deep discount debt obligations (other than an obligation that is a prescribed debt obligation for the purpose of subsection 12(9) of the Act) issued by persons that are not subject to tax under Part I of the Act or by a non-resident person not carrying on business in Canada. Under subsection 16(3) of the Act, the difference between the principal amount of such debt obligation and its issued price (i.e., the discount) is included in the income of the first taxpayer that acquires a particular obligation as a capital property. The amount included in the income under subsection 16(3) of the Act is added in computing the adjusted cost base of the debt obligation under paragraph 53(1)(g) of the Act.
Subsection 12(9) of the Act provides (for the purposes of subsection 12(3), (4) and (11) and 20(14) and (21)) that where a taxpayer acquires an interest in a prescribed debt obligation (as defined in subsection 7000(1) of the Income Tax Regulations, hereafter "Regulations"), an amount determined in prescribed manner (subsections 7000(2) to 7000(5) of the Regulations) is deemed to accrue to the taxpayer as interest on the obligation in each taxation year during which the taxpayer holds the interest in the obligation. A stripped bond is a prescribed debt obligation by virtue of paragraph 7000(2)(b) of the Regulations. A bond issued at discount could be a prescribed debt obligation. For example, a bond issued at discount in respect of which no interest is stipulated to be payable is a prescribed debt obligation.
An individual may make the election provided in subsection 110.6(19) of the Act in respect of bonds, Treasury Bills, stripped bonds and detached coupon owned on February 22, 1994 which are capital properties.
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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