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.
Principal Issues: Tax treatment of a banker's acceptance, including a disposition.
Position: Accrued interest income taxable pursuant to paragraph 12(1)(c). Possible capital gain or loss in the case of a disposition prior to maturity.
Reasons: As provided for in the Act.
XXXXXXXXXX
2010-037915
V. Srikanth
October 8, 2010
Dear XXXXXXXXXX :
Re: Banker's Acceptance
This is in response to your correspondence dated August 27, 2010, wherein you requested our comments on the tax implications of a banker's acceptance in the hands of an investor.
Our Comments
Written confirmation of the tax implications inherent in actual proposed transactions is given by this Directorate only where the transactions are the subject of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, entitled Advance Income Tax Rulings. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on our website at http://www.cra-arc.gc.ca. If, however, the particular transactions are completed or partially completed, the enquiry should be addressed to the relevant Tax Services Office. Your request was not submitted as an advance income tax ruling request, however, as stated in paragraph 22 of IC 70-6R5, we do provide written opinions on general enquiries which are not binding and we are prepared to provide you with the following comments.
Generally, a banker's acceptance (B.A.) is a negotiable commercial draft (i.e., written instruction to make payment) that has been "accepted" by the borrower's bank. In this transaction, the borrowing company presents its B.A. to the bank. The bank makes a short-term loan to the borrower and stamps and accepts the B.A. for a stamping fee. Once stamped, investment dealers who act as agents or principals sell the B.A. to investors in the market on a discount basis. The bank has now accepted to pay the interest and the principal to the investors. At maturity, the borrowing company repays the loan to the bank, which in turn repays the investors.
The scheme of the Income Tax Act (the "Act") contemplates that discounts, that is the difference between purchase price and maturity value, at least those payable on non-interest bearing debt obligations, are interest. For the holder of a B.A., where a B.A. is held until maturity, interest accrued each year will be included as income for that year, pursuant to paragraph 12(1)(c) and subsections 12(3), 12(4), 12(9) of the Act. CRA made the following comments during the 2005 conference of the Association de planification fiscale et financière (APFF), in response to the question on the tax treatment of a B.A. from an investor's point of view:
"Subsections 12(3), 12(9), 20(14) and 20(21) of the ITA, the definition of "investment contract" in subsection 12(11) of the ITA and section 7000 of the Regulations refer to a debt obligation. This term generally means the right of the creditor to receive a sum of money and to demand its payment. In our opinion, a banker's acceptance acquired by a taxpayer constitutes a debt obligation for the purposes of applying the above-mentioned provisions.
Moreover, the holder of a banker's acceptance is subject to paragraph 12(1)(c) of the ITA with respect of any amount received or receivable (depending on the method regularly followed by the taxpayer in computing the taxpayer's income) as, or on account of, in lieu of payment of or in satisfaction of, interest to the extent that the interest was not included in computing the taxpayer's income for a preceding taxation year."
You specifically asked about the tax consequences on the disposition of a B.A. prior to maturity and, in our view, subsection 20(14) of the Act ensures that the interest which accrued to the transferor before that time, is included in his/her income and is, thus, excluded from the proceeds of disposition of the B.A. Further, the disposition of a B.A. could give rise to a capital gain or loss but only to the extent that the proceeds of disposition, excluding the interest that is otherwise required to be included in income, exceeds or is less than the adjusted cost basis of the B.A.
For an issuer of a non-interest bearing debt obligation, such as a B.A., reporting on an accrual basis, the issue discount will generally be deductible as interest in that taxation year to which it relates such that it can be said to be payable in respect of the year.
We trust our comments will be of assistance to you.
Yours truly,
R.A. Albert, CA
For Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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