28 November 1996 External T.I. 9637465 - VALUATION OF STRIP COUPON

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 "straight-line" method of valuation is more appropriate than "bid/ask quotation" to determine fair market value of strip coupon.

Position:

Doesn't appear to be but verify with Valuations Section.

Reasons:

Quoted market price should be more reflective of fmv than straight-line since latter does not take into account fluctuations in interest rates at the time an instrument is valued which could cause the coupon to be sold at a discount or premium.

XXXXXXXXXX							963746

Attention: XXXXXXXXXX

November 28, 1996

Dear Sirs:

Re: Valuation of Strip Coupon

This is in reply to your letter of November 4, 1996, in which you ask whether a straight-line valuation of a strip coupon held in a registered retirement income fund ("RRIF") is an acceptable method of determining the fair market value of the investment for purposes of the definition of "minimum amount" in subsection 146.3(1) of the Income Tax Act (the "Act").

The Directorate is unable to confirm whether a method of valuation will determine the fair market value as required by any particular provision in the Act. The Department provides advice on these matters through the Valuations Sections located in the tax services office. For Metropolitan Toronto, you may address your enquiry to Mr. Murray Game at the Toronto Centre Tax Services Office, 36 Adelaide Street, Toronto, Ontario, M5C 1J7 (telephone (416) 973-9211; fax (416) 954-6015).

Generally, however, it is our understanding that where an investment is freely traded in the market (stock exchange or similar forum) the bid/ask quotation or the listed price on the valuation date would reflect fair market value. These methods would be best suited to meet the standard definitions of "fair market value". For example, Blacks' Law Dictionary (6th edition) defines "fair market value" as:

the amount at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of the relevant facts.

If you are aware of an industry convention of valuing certain investments on a straight-line basis (which has been accepted by the Department) and you believe the strip coupon's resemblance to such investments supports a valuation on the same basis, you may wish to mention this to the Valuations Section identified above.

We trust the foregoing comments assist.

Yours truly,

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