| 24(1) | File No. 5-9716 |
| Kevin J. Donnelly | |
| (613) 957-3500 | |
| 19(1) |
June 12, 1990
Dear Sirs:
Re: Subsection 12(4) and paragraph 12(11)(a) of the Income Tax Act (the "Act")
We replying to your March 6, 1990 letter requesting our interpretation of proposed subsection 12(4) and paragraph 12(11)(a), as included in Bill C-28, where a taxpayer has included accrued interest on a debt obligation in his income pursuant to an election under paragraph 78(1)(b) of the Act.
The application of the amendment to paragraph 12(11)(a) of the Act contained in subsection 4(4) of Bill C-28, is described in subsection 4(7) of Bill c-28 as follows:
Subsection (4) is applicable to the 1985 and subsequent taxation years, except that, in applying paragraph 12(11)a) of the said Act, as enacted by subsection (4), in respect of debt obligations acquired before 1990, that paragraph shall be read as follows:
(a) "investment contract", in relation to a taxpayer, means any debt obligation (other than a salary deferral arrangement, an income bond, an income debenture, a small business development bond, a small business bond, an obligation in respect of which the taxpayer has, at periodic intervals of less than 3 years, included, in computing the taxpayer's income throughout the period in which the taxpayer held an interest in the obligation, the income accrued thereon for such intervals, or a prescribed contract);
Where paragraph 78(1)(b) of the Act has applied to an obligation acquired by a taxpayer in 1980 so that accrued interest has been included in income on January 1, 1983 and each subsequent year in computing the taxpayer's income, it is our opinion that the proposed form of subsection 12(4) of the Act, if enacted, would not apply to that obligation. In the foregoing circumstances, the exception in the above-noted amended definition of investment contract would be met, i.e. the taxpayer's obligation would be
...an obligation in respect of which the taxpayer has, at periodic intervals of less than 3 years, included, in computing the taxpayer's income throughout the period in which the taxpayer held an interest in the obligation, the income accrued thereon for such intervals,...
If Bill C-28 is enacted units currently proposed form, it is our opinion that subsection 12(4) of the Act in its current form (S.C. 1980-81-82-83, c.140, subsection 4(7)) would continue to apply to an obligation which is an investment contract acquired before 1990, which has not been altered, as subsection 4(6) of Bill C-28 establishes that the proposed repeal of subsection 12(4) would be applicable only with respect to investment contracts acquired or materially altered after 1989.
The opinions expressed in this letter are not advance income tax rulings and are therefore not binding on Revenue Canada, Taxation in respect of any transaction or taxpayer.
Yours truly,
ChiefLeasing and Financial SectionFinancial Industries DivisionRulings Directorate