Principal Issues: [TaxInterpretations translation] When does the "anniversary day" of an "investment contract" that is a "prescribed debt obligation" occur when the date of issue of the contract is January 1 of a particular year?
Position: The "anniversary day" is December 31.
Reasons: In accordance with subsection 12(11), the "anniversary day" is the day that is one year after the day before the date of issue of the contract, which is December 31.
2005-012264
XXXXXXXXXX Guy Goulet, CA, M. Fisc.
(613) 957-9768
May 31, 2005
Dear Sir,
Subject: Accrued interest
This is in response to your email of March 24, 2005 in which you asked in which specific taxation year the individual should include accrued interest in computing income in the Particular Situation described below.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act").
1. A $1,000 escalating-rate investment certificate with a three-year term was issued to an individual on January 1 of a particular year.
2. This investment certificate bears interest at a rate of 6% in the first year (Year 1), 8% in the second year (Year 2) and 10% in the third year (Year 3). This interest is payable annually.
3. The investment certificate is an "investment contract" as defined in subsection 12(11) and is a "prescribed debt obligation" by virtue of paragraph 7000(1)(c) of the Income Tax Regulations (the Regulations).
Our Comments
It appears to us that the situation described in your letter may be an actual situation involving taxpayers. The Canada Revenue Agency ("CRA") does not generally provide written opinions on proposed transactions otherwise than by way of advance ruling. Furthermore, it is the responsibility of the relevant Tax Services Office to determine whether completed transactions have received appropriate tax treatment. However, we can offer the following general comments which may not be fully applicable in a particular situation.
The Act provides rules for computing interest income for debt obligations that are investment contracts as defined in subsection 12(11). Subsection 12(4) requires an individual who holds an interest in an investment contract on the "anniversary day" of the contract to include in computing income for the year the interest accrued to the individual on the contract to the end of the "anniversary day" of the contract to the extent that the interest was not otherwise included in computing the individual's income for the year or a preceding taxation year. Subsection 12(11) defines "anniversary day" as
(a) the day that is one year after the day immediately preceding the date of issue of the contract,
(b) the day that occurs at every successive one year interval from the day determined under paragraph (a), and
(c) the day on which the contract was disposed of;
We are of the view that in the case of the investment certificate, the "anniversary day" would be December 31 since that day is one year after the day before the date the contract was issued (the date of issue). Since the individual would hold an interest in the investment certificate on December 31 of Year 1, the individual would be required by subsection 12(4) to include in computing income for that year the interest accrued to the individual on the investment certificate to the end of that day to the extent that such interest was not otherwise included in computing the individual's income for the year or a preceding taxation year. The same logic would apply for Year 2 and/or Year 3.
Subsection 12(9) provides that where a taxpayer acquires an interest in a prescribed debt obligation, an amount determined in prescribed manner shall be deemed to accrue to the taxpayer as interest on the obligation in each taxation year during which the taxpayer holds the interest in the obligation. Paragraph 7000(2)(c.1) of the Regulations provides that, for the purposes of subsection 12(9), the amount that is deemed to accrue to a taxpayer as interest on the debt obligation in each taxation year in which the taxpayer holds an interest in the obligation is the interest that would be determined for the year if the interest on the obligation for that year were computed on a compound interest basis. In our view, this calculation should be made on the "anniversary day" of the investment certificate.
Consequently, the individual should include in computing income for Year 1, Year 2 and Year 3, respectively, the amount computed under paragraph 7000(2)(c.1) of the Regulations as interest accrued to the individual on the investment certificate to the extent that such interest would not otherwise have been included in computing the individual's income for the year or for a preceding taxation year.
We hope that our comments will be of assistance.
Ghislain Martineau
for the Director
Financial Industries Division
Income Tax Rulings Directorate
Directorate General for Policy and Planning