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 increase in market value of a strip coupon in RCA subject to "refundable tax".
Position:
Deemed accrued interest is subject to the tax.
Reasons:
Income from property is subject to 207.5(1) refundable tax, and strip coupon's deemed accrued interest (12(9) and 12(4)) is therefore subject to the tax.
XXXXXXXXXX 964149
Attention: XXXXXXXXXX
January 22, 1997
Re: Strip Coupon in Retirement Compensation Arrangement ("RCA")
This is in reply to your letter of December 10, 1996, in which you ask whether the increase in market value of a discounted strip coupon held in an RCA is subject to "refundable tax" as defined in subsection 207.5(1) of the Income Tax Act (the Act").
"Refundable tax" is defined in paragraph (b) of the definition to include 50% of all amounts each of which is the income (determined as if the Act were read without reference to paragraph 82(1)(b)) of an RCA trust from a property for the year or a preceding taxation year.
Income from property is described in subsection 12(4) of the Act as including, where the RCA trust holds an interest in an investment contract on any anniversary day of the contract, the interest that accrued to the RCA trust to the end of that day with respect to the investment contract to the extent that the interest was not included in the RCA trust's income for that year or a preceding taxation year. If the RCA trust has a beneficiary which is a corporation or partnership, the provisions of subsection 12(3) would apply instead to similar effect.
For the purposes of subsections 12(3) and (4) and other provisions subsection 12(9) of the Act deems an amount determined in prescribed manner to accrue to the RCA trust as interest in each year that the RCA trust holds an interest in a debt obligation prescribed by section 7000 of the Income Tax Regulations. A strip coupon is a prescribed debt obligation as set out in paragraph 7000(1)(b) of the Income Tax Regulations.
Therefore, it is our view that strip coupons issued at a discount and held by an RCA trust are subject to Part XI.3 tax by virtue of the combined application of either subsection 12(3) or (4) and subsection 12(9) of the Act, paragraph 7000(1)(b) of the Income Tax Regulations, and paragraph (b) of the definition of "refundable tax" in subsection 207.5(1) of the Act. The particular method of calculating the accrued interest in this situation is set out in paragraph 7000(2)(b) of the Income Tax Regulations.
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
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