Regulation 7000

Subsection 7000(1)

Paragraph 7000(1)(a)

Administrative Policy

28 September 1994 T.I. 941626 (C.T.O. "Interest Income")

The interest accrual rules for prescribed debt obligations generally will not apply to debt obligations (in this case, undivided interests in wholesale receivables sold to investors and payable on a floating interest rate basis) that pay a floating rate of interest to an investor on a monthly basis.

Tax Professionals Mini Round Table - Vancouver - Q. 14 (March 1993 Access Letter, p. 104)

An interest-free debt representing the amount owing for the sale of assets to another company represents a prescribed debt obligation. However, where the proceeds are equal to the fair market value of the assets, the calculation under Regulation 7000(2)(a) will not result in any interest accrual.

87 C.R. - Q.49

a shareholder loan bearing interest at a nominal rate which is purchased at a discount is not a prescribed debt obligation.

84 C.R. - Q.14

where a bond is stripped of its coupons, and the bond residue and the detached coupons are sold separately at a discount, s. 12(9) is applicable both to the bond residue and the detached coupons.


Holmes, "Supplemental Retirement Arrangements May Provide Deferral for Employee and Deduction for Employer", Taxation of Executive Compensation and Retirement, March 1990, p. 243

Once the amount of payments to be made to an employee under a supplemental pension arrangement are determined, the accrual rules should not apply as long as the employer's obligation is not interest bearing - because the executive has no cost for his entitlement to the payments, and thus the calculation of deemed interest cannot be performed.

Ulmer, "Taxation of Interest Income", 1990 Conference Report, c. 8.

Paragraph 7000(1)(b)

Administrative Policy

October 1992 Central Region Rulings Directorate Tax Seminar, Q. N (May 1993 Access Letter, p. 233)

A stripped bond is a prescribed debt obligation under s. 7000(1)(b).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 52 - Subsection 52(1) 28

15 April 1992 T.I. (Tax Window, No. 18, p. 21, ¶1864)

A taxpayer who acquires a bond whose interest coupons for the first ten years previously were stripped and sold separately will be required to accrue interest calculated in the manner prescribed by Regulation 7000(2)(b). When an interest coupon matures, the portion of the proceeds of disposition that reasonably may be considered to represent a recovery of the cost to the taxpayer is not included in income.

13 June 1991 T.I. (Tax Window, No. 4, p. 14, ¶1306)

Both strip bonds and interest coupons which have been removed from them are prescribed debt obligations. When an interest coupon matures, the proceeds of disposition which represent a recovery of the cost need not be included in income.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 52 - Subsection 52(1) 27


Duncan Osborne, "CARS and PARS Focus on Stripping Corporate Bonds", Corporate Finance, Vol. XI, No. 1, 2003, p. 1023.

Allgood, "Recent Developments in Asset-Backed Securitization", 1993 Conference Report, c. 16

Discussion of application of interest accrual rules to arrangements creating unequal interests in personal property.

Paragraph 7000(1)(c)

Administrative Policy

9 September 2003 External T.I. 9 September 2003 T.I. 2003-0006645 - Callable Step-Up Bond

callable step-up bond subject to accrual under Reg. 7000(2)(c.1)

In response to a query as to whether callable step-up bonds are subject to the yield-to-maturity calculations in Reg. 7000(2)(c.1), CRA stated:

[A] callable step-up bond with features that include increasing interest rates throughout its term to maturity, and provides the issuer the ability to redeem the bond without penalty or premium at or prior to the day on which the interest rate would increase, is a prescribed debt obligation [under Reg. 7000(1)(c)]. …

[A] callable step-up bond is no different than any other step-up bond that has increasing interest rates throughout its term to maturity… .

Neither the Act nor the Regulations contain a deeming provision that would consider a callable step-up bond to mature the next day on which the issuer is permitted to redeem it without penalty or premium. Callable step-up bonds are treated as having a maturity…that is, the maturity date that is listed as its term. …

[T]he excess interest income reported for tax purposes can be deducted under subsection 20(21).. .

19 May 1992 T.I. 920810 (C.T.O. "Deep Discount Bonds")

"It is our position that an interest in an obligation which is issued at a discount and carries a stipulated rate of interest is not a prescribed debt obligation under subsection 7000(1) of the Income Tax Regulations ... . The determination of whether or not a true discount represents interest could not be made without knowing the nature or the activities and the legal obligations of both parties to a transaction ... ."

ATR-61, 20 April 1995 "Interest Accruals"

Where a special term deposit provided for annual interest of 2.25%, compounded annually and paid at maturity, and a bonus payment also payable at maturity based on the TSE 35 index (with an ability to lock in the bonus payable on maturity at an earlier date), the interest accrual rules would not apply to the bonus prior to any lock-in given that prior to lock-in its amount was not determinable.


Kevin Kelly, "Callable and Extendible Step-Up Notes", Corporate Finance, Vol. XI, No. 4, 2004, p. 1127

Comparison of extendible and callable step-up notes (pp.1127-8)

An Extendible Step-Up Note offers essentially the same economics as a Callable Step-Up Note, but rather than having a maturity date with optional redemption dates prior to that time, an Extendible Step-Up Note has an initial maturity date, with the option for the issuer to extend the maturity date on the extended maturity dates up to a final maturity date….

Extendible (unlike callable) note not within Reg. 7000(1)(c) (p. 1128)

[A] Callable Step-Up Note will meet the criteria set out in paragraph 7000(l)(c) of the Regulations as it can be determined, at the time that the note is (acquired, that the maximum amount of interest payable thereon in a year will be less than the maximum amount of interest payable in a subsequent year. [fn 6: This characterization has recently been confirmed in …2003-0006645…] However, an Extendible Step-Up Note should not be considered a prescribed debt obligation for these purposes, as a holder of an Extendible Step-Up Note has no present right, at the time that the note is acquired, to any interest beyond the initial maturity date or extended maturity date, as the case may be….

Example of application of Reg. 7000(2)(c.1) (p. 1129)

Using a simple example, assume an investor acquires a three-year Callable Step-Up Note that is redeemable at the option of the issuer at the end of each year and that bears interest of 6% in year 1, 8% in year 2.and 10% in year 3. Here, paragraph 7000(2)(c.1) will result in a 7.899% accrual rate for each year that certain investors hold the note.

PDO rules do not apply to individuals (p. 1129)

[P]aragraph (i) of the definition of "investment contract" provides that where a holder includes interest (and amounts in lieu of interest) in computing its income accrued on a debt obligation on at least an annual basis, the debt will not be an investment contract. The terms of a Callable Step-Up Note (as well as a non-callable "Step-Up Note" or "Escalating Rate Note") generally provide that the annual stipulated interest will be paid semi-annually each year (such that the annual stipulated interest will be included in income on a received or receivable basis). Consequently, a Callable Step-Up Note (as well as a non-callable "Step-Up Note" or "Escalating Rate Note") should not be considered to be an investment contract and therefore subsection 12(4) should not apply to an individual holder….

Paragraph 7000(1)(d)

See Also

James McTamney & Co. Ltd. v. MNR, 89 DTC 194 (TCC)

Pawners were under no obligation to repay sums paid to them by a pawnbroker unless they redeemed the articles in question. Therefore, there were no "debt obligations" of the pawners to the pawnbroker.

Administrative Policy

12 December 1996 Internal T.I. 7-963388 -

Although a note payable for property acquired that has a contingent interest payment based on an unknown amount would be a prescribed debt obligation under Regulation 7000(1)(d), because the amount of the interest that could be payable in respect of the current year cannot be calculated before the principal payment date, no information return is required to be filed under Regulation 201(4), and no amount is included in income under s. 12(4).

