A linked note is a debt obligation in which the return is linked
to the performance of one or more reference assets or indexes. The
underlying asset or index can be a basket of stocks, a stock index,
a commodity, a currency or units of an investment fund.
The Canadian tax legislation contains specific rules that
require investors that dispose of a debt obligation to include in
their income any interest that accrued on the obligation to the
date of disposition. However, in the case of linked notes,
investors have generally taken the position that so long as the
ultimate return on the linked note was not determinable at the time
of its disposition—for example, where the note is sold in a
secondary market prior to maturity—no amount would be
considered to have accrued as interest. Instead, the increase in
value would be reported as a capital gain for which only 50 percent
of the increase would be required to be included in income.
