CTP13_Chapter_07

If from bonds issued for not less than 97 of maturity

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Unformatted text preview: eld Not More Than 4/3 Of Stated Rate Copyright © 2014, Clarence Byrd Inc. 13 Canadian Tax Principles Premium - Issuer • Deliberate creation of a premium – Interest paid will be reduced to a “reasonable” amount over Interest the life of the debt the • Money lenders – Premium taken into income immediately • Other taxpayers – Premium is a non-taxable receipt Copyright © 2014, Clarence Byrd Inc. 14 Canadian Tax Principles Discount And Premium Example: Bonds with a maturity value of $1,000,000 are issued at a price of $980,000. Interest at 10 percent of maturity value is paid annually and bonds mature in 20 years. Interest Expense Bonds Payable – Discount Cash $101,000 Cash Bond Investment Revenue $100,000 1,000 $ 1,000 100,000 $101,000 Tax Expense And Revenue Copyright © 2014, Clarence Byrd Inc. 15 Canadian Tax Principles At Maturity Investor: The extra $20,000 received is a capital gain (taxable amount equals $10,000). Issuer: The extra $20,000 paid is a deduction. ITA 20(1)(f) - Fully deductible if: - Issue price not less than 97% of face value, and - Effective yield does not exceed 4/3 of stated yield. Otherwise: An allowable capital loss (1/2 deductible) Copyright © 2014, Clarence Byrd Inc. 16 Canadian Tax Principles Interest As An Inclusion • Corporations – ITA 12(3) Requires Full Accrual – Generally The Same As GAAP Copyright © 2014, Clarence Byrd Inc. 17 Canadian Tax Principles Interest As An Inclusion • Individuals – ITA 12(1)(c) Allows Use Of Cash Basis, Receivable Basis, Or ITA Full Accrual Full • Accrual Rules - ITA 12(4) – Interest must be accrued on each anniversary date of debt Copyright © 2014, Clarence Byrd Inc. 18 Canadian Tax Principles Accrual Rules Example • Example: Five year, $100,000 bond is issued on January 1, Five 2013. Pays annual interest of 10 percent only at maturity. 2013. – No cash flow until maturity – Would have to record interest on each January 1, regardless Would of when bond purchased. of Copyright © 2014, Clarence Byrd Inc. 19 Canadian Tax Principles Prescribed Debt Obligations • ITR 7000(1)(a) - Zero Coupon Bonds • Use Effective Rate • ITR 7000(1)(b) - Stripped Bonds • Use Effective Rate • ITR 7000(1)(c) - Rate Increases Over Time • Use Effective Rate Based On Maximum • ITR 7000(1)(d) - Contingent Rate • Maximum Payable For The Year Copyright © 2014, Clarence Byrd Inc. 20 Canadian Tax Principles Example Example: Purchase debt obligation for $1,000. At maturity after five years it pays $1,762 (effective yield = 12 Percent). Year 1: [(12%)($1,000)] = $120 Year 2: [(12%)($1,120)] = $134 Year 3: [(12%)($1,254)] = $150 Year 4: [(12%)($1,404)] = $169 Year 5: [(12%)($1,573)] = $189 + $1,573 = $1,762 Copyright © 2014, Clarence Byrd Inc. 21 Canadian Tax Principles Accrued Interest At Purchase • On October 1, 2013 buy $100,000 bond with interest payable at On 10 percent on December 31, 2013. Price = $107,500 10 – $7,500 will be included in the income of t...
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