Subsection 7000(2)

Paragraph 7000(2)(a)

See Also

Goulet v. The Queen, 2009 DTC 1875, 2009 TCC 127 (Informal Procedure), aff'd 2011 DTC 5138 [at 6120], 2011 FCA 164

In finding that the difference between the purchase price of notes and of commercial paper acquired by the taxpayer in the secondary market and their redemption price was interest to the taxpayer, Bédard, J. rejected the taxpayer's submission (at para. 6) that s. 12(9) of the Act and Regulation 7000(2) applied only to taxpayers who held prescribed debt obligations that were acquired at the time of their issue.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(c) discounts not compensation for risk 116

Administrative Policy

28 July 2014 External T.I. 2014-0532651E5 - Loan to charitable foundation

non-interest bearing and non-arm's length term loan could trigger PDO rules

Canco advances the Loan to a related charitable foundation. The Loan is not issued at a discount and matures in X years. Are there any tax consequence to Canco to the Loan not bearing interest? CRA stated:

Where the cost of the Loan is less than the amount payable at maturity, there will be a deemed accrual under paragraph 7000(2)(a) of the Regulations. However, because the Loan was made between two non-arm's length parties, paragraph 69(1)(a)… may apply to reduce the cost of the Loan to Canco. If the Loan is not repayable at the demand of Canco, it is possible that the fair market value of the Loan could be less than the amount advanced by Canco under the Loan. If that is the case, then paragraph 69(1)(a)… could deem Canco to have acquired the Loan at a cost equal to the fair market value of the Loan, triggering the deemed accrual under paragraph 7000(2)(a)… .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(a) non-interest bearing term loan could trigger PDO rules 156

90 C.R. - Q10

Provided that a non-interest bearing demand promissory note is redeemable for its face amount, the calculation in s. 7000(2)(a) will not result in accrued interest income.

88 C.R. - "Finance and Leasing" - "Inclusion in Income"

T Bills are governed by Regulation 7000 rather than s. 16(3).

Paragraph 7000(2)(b)

Administrative Policy

18 March 1993 Memorandum (Tax Window, No. 32, p. 7, ¶2599)

A numerical example illustrating the application of Regulation 7000(2)(b) to four interest coupons purchased at a discount.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 52 - Subsection 52(1) 28


Sabrina Wong, Sania Ilahi, "Tax Implications of Asset Securitizations", 2015 CTF Annual Conference Report

Co-ownership structure for mortgage securitizations (p. 12:14)

The securitization of mortgages has often been structured as the sale by an SPE (the issuer SPE) of undivided co-ownership interests in a pool of mortgages. The basis of the structure is a custodial arrangement in which the issuer SPE purchases the mortgage loans from a mortgage seller (or less often originates the mortgage loans itself) and then transfers all of its rights, title, and interests in the mortgage loans to the custodian who acts as agent, bare nominee, and bailee for the investors. The mortgage seller or a related entity continues to service the mortgages. The securities sold by the issuer SPE to the investors (the certificate holders) evidence undivided co-ownership interests in the mortgage loans and all related rights under the mortgage loans. The certificates typically include…:

  1. fast-pay or sequential-pay certificates issued in a class (for example, classes A to D) under which the certificate holders are entitled to receive (in sequential order, for example, of A to D) payments of certificate interest at a specified rate (commonly called "the passthrough rate") on the certificate balance and payments in respect of the certificate balance, until the certificate balance is reduced to nil;
  2. interest-only certificates entitled to receive only payments of certificate interest at a specified rate on the certificate balance; and
  3. residual certificates entitled to the remaining amounts.

Application of PDO (Reg. 7000(2)(b)) rules (p. 12:15)

Since the co-ownership interests evidenced by the certificates are unequal with respect to their rights to principal and interest payments on the underlying mortgage loans, each investor does not necessarily receive the same percentage of each payment of interest and principal. A certificate holder's co-ownership interest in a mortgage loan constitutes a prescribed debt obligation under regulation 7000(1)(b).

Interaction of servicing fees and PDO calculation (p. 12:16)

[T]he certificate holder's share of various fees and expenses relating to the servicing of the mortgage loans…should generally be deductible on a current basis, provided that they are reasonable. However, it is generally difficult to determine which certificate holder is responsible for which portion of the fees and expenses. A practical approach is for the certificate holder to report the net amount received and compute the prescribed-debt obligation accrual on the basis of the net amounts. The CRA agrees with this position [in 2007-022514lR3].

Paragraph 7000(2)(c)

Administrative Policy

30 March 2005 External T.I. 2004-0102421E5 F - Placement à rendement progressif

use of minimum rate if maximum is unknown

A callable debt instrument provides for a rate of interest which will increase for each period except for one of the periods and (in a second case) for a rate of interest which increases in each period except that the issuer may increase the interest rate for each period. After noting that Reg. 7000(2)(c) would apply, as the interest was not fixed for at least one of the periods, CRA stated (TaxInterpretations translation):

[T]he issuer must annually calculate based on the interest rates known at the moment of calculation. When an instrument specifies a minimum rate for each year in its term, the calculation of the amount must be effected taking into account the maximum known rates. For the years for which the maximum rate is not yet known, it is the minimum rate which must be used in the calculation. In the situation where the debt instrument does not specify the rate of interest for certain periods, the amount must be calculated taking into account the known rate and taking into account the hypothesis that the rate, for periods where no rate is specifed, is nil.

87 C.R. - Q.55

in calculating the accrual under Regulation 7000(2)(c), a bondholder must include a bonus which is payable by the issuer if it should choose to redeem the bond before maturity.

Paragraph 7000(2)(c.1)

Administrative Policy

5 April 2004 External T.I. 2004-006802 -

Interest on an escalating term deposit would be reported on a yield-to-maturity basis.

Paragraph 7000(2)(d)


Ludmer v. Attorney General of Canada, 2018 QCCS 3381

mere possibility of locking in value accretion each year did not crystallize the maximum amount of interest respecting the year

The Canadian-resident taxpayers were shareholders of a BVI company (“SLT”) which, in turn, held notes issued by two foreign subsidiaries of two Canadian banks. The notes were payable in 15 years and the amount payable was calculated by reference to the performance of a reference portfolio of equities or bonds.

CRA considered that there was a requirement to recognize deemed interest income on the notes under Reg. 7000(2)(d) given that, in contrast to the usual equity-linked notes that were available to investors at the time, these notes had “internal puts,” i.e., SLT had the right to terminate the notes at any time, on 367 days’ notice, at the market value of the reference assets. On this basis, it considered that the “the maximum amount of interest thereon that could be payable thereunder in respect of that year” was the difference between the maximum value of the reference assets at the end of the year and the maximum value in the prior years, and assessed accordingly, to treat such annual increase as foreign accrual property income of SLT under element C of the s. 95(1) FAPI definition.

In finding that these assessments were unreasonable, Hamilton JCS stated (at paras. 438-440):

Rulings issued a series of opinions that equity-linked notes are not taxable on an accrual basis but only on maturity, unless the taxpayer has the right to lock in the return before maturity and exercises that right. The mere fact that something could have been done to crystallize the value was not sufficient with other notes.

…The CRA never suggested that the possibility of locking-in the bonus means that an amount can be accrued based on the highest value of the index in the year. The mere possibility was not enough.

The Court concludes that the arguments put forth to justify the annual accrual of interest on the SLT Notes under Regulation 7000 represent a significant break from the prior practice of the CRA on equity-linked notes that cannot be justified by any distinction between the Notes and the prior equity-linked notes. Essentially, the CRA applied an assessing position to the SLT shareholders that it did not apply to any other taxpayer.

