Re: Accrued interest on stripped coupons
We are writing in response to your memorandum of October 8, 1991 describing what you see as a circularity problem with respect to accrued interest on stripped coupons due to the fact that, in your view, stripped coupons are not "investment contracts". Also involved is the inter-action of subsection 201(4) of the Income Tax Act Regulations with paragraph 12(11)(a) and subsections 12(4) and 12(9) of the Act.
Our comments
We believe that this issue is resolved by the revisions to subsection 12(9) and paragraph 12(11)(a) contained in Bill C-18. (See Bill C-18 and the explanatory notes under paragraph 12(11)(a) of the Act that address the "circularity" problem.) As we understand it, the addition of the words "otherwise than by reason of subsection (4)" in revised subparagraph 12(11)(a)(ix) means that a stripped bond is an investment contract for purposes of subsection 12(4) of the Act and interest is deemed to accrue on such contracts in each year during which the taxpayer holds an interest in the contract. The interest that is deemed to accrue on the contract is required by subsection 12(4) to be reported annually to the extent already not reported.
As discussed on October 22, 1991 (Thornley-Sequin), revised Regulation 201(4) only applies to a stripped coupon if it is described in Regulation 201(1)(b)(i) to (v). This would be the case if the bond and coupons were "fully registered", which as I understand it, is generally not the case. Also as discussed, the inter-action of Regulation 201(6) and (7) results in no reporting requirements for debt obligations in "bearer" form other than that required by subsection 234(1) of the Act.
We trust our explanation is satisfactory.
E.Wheeler for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch