Jasmine purchases a 1-year, $10,000 face value strip bond for $9,600. At maturity, when Jasmine receives $10,000, which of the following statements…

Strip bonds, or zero-coupon bonds, do not pay periodic interest. Instead, they are purchased at a discount to their face value. The difference between the purchase price ($9,600) and the face value received at maturity ($10,000) represents the investor's return. For tax purposes in Canada, this accrued income of $400 is deemed to be interest income. This income must be reported annually over the life of the bond, even though it is not paid out until maturity.

A. Jasmine realizes a capital dividend of S400: Capital dividends are specific tax-free distributions from a corporation's capital dividend account and are unrelated to bond income.

B. Jasmine realizes a taxable dividend of $400: Dividends are distributions of profit from equity (shares), not interest payments from debt instruments like bonds.

C. Jasmine realizes a taxable capital gain of $400: The return on a strip bond is specifically treated as interest income by the Canada Revenue Agency, not a capital gain.

1. Canada Revenue Agency. (n.d.). Income Tax Folio S3-F6-C1, Interest Income. Paragraph 1.21. "The return on an investment in a stripped bond... is treated as interest that accrues to the investor until the maturity or disposition of the bond."

2. Canadian Securities Institute. (2022). Investment Funds in Canada. Chapter 6: Fixed-Income Securities. "The difference between the purchase price and the face value is considered interest income for tax purposes, and it must be reported annually."