It also was unreasonable for CRA to assess all of the increase in value of the Note in the taxation years prior to 2005 (which were statute-barred) in its reassessments for the 2005 taxation year. Hamilton JCS stated (at para. 538):

It is difficult to understand how Regulation 7000(2)(d), which provides for the inclusion in income of “the maximum amount of interest thereon that could be payable thereunder in respect of that year” [emphasis added], can be interpreted in such a way as to include increases in value from previous years. The CRA made no attempt to explain this.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(2) recurring fee reduction amounts received for no work were income and taxable under s. 56(2) when directed to controlled company 275
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) - Paragraph 152(4)(a) - Subparagraph 152(4)(a)(i) nature of the legal advice relied upon was unclear 405
Tax Topics - Income Tax Act - Section 152 - Subsection 152(1) improper advancing of “settlement” elements that were not sustainable 43
Tax Topics - Income Tax Act - Section 94.1 - Subsection 94.1(1) equity-linked notes held in BVI company were portfolio investments held with a tax avoidance purpose, but were not subject to 7000(2)(d) interest accrual 540
Tax Topics - General Concepts - Negligence and Fiduciary Duty damages awarded against CRA for inter alia making unreasonable reassessments 252
Tax Topics - Income Tax Act - Section 3 - Business Source/Reasonable Expectation of Profit recurring fee reduction amounts received for no work were income from a source 299

See Also

Cassan v. The Queen, 2017 TCC 174

no requirement to accrue interest on index-linked note in a year when the return thereon was not determinable

In December 2009, the taxpayers participated in a program that had both an investment and gifting component. Under the investment component:

  1. The taxpayer purchased a minimum of 10 limited partnership units (the “LP Units”) in an Ontario limited partnership (the “2009 LP” – whose general partner was owned by a family trust of the owner of the promoter (“EquiGenesis”)) for $36,140 per LP unit, of which $32,000 was funded by a loan (a “Unit Loan,”) – which had a maturity date in February 2019, was secured by a pledge of the LP Units, bore interest at 7.85%, all of which in fact was funded with further cash advances from the lender (“capitalized interest”), who was a trust (“FT”) - and the balance was funded by the taxpayer.
  2. The 2009 LP used these per-unit proceeds to pay $1,565 in issue expenses and $34,575 to purchase “Linked Notes” (issued by “Leeward,” a BVI corporation), which provided for the payment on their maturity on December 31, 2028 of their $34,575 principal plus the greater of two amounts, each calculated by reference to a notional portfolio consisting in one case of the performance of a notional balanced portfolio and in the second case, based on 200% of the appreciation in a specified stock index– and which, although secured, ranked behind the Notes issued by it in connection with the gifting component.
  3. Leeward made a secured loan of $32,000 of the amount so received to a trust affiliated with FT (“DT”), which immediately lent the same amount as a secured loan to FT, with each loan bearing interest at 7.85% p.a. and maturing on December 31, 2028. DT granted Leeward a security interest over all its assets and FT granted DT a security interest over all its assets.
  4. Leeward also invested $2,575 in Class D Notes (the “Man Notes”) issued by a U.K.-based investment manager (“Man Investments”) and with a return dependent on the return realized on an underlying pool of assets managed by it. The return on the Man Notes to December 31, 2028 was required to be at least 9.61% p.a. in order for Leeward to be able to discharge the TGTFC Notes when they matured in 2028.

In finding that the 2009 LP was not required to accrue interest income under Reg. 7000(2)(d) respecting the linked notes in 2 above, Owen J stated (at paras. 402-3, 405):

[T]he text of paragraph 7000(2)(d) requires a determination, for each taxation year to which the contingency applies, of the maximum amount of interest that could be paid in respect of that year under the terms and conditions of the debt obligation if the contingency did not exist. The assumption underlying paragraph 7000(2)(d) is that such an amount is capable of determination, which is consistent with the approach taken in paragraphs 7000(2)(a) through (c.1) of the ITR.

