6 March 1996 Internal T.I. 9606766 - PRESCRIBED DEBT OBLIGATION - RENEWAL OPTION

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 a particular two year investment certificate in which the second year is renewable at the option of the investor is a prescribed debt obligation.

Position:

Yes

Reasons:

Reg 7000(4)

			March 6, 1996

	HEADQUARTERS	HEADQUARTERS
	Client Services Directorate							J.P. Dunn
	Tax Publications Division	(613) 957-8953
	Specialty Section
	Attention:  Sue Wormington
			960676

Prescribed Debt Obligations - XXXXXXXXXX

We are writing in response to your facsimile correspondence of February 20, 1996 concerning an enquiry received from the
XXXXXXXXXX

and whether, in our view, such obligations would constitute a "prescribed debt obligation" within the meaning of that term in subsection 12((9) of the Act and section 7000 of the Income Tax Regulations.

As we understand, the particular obligation is a one year obligation with an option available to the holder to renew at the end of the first year for an additional year. Although it is not perfectly clear from the incoming letter, it appears that interest earned in the first year is either,

i)paid to the recipient at the end of that first year in the event that the holder decides not to extend the term for the additional year or,

ii)in the event that the renewal option is exercised, the first year's interest is, at the option of the holder either,

a) paid to the holder and the original principal amount is reinvested at the previously agreed renewal rate or,

b)is added to the original principal amount and allowed to compound at the renewal rate.

As a preliminary point, we would note that, in circumstances in which the option to renew is exercised and the interest for the first year is added to the principal amount of the obligation, it is the view of the Department that such interest has been paid at the time of renewal.

Although we would agree with your view that, in circumstances in which interest is payable annually, the obligation would generally fall within the parameters of paragraph 12(1)(c) of the Act such that interest earned would be reported at the stated rate and not calculated on a compound basis pursuant to subsection 12(9) and regulation 7000, it is our view that, in the present case, subsection 7000(4) of the Regulations would be applicable to consider the obligation to be a "prescribed debt obligation" for the purpose of subsections 12(4) and (9) of the Act. Subsection 7000(4) of the Regulations considers that, in circumstances in which the terms of the obligation include an option to extend the term of the obligation upon maturity, the renewal obligation will be considered, for the purposes of section 7000 of the Regulations, to be a continuation of the original obligation unless it could reasonably have been foreseen at the time of original issue that the renewal obligation would be issued at the then current rate of interest.

Accordingly, it is our view that the obligation in question is an obligation described in paragraph 7000(1)(c) of the Regulations and, for the purpose of subsection 12(9) of the Act, interest as computed pursuant to paragraph 7000(2)(c) will be deemed to accrue to the holder in each year in which the obligation is held.

We trust that this is the information which you require.

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