May 02, 1986
TO - G.F.V. Wilkie Director Assessing Division
FROM - Leasing and Financing Section A. Godin 995-2455
RE Government of Canada Treasury Bills
This is in reply to your letter of March 21, 1986 wherein you requested our opinion on the proper treatment to be given to any gain or loss upon the disposition of a treasury bill where it is traded prior to maturity. You have also asked for our opinion on the application of subsection 39(4) in respect of treasury bills.
Treasury bills are prescribed debt obligations and investment contracts as defined in subsection 7000(1) of the Regulations and paragraph 12(11)(a) of the Act respectively. Accordingly, the deemed interest calculated in accordance with paragraph 7000(2)(a) of the Regulations is deemed to accrue to an investor pursuant to subsection 12(9) of the Act.
An individual investor must include the interest accrued to him pursuant to subsection 12(9) of the Act on every third anniversary by virtue of subsection 12(4) of the Act or if he elects to do so, on an annual basis by virtue of subsection 12(8) of the Act. Corporations, partnerships, unit trusts and certain other trusts have to include the amount accrued pursuant to subsection 12(9) of the Act into income on an annual basis by virtue of subsection 12(3) of the Act. Where a taxpayer disposes of his treasury bill prior to maturity, he is subject to the same tax treatment, i.e. the interest accrued on the debt instrument to the date of disposition must be brought into income pursuant to subsection 12(3), 12(4) or 12(8) of the Act to the extent that it has not been included previously.
Prior to the recent amendments flowing from Bill C-72 and applicable to 1985 and subsequent years, subsection 12(4) of the Act could not be invoked to bring the interest accrued on treasury bills into income because of the definition of "investment contract" and "third anniversary" (paragraphs 12(11)(a) and (b) of the Act). Consequently, accrued interest was included in income pursuant to subsection 20(14) of the Act where the treasury bill was traded prior to maturity, and pursuant to paragraph 12(l)(c) or subsection 16(1) of the Act in other cases.
The aggregate of all amounts of interest included in income prior to the disposition is included in computing the cost of the treasury bill by virtue of subsection 52(1) of the Act. At the time of a disposition, a capital gain or loss can occur in accordance with the ordinary capital gain and loss rules. In our view, a capital gain or loss can occur on disposition and is not restricted to the situation where the treasury bill is traded at any amount in excess of its face or maturity value or conversely at an amount less than its purchase price to the investor. It is expected however that the cost of the treasury bill as adjusted pursuant to subsection 52(1) of the Act will closely approximate the market value of identical instruments. Capital gains and losses will therefore generally occur only when there is a variation in interest rates on capital markets.
In answer to your second question, it is our view that a treasury bill is a "Canadian security" as defined under subsection 39(6) of the Act, and accordingly, it can be the object of an election under subsection 39(4) of the Act.
We trust these comments will be of assistance to you.
Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch