4 June 2026 External T.I. 2023-0991701E5 - Stripped bond held in RCA

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.

Principal Issues: The taxpayer has posed questions regarding certain tax issues where an RCA holds a stripped bond.

Position: Application of the Act and Regulations explained in response to his three questions.

Reasons: The law is clear.

XXXXXXXXXX 2023-099170
P. Kohnen

June 4, 2026

Dear XXXXXXXXXX:

Re: Stripped bond held in retirement compensation arrangement

This is in reply to your correspondence dated April 14, 2023, wherein you posed several questions in relation to a scenario in which a stripped bond is held within a retirement compensation arrangement (“RCA”). We apologize for the delay in providing our response.

The questions raised in your submission were as follows:

1. When holding a stripped bond inside an RCA, how should the 50% refundable tax be withheld when interest is only accrued and not distributed?

2. Should the RCA trustee contribute additional funds equal to the 50% refundable tax on accrued interest?

3. If so, are the additional contributions to the RCA taxable to the recipient at the time of withdrawal from the RCA?

Our comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”)(footnote 1) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC70-6R12, Advance Income Tax Rulings and Technical Interpretations.

Subject to certain listed exclusions, an RCA is defined in subsection 248(1) generally as a plan or arrangement under which contributions are made by an employer or former employer of a taxpayer to another person or partnership (a “custodian”) in connection with benefits that are to be or may be received or enjoyed by any person on, after or in contemplation of any substantial change in the services rendered by the taxpayer, the retirement of the taxpayer, or the loss of an office or employment of the taxpayer.

For purposes of Part XI.3 of the Act in respect of an RCA, subsection 207.5(1) defines an “RCA trust” to mean a trust that is deemed to be created in respect of the subject property of the RCA by subsection 207.6(1), or a trust that is governed by the arrangement. Although the taxable income of an RCA trust is not subject to Part I tax by virtue of paragraph 149(1)(q.1), an RCA trust is subject to the 50% refundable tax calculated pursuant to the “refundable tax” definition in subsection 207.5(1).

Subsection 207.5(1) defines the refundable tax of an RCA trust at the end of a taxation year. In general, the refundable tax is equal to 50% of all contributions made to the RCA from its inception, plus 50% of the amount, if any, by which its income and capital gains for all years exceeds its losses and capital losses for all years, less 50% of all distributions under the RCA. For the purposes of this calculation, the income (or loss) for a year of an RCA trust is the total of the income (or loss) for the year of the trust from each business or property (determined as if the Act were read without reference to any dividend gross up normally included under paragraph 82(1)(b)).

By virtue of subsection 207.7(1), which governs the liability for Part XI.3 tax under the Act in respect of an RCA, refundable tax will be payable in years in which the refundable tax at the end of the current year is greater than the refundable tax at the end of the immediately preceding year. Conversely, a refund of Part XI.3 tax in accordance with subsection 207.7(2) will generally be available when, at the end of the current year, the refundable tax is lower than the refundable tax at the end of the immediately preceding year.

The following are our comments with respect to each of your questions.

Question 1

While the term “stripped bond” is not defined in the Act, for purposes of our response, we assume that your reference to a stripped bond held by an RCA trust refers to the principal portion of a bond (often referred to as the residual) that has been separated from the interest-paying portion (also referred to as the coupon). The principal portion of the bond is sold at a discount based on the current market price and the expected yield to maturity.

The stripped bond, as described in the previous paragraph, would be an “investment contract” as defined in subsection 12(11) and a “prescribed debt obligation” pursuant to paragraph 7000(1)(b) of the Income Tax Regulations (the “Regulations”). Subsection 12(4) requires the inclusion in income of interest that has accrued on an investment contract on an annual basis, while paragraph 7000(2)(b) of the Regulations determines the amount of interest that is deemed to accrue on a prescribed debt obligation pursuant to subsection 12(9). Generally, the interest income accrued on a stripped bond at its anniversary day, (as that term is defined in subsection 12(11)), would be included in computing income in each taxation year in which an RCA trust owns a stripped bond on its anniversary day, even though no physical payment of interest has occurred in respect of the stripped bond.

The anniversary day is generally the date when a stripped bond was initially issued and each one year anniversary thereafter. However, if an RCA trust disposes of a stripped bond, this triggers an anniversary day and subsection 12(4) would require the accrued interest up to the date of disposition to be included in computing income. The amount of interest so included in computing income of the RCA trust for a year is added in computing the cost of the stripped bond by virtue of subsection 52(1). On a sale of a stripped bond, a capital gain would result if the proceeds of disposition are greater than the adjusted cost base of the bond (adjusted by any increase under subsection 52(1)). Similarly, a capital loss could result where proceeds of disposition are less than the adjusted cost base.

For a given taxation year, both the accrued interest and capital gain or loss, if applicable, would be included when calculating the refundable tax for an RCA trust at the end of the taxation year. Pursuant to subsection 207.7(1), tax will be payable by the custodian of an RCA for a taxation year in which the refundable tax at the end of that year is greater than the refundable tax at the end of the immediately preceding year.

Question 2

The custodian of an RCA is required, pursuant to subsection 207.7(3), within 90 days after the end of a taxation year of the RCA trust, to file the T3-RCA Retirement Compensation Arrangement (RCA) Part XI.3 Tax Return, and calculate and remit the tax owing, if any.

Your question appears to raise a concern that there may be refundable tax owing in respect of an RCA trust that might not hold sufficient liquid assets to remit the refundable tax, because the interest income on the stripped bond is, as noted above, accrued for a given taxation year. The Act does not provide for any exclusion from the above-noted requirement to remit the tax.

It should be noted that if a contribution to an RCA trust is made, in order to remit the tax owing, the amount of the contribution is included in the calculation of refundable tax for the taxation year in which the contribution is made, pursuant to paragraph (a) of the refundable tax definition.

Question 3

Generally, any amounts received by a person out of or under an RCA are included in computing the income of the person for the taxation year of receipt pursuant to paragraphs 56(1)(x) or (z).

We trust these comments will be of assistance.

Yours truly,

Irina Schnitzer
Section Manager
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1. Unless as otherwise stated, all legislative references in this document are to the Act.