The approach taken in each of paragraphs 7000(2)(a) through (d) is consistent with the general proposition that an amount is not recognized as income under the ITA unless the amount can be ascertained with some reasonable degree of certainty. …

In the absence of an actual crystallizing event there is simply no way of knowing the actual amount that the 2009 LP is entitled to be paid under the terms of the Linked Notes and therefore there is no amount to reallocate to avoid a deferral of income. This is not an inappropriate result because in fact there is no deferral of the return on the Linked Notes because until an actual crystallizing event there is no return to defer. The result simply follows the uncertainty attached to such debt obligations.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(1) - Total Charitable Gifts common law gift was vitiated by loan to donor at unreasonably low rate 746
Tax Topics - Income Tax Act - Section 143.2 - Subsection 143.2(12) although borrowing by taxpayers had a term of 9.3 years, they had a reasonable expectation of refinancing with the promoter’s assistance 466
Tax Topics - Income Tax Act - Section 143.2 - Subsection 143.2(7) - Paragraph 143.2(7)(a) loans were not bona fide in that not handled with commerciality 655
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) interest on loan to acquire LP units was deductible as there was a prospect of gross income being allocated by LP in 19 years’ time 583
Tax Topics - Statutory Interpretation - Realization Principle amount should not be recognized until ascertainable 67
Tax Topics - Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(c) gratuitous transfer is gift irresepctive of absence of benevolent intent 50

William E. Thomson Associates Inc. v. Carpenter (1989), 69 OR (2d) 545 (C.A.)

Although a facility fee fell within the definition of "interest" in the Criminal Code, the trial judge properly exercised his discretion to permit the severance of the obligation to repay principal in accordance with the principles governing the intervention of public policy to strike down a contract.

Administrative Policy

2007 Ruling 2007-0237351R3 - Stock-link Notes

stock-indexed note

Ruling respecting a stock-linked note where no return (other than in extraordinary circumstances) was payable until maturity, that so long as any variable return early payment amount does not become payable before the year in which the final valuation date occurs, no amount will be required to be included under s. 12(4) in the income of an individual note holder, and that the variable return will be required to be included under s. 12(1)(c) on maturity.

27 June 2001 External T.I. 2001-0079875 - EQUITY-LINKED INVESTMENT CERTIFICATE

return on stock-index linked GIC require to be recognized on maturity

A bank GIC has a 3 year term, interest is calculated by reference to an increase in the value of a particular stock or stock index with no guaranteed annual interest, and with interest paid at maturity. Can the interest be apportioned over the three year term? CRA responded:

An equity-linked investment by an individual such as the one described in your letter is generally considered a prescribed debt obligation pursuant to paragraph 7000(1)(d) of the Regulations such that an amount of interest is calculated pursuant to paragraph 7000(2)(d)… . [S]ince the return on the equity-linked investment held by an individual as described in your letter was not known until the maturity date, no amount could be deemed to accrue under the rules set out in paragraph 7000(2)(d)…until the maturity date. Accordingly, the entire return on the investment is calculated and reported for income tax purposes in the taxation year into which such maturity date falls. There is no provision…[to] permit the interest amount…to be apportioned over multiple taxation years.

9 August 2001 External T.I. 2001-007626 -

recognition on stock index-linked GIC on maturity

The amount payable on maturity on a stock-index linked GIC (which is deemed to be interest by Regulation 7000(3)) does not require any recognition of income in years prior to the year of maturity because "the maximum amount of interest that could be payable in the year with regard to the deeming provision in subsection 7000(3) of the Regulation is unknown". In the year of maturity, the full amount of the index-linked return is the maximum amount of interest that could be payable under the GIC for that year for purposes of Regulation 7000(2)(d).

1997 Ruling 971975 [90% cap does not engage accrual]

90% cap does not engage accrual

The return on an index-linked note is capped at 90% of the principal amount. A representation is made that "the Return that the Holder can expect to receive on the Notes is indeterminable being an amount between 0% and 90% (inclusive) of the Principal Amount." Ruling that no amount will be required to be included in the Holder's income under s. 12(4) during the term of the Notes.

28 July 1994 940615 (C.T.O. "T-5 Reporting")

In response to a query as to whether T-5 reporting was required for a stock-index linked obligation on which a contingent payment was based on the TSE 100 stock index, RC indicated that "where the maximum amount that could be payable in respect of the year cannot reasonably be calculated, the interest amount is only included in income pursuant to paragraph 12(1)(c) of the Act in the year received or receivable."