An individual acquired a bond, bearing interest at 7% and with a face value of $100, for investment purposes in the secondary market for $124. What is the treatment of the $24 premium? CRA stated:
[W]here an individual acquires an interest-bearing bond in the secondary market as an investment at a premium, it is the CRA's view that the premium paid is an amount that forms part of the cost of the debt obligation for the purpose of determining the adjusted cost base of the debt obligation. Accordingly, the loss realized on the disposition of the debt obligation resulting from the premium on the disposition of the obligation (at maturity or on assignment) will be considered a capital loss. Furthermore, the length of the holding period of the bond does not change the nature of the premium.
However, where an individual holds a bond as a trader or dealer, it is CRA's view that any loss realized on the disposition of the bond that is attributable to the payment of a premium will be on income account.