10 August 1995 External T.I. 9518455 - STRIPPED BONDS - ELIGIBLE FOR INVESTMENT ALLOWANCE?

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:

Whether the interest coupon stripped from a bond qualifies for an investment allowance under subsection 181.2(4) of Part I.3.

Position TAKEN:

A stripped interest coupon qualifies for an investment allowance if the underlying bond, on the assumption that it was not stripped, would otherwise have qualified; the bond is not issued by a government body exempt from tax by section 149.

Reasons FOR POSITION TAKEN:

Legislation. Words "similar obligation", in paragraph 181.2(4)(c) are broad enough to embrace the stripped interest coupon. This is consistent with positions taken with respect to subsection 39(6) and the definition of "qualified investment" in section 204 where the words of the Act are identical.

	                    				951845
XXXXXXXXXX                      	G. Donell

Attention: XXXXXXXXXX

August 10, 1995

Dear Sir:

Re: Large Corporation Tax & "Stripped bonds"

This is in reply to your letter of July 5, 1995 in which you have asked us whether an interest coupon stripped from a bond should, for the purpose of calculating Large Corporation Tax under Part I.3 of the Income Tax Act (the "Act"), be considered to qualify as an investment allowance pursuant to paragraph 181.2(4)(c) of the Act.

Where a corporation acquires a "stripped bond" (i.e., a bond certificate from which the interest coupons have been detached prior to maturity), a detached coupon, or an undivided interest in a right to receive principal or interest in respect of a bond, such bond, detached coupon or undivided interest will be eligible for an investment allowance as long as the underlying bond, on the assumption that it had not been stripped, would have otherwise been eligible. In our view, the bond, coupon or undivided interest would be regarded as a "similar obligation", as that expression is used in paragraph 181.2(4)(c) of the Act, to the unstripped bond.

With respect to the example included with your letter, we would note that the investment allowance of a corporation other than a financial institution is comprised of several elements including a bond, debenture or similar obligation of another corporation. Excluded from this definition, however, is indebtedness of any corporation that is exempt from tax under section 149 of the Act on all of its taxable income. Pursuant to paragraph 149(1)(d) of the Act no tax is payable upon the taxable income of a person for a period when that person was a corporation, commission or association not less than 90% of the shares or capital of which was owned by Her Majesty in right of Canada or a province. Accordingly, to the extent that the entity described in your example is such a corporation, commission or association, any debt obligations issued by that entity would fail to qualify for inclusion in the calculation of a corporation's investment allowance because of that limitation.

We trust that the above comments are of assistance to you.

Yours truly,

Chief
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy & Legislation Branch