19 February 1996 External T.I. 9531505 - COST AMOUNT OF STRIPPED BOND OR DISCOUNT NOTE

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:

Cost amount of stripped bond which are held in RRSP

Position:

The cost amount includes the annual accrual of the discount into income.

Reasons:

A strip bond is a prescribed debt obligation.

XXXXXXXXXX 5-953150

Attention: XXXXXXXXXX

February 19, 1996

Dear Sirs:

Re: Cost Amount of a Stripped Bond or Discount Notes

This is in reply to your facsimile of November 30, 1995 in which you request a technical interpretation with respect to the cost amount of a stripped bond or discount notes acquired by a Registered Retirement Savings Plan ("RRSP") for the purpose of subsection 206(2) of the Income Tax Act (the "Act").

Property acquired by an RRSP must be recorded at its "cost amount" for the purposes 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.

In our view, a stripped bond is an investment contract and a "prescribed debt obligation" (P.D.O.) by virtue of paragraphs 12(11) of the Act and 7000(1)(b) of the Income Tax Regulations (the "Regulations") respectively. An amount determined pursuant to paragraph 7000(2)(b) of the Regulations is deemed to be interest on the P.D.O. and the interest thereon must be accrued and included in income over the period of ownership of the P.D.O. in accordance with subsection 12(4) and 12(9) of the Act. Hence, the total amounts included in income to the maturity of the P.D.O. should equal the discount.

The amount so included in income each year for the purposes of subsection 12(9) of the Act is added in computing the cost to the investor of that P.D.O..

On a sale of a P.D.O. prior to its maturity date, a capital gain could result if the proceeds of disposition are greater than the adjusted cost base of the security. Similarly, a capital loss could result where proceeds of disposition are less than the adjusted cost base.

We trust our comments will be of assistance to you.

Yours truly,

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