Commentary on Sections Overview Chapter 2: Accrued income profits and losses Section 635: Payment on transfer of variable rate securities
1867.This section sets out the payment treated as made where variable rate securities are transferred and the settlement day for the transfer falls within an interest period. It is based on section 717 of ICTA. Section 627 gives the meaning of “variable rate securities”.
1868.Subsection (1) provides that a payment is treated as made to the transferor. But no one is treated as making the payment (see subsection (3)), nor does the payment enter the calculation of any accrued income profit or loss of the transferee (see subsection (4)).
1869.This is an anti-avoidance provision. The interest on a security could be structured so as to circumvent the intended effects of the accrued income scheme (for example, by using wide variations in the rate of interest payable at various times over the lifetime of the security). Where this happens, a time apportionment formula, which assumes that interest accrues at an even rate, would not produce an amount consistent with the value of the accruing interest. Instead, subsection (2) simply provides that the amount of the payment treated as made should be “just and reasonable” (and the transferor should make a self-assessment for the relevant tax year accordingly).
1870.No provision is made in this case for any exemption for interest received by the transferee.