20 March 1998 Internal T.I. 9804976 - REG 7000 - TREASURY BILLS

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 paragraph 7000(2)(a) of the Regulations could be interpreted in such a manner that the amount taxed as interest on the disposition of a treasury bill would be equal to the difference between the cost of the bill and its proceeds of disposition?

Position:

Cannot be so interpreted.

Reasons:

Wording of provision would not support such an interpretation.

		March 20, 1998

	CLIENT SERVICES DIRECTORATE	HEADQUARTERS
	Specialty Publications Section	Carole Chouinard
	Attention:  Sue Wormington
		6-980497

Tax Treatment of Proceeds of Disposition of Treasury Bills

This is further to your memorandum of February 25, 1998, wherein you inquired whether a different interpretation of paragraph 7000(2)(a) of the Income Tax Regulations (the "Regulations") could be adopted with respect to treasury bills.

In your view, the application of this provision leads to an unacceptable result from a tax perspective where market interest rates have increased and the proceeds obtained by a taxpayer who disposes of a treasury bill before maturity are accordingly adversely affected. In such circumstances, you argue that paragraph 7000(2)(a) of the Regulations should be interpreted such that the taxpayer would report as interest only an amount equal to the difference between the proceeds of disposition and the cost of the treasury bill.

Section 7000 of the Income Tax Regulations (the “Regulations”) defines the types of debt obligations that are “prescribed debt obligations” for purposes of subsection 12(9) of the Income Tax Act (the “Act”) and mandates specific accrual rules for such instruments. Paragraph 7000(1)(a) of the Regulations applies to instruments such as treasury bills, in respect of which no interest is stipulated to be payable on its principal amount. In the absence of a specific provision, such as paragraph 7000(2)(a) of the Regulations, it would be impossible to determine the manner in which the accrual rules in subsections 12(3) and (4) of the Act apply to such instruments. Accordingly, paragraph 7000(2)(a) of the Regulations provides that interest is deemed to accrue on the basis of the constant actuarial yield to the investor based on the cost of the instrument.

From a tax policy perspective, these rules provide certainty with respect to the determination of accrued interest in circumstances where, because of the nature of the instrument, it would be difficult or unclear how to make such a determination. Although these rules may lead to results that appear harsh to taxpayers, it is the Department’s role to interpret and apply the Act as it is worded and we cannot, in the name of expediency, apply the Act in a manner contrary to a specific provision, such as paragraph 7000(2)(a) of the Regulations. Furthermore, the only reason the result appears harsh in the situation described in your memorandum is that the taxpayer does not have a capital gain against which to apply the capital loss triggered by the disposition of the treasury bill. His predicament in this respect is not unlike that faced by many taxpayers who dispose of capital property at a loss, yet have no capital gains in the taxation year of the loss against which to apply the capital loss. However, to the extent this capital loss cannot be used in the loss year, it becomes a carried-over loss that can be used in calculating the taxable income of other taxation years, subject to certain limitations.

Any change to the rules regarding the determination of accrued interest in respect of treasury bills would require an amendment to the Act. Should the taxpayer in respect of which the Edmonton TSO wrote wish to make submissions regarding such a change, he should write to the Department of Finance, who is responsible for amendments to the Act.

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