Government of Canada Securities - Technical Guide

This summary is of a general nature only and it is not intended to be, nor should it be construed to be, legal or tax advice to any prospective purchaser of Bonds and no representation with respect to the Canadian federal income tax consequences to any such purchaser is made herein. Prospective purchasers of Bonds should consult their own advisers with respect to their individual circumstances. This summary does not apply to persons acquiring Bonds otherwise than pursuant to an offering of the Bonds made by the Government of Canada.

The following general summary fairly describes the principal Canadian federal income tax considerations generally applicable to purchasers of Bonds, pursuant to an offering of Bonds by the Government of Canada, who are residents of Canada for the purposes of the Income Tax Act (Canada) (the "Act"), to whom the Bonds constitute capital property for the purposes of the Act and who are subject to tax under Part I of the Act.

This summary is based upon the current provisions of the Act and the regulations thereunder (the "Regulations") in force as of the date hereof, the current published administrative and assessing policies of Revenue Canada. This summary is not exhaustive of all possible Canadian federal income tax consequences and, moreover, does not take into account or anticipate any provincial, territorial or foreign income tax considerations, which considerations may differ significantly from those discussed herein. Tax legislation in certain of the provinces may require amendments so that Bondowners will be afforded similar provincial tax treatment to that described in this summary.

The normal rules which require certain taxpayers to include interest in income on an accrual basis will not apply to Coupon Interest. Rather, a Bondowner will be required to include in income for each taxation year in which the Bondowner owned a Bond any Coupon Interest which has been received or become receivable in that taxation year, depending upon the method regularly followed by the Bondowner.

A Bondowner will be required to include in income the full amount of Coupon Interest paid on a Coupon Payment Date, being the interest which has accrued since the immediately preceding Coupon Payment Date for the relevant series of Bonds; however, to the extent that Coupon Interest has accrued prior to the date of issuance of Bonds, a deduction will be available to the Bondowner. Any amount which is so deductible must be deducted in computing the adjusted cost base of the Bond to the Bondowner.

On the disposition or a deemed disposition of a Bond, the Bondowner will realize a capital gain (or capital loss) to the extent that the proceeds of disposition (net of any costs of disposition) exceed (or are exceeded by) the adjusted cost base of the Bond to the Bondowner.

Pursuant to the provision of the Act, any accrued Coupon Interest on a Bond to the date of disposition of such Bond must be included in the income of the Bondowner. To the extent that the amount received on the disposition of a Bond by the Bondowner in respect of the Coupon interest is less than the accrued Coupon Interest on such Bond, the Bondowner may be entitled to a deduction.

Taxation of Coupon Interest

The normal rules which require certain taxpayers to include interest in income on an accrual basis will not apply to Coupon Interest. Rather, a Bondowner will be required to include in income for each taxation year in which the Bondowner owned a Bond any Coupon Interest which has been received or become receivable in that taxation year, depending upon the method regularly followed by the Bondowner.

A Bondowner will be required to include in income the full amount of Coupon Interest paid on a Coupon Payment Date, being the interest which has accrued since the immediately preceding Coupon Payment Date for the relevant series of Bonds; however, to the extent that Coupon Interest has accrued prior to the date of issuance of Bonds, a deduction will be available to the Bondowner. Any amount which is so deductible must be deducted in computing the adjusted cost base of the Bond to the Bondowner.

Taxation of Inflation Compensation

The Act provides that a Bondowner is required to include in computing income for a taxation year, as interest, the amount by which Inflation Compensation has increased for any inflation adjustment period that ends in such taxation year and during which the Bondowner owned the Bond. The amount of any such increase required to be included in a Bondowner's income at any time shall be added to the adjusted cost base of the Bond to the Bondowner.

The Act further provides that the amount by which accrued Inflation Compensation has decreased for any inflation adjustment period that ends in a taxation year of a Bondowner and during which such Bondowner owned the Bond shall be deductible in computing the income of the Bondowner for such year. The amount of any such decrease permitted to be deducted in computing the income of a Bondowner at any time shall be deducted from the adjusted cost base of the Bond to the Bondowner.

For these purposes, the first inflation adjustment period for a series of Bonds acquired in an offering by the Government of Canada will be the period commencing on the date of issuance of such Bonds. Each subsequent inflation adjustment period will commence on a Coupon Payment Date for such series. An inflation adjustment period will end on the earlier of the next Coupon Payment Date for such series and the date of disposition of the Bond.

Disposition of a Bond

On the disposition or a deemed disposition of a Bond, the Bondowner will realize a capital gain (or capital loss) to the extent that the proceeds of disposition (net of any costs of disposition) exceed (or are exceeded by) the adjusted cost base of the Bond to the Bondowner. The tax treatment of changes in the Inflation Compensation for inflation adjustment periods ending in the taxation year of disposition is described above under the heading "Taxation of Inflation Compensation".

Pursuant to the provision of the Act, any accrued Coupon Interest on a Bond to the date of disposition of such Bond must be included in the income of the Bondowner. To the extent that the amount received on the disposition of a Bond by the Bondowner in respect of the Coupon interest is less than the accrued Coupon Interest on such Bond, the Bondowner may be entitled to a deduction.

The following summary fairly describes the principal Canadian federal income tax consequences generally applicable to an owner of a beneficial interest in a Bond who for purposes of the Income Tax Act (Canada) (the "Act") is a non-resident of Canada and is not deemed to be a resident of Canada. This summary is based on the provisions of the Act and the Regulations thereunder in force on the date hereof. This summary does not address provincial, territorial or foreign income tax considerations and is not applicable to Canadian residents. No assurances can be given that changes in the law or administrative practices or future court decisions will not affect the tax treatment of the owner of a beneficial interest in a Bond.

Under the Act, Canada is not required to withhold tax from interest or principal paid or credited by Canada on Bonds to a non-resident of Canada except where all or any portion of such interest is contingent or dependent on the use of or production from property in Canada or is computed by reference to revenue, profit, cash flow, commodity price or any similar criterion or by reference to dividends payable on any class of shares of the capital stock of a corporation and the Bond is not a prescribed obligation for purposes of paragraph 212(1)(b) and the definition "participating debt interest" in subsection 212(3) of the Act. The applicability of the foregoing exceptions to a particular issue of Bonds will be dealt with as necessary in the Prospectus Supplement relating to the issue of the Bonds. In addition, under such laws, no other tax on income or capital gains is payable in respect of Bonds or the interest thereon by owners of beneficial interests who are neither residents nor deemed to be resident of Canada, and who do not use or hold, and are not deemed or considered to use or to hold, the Bonds in carrying on business in Canada (and in particular, in the case of insurers, do not carry on an insurance business in Canada with which such Bonds are effectively connected).

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