25 June 1997 External T.I. 9716185 - REPORTING OF INVESTMENT INCOME

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Reporting of interest on PDO on T5

Position:

	Per reg. 201(4) - must be amount calculated per 	reg. 7000

Reasons:

Reg. 201(4)

	                            	     971618
XXXXXXXXXX 	                               J.P. Dunn

Attention: XXXXXXXXXX

June 25, 1997

Dear Sirs,

Re: Reporting of Investment Income

We are writing in response to your correspondence of March 15, 1997 to the Surrey Taxation Centre wherein you had requested information regarding the calculation of the amount of interest income to be reported with respect to certain bonds. Your letter has been forwarded to this Division for reply.

As we understand, the annual interest paid on the bonds is substantially less than the stated rate of interest payable on the bonds with the difference to be paid at some indeterminate time in the future with such payment subject to the financial capability of the issuer.

In a situation in which the full stated amount of interest is not paid by the issuer each year, the bond would qualify as an "investment contract" as defined in subsection 12(11) of the Income Tax Act. Accordingly, section 7000 of the Income Tax Regulations would apply to determine the amount of interest income to be reported by the holder of the investment contract each year.

Paragraph 7000(1)(d) of the Regulations defines a "prescribed debt obligation" as an obligation in respect of which,

"the amount of interest to be paid in respect of any taxation year is, under the terms and conditions of the obligation, depending on a continency existing after the year".

With respect to such a prescribed debt obligation, paragraph 7000(2)(d) of the Regulations states that the amount of interest to be included in the income of the holder for a taxation year is "the maximum amount of interest thereon that could be payable thereunder in respect of that year". In the case of the debt instrument described in your letter, this would be the stated rate of interest on the bond, regardless of the amount actually paid in a year.

We would note, however, that should there be a reasonable doubt that the full amount of interest would be eventually received, the taxpayer reporting the income would be entitled to claim a reserve pursuant to paragraph 20(1)(l) of the Income Tax Act with respect to that portion of the amount included in income which is considered to be doubtful. The determination of whether this particular reserve is or is not available would require an examination of all of the pertinent facts concerning the debtor's ability to pay the full amount of the interest in the future.

We trust that this is the information which you require.

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch