Is the interest on savings bonds taxable? The interest you make on your savings bonds is taxed at the federal level, but not at the state or municipal level.
In Canada, are bonds tax-free?
Municipal bonds are among the least well-known government securities in Canada, but they also happen to be among the highest-yielding and safest.
Some have excellent AAA ratings, which are nearly non-existent in the corporate market; all have yield premiums over their home provinces’ bonds; and none have defaulted since the 1930s, according to bond raters and investment bankers.
Despite their merits, “Munis” are obscure. According to Stephen Ogilvie, head of Standard & Poor’s Corp.’s municipal bond finance department in Toronto, they account for around 2% of the SC universe bond total return index, Canada’s leading bond index. Institutions often buy the offerings, while underwriters frequently reserve allotments for retail clients.
Munis are uncommon for the same reason that they are appealing, according to Ogilvie: “The reason for the lack of depth in the Canadian municipal bond market as there is in the United States is that Canadian municipalities are debt averse.” Their foreign counterparts, especially those in the United States, borrow significantly more.”
In addition, he points out that, unlike in the United States, where municipal bonds are exempt from certain income taxes, interest on Canadian munis is taxed as ordinary income, just like any other bond. In addition, there is no particular tax structure in place in Canada to provide a tax-free market for municipal bonds.
The traditional culprits in municipal bond purchases are pension funds and life insurance corporations. Because most of the issues are small, thinly traded, and carry premiums for their lack of liquidity, they frequently hold them to maturity. According to an investment banker who works with these bonds, the liquidity premium is usually baked into each offering as a one- or two-basis-point increase in yield. The market may further discount the notes, adding two to six basis points to the built-in premium. However, if you try to sell the majority of the issues, the yield premium you obtained as a buyer will be forfeited to the next bidder, who will be looking for his or her own “illiquidity discount.”
As a result, Canadian munis are keeper species. They also provide good incentives. For example, the Municipal Finance Authority of British Columbia, which manages debt offerings for the province’s municipalities and communities, recently issued a 10-year bond with a 4.338 percent yield to maturity due Oct. 31, 2016. This translates to a yield premium of 31.5 basis points over a June 2015 Canada bond and three basis points over a March 2016 Ontario bond. The entire issue size was $715 million, which included a previous debt issuance. The issuance, which is rated AAA by Moody’s Investors Service Inc. (AA+ by Standard & Poor’s), is an example of the yield and quality offered by the municipal bond market, which rarely offers issues below investment grade.
In contrast to the corporate bond market, where AAA ratings on straight corporate credits are rarely, if ever, issued, a number of Canadian municipalities, including Saskatoon and London, Mississauga, and the regional municipalities of Durham, Peel, and Halton in Ontario, offer a number of AAA credits. Dominion Bond Rating Service Ltd. ranks Toronto’s credit at AA (low), Winnipeg at AA (high), Calgary and Edmonton at AA (high), and Montreal at A. (high).
Although raters disagree on specific grades, all munis that are rated are investment-grade, according to Paul Judson, DBRS’s vice president for Canadian munis.
And, while all three types of bonds are financed by tax revenue that reflects the strength of their respective economies, munis have portfolio values that are quite different from federal and provincial bonds, according to Judson: “The credit quality of municipal bonds rests on the issuers’ taxing powers.” Property taxes, which are more predictable than income tax flows, are available to them. Property taxes are less affected by economic cycles than income taxes, which are used by higher levels of government.”
Furthermore, governments have the authority to seize property if owners do not pay their property taxes, according to Judson. Municipalities also have more leeway in raising taxes than other levels of government. He claims that when the economics of western provinces grow stronger, the security of munis grows.
Munis come in a variety of shapes and sizes. The simplest to analyze is the basic “bullet” bond, which has only one due date. For example, a $100 million City of Toronto issue due September 27, 2016 was priced at issue to yield 4.5 percent, saving 43.3 basis points over a comparable Canada bond. There are also “amortizing” bonds, which are issued in ten-bond series with consecutive due dates. Amortizing bonds can divide a $100 million issuance — a reasonable sum in the munis market — into ten $10 million bonds, each due one year apart and too little to support much of an aftermarket.
“Taking on less liquidity is rewarded with a higher yield,” says Dave Burner, senior vice president, government finance at National Bank Financial Ltd. in Toronto.
“For a time-specific return, municipal bonds are acceptable for a buy-and-hold strategy,” Judson says. “The concern is whether the yield boost is sufficient to cover the illiquidity.”
“How can you go wrong with a buy-and-hold strategy for high-quality munis, picking up a yield that can be up to 10% more than the yield on a federal bond?” enquires Derek Moran, president of Kelowna, British Columbia-based financial planning firm Smarter Financial Planning Ltd. “If you’re looking for a high yield, munis are a good option, especially if you buy at issue and hold until maturity.” That isn’t a means to make a profit, but it is a terrific way to produce consistent revenue.” IE
In Canada, how are bonds taxed?
Interest income from investments such as Canada Savings Bonds, GICs, T-bills, and strip bonds is taxed at your marginal tax rate without any tax breaks. Accrued interest on investments made before 1990 is normally required to be reported every third anniversary.
What is the best way to declare Canada Savings Bonds on my taxes?
Regular and compound interest Canada savings bonds are the two varieties available. You must declare the interest on your tax return even if it isn’t paid yearly (compound interest). You must record your interest income on line 121 of your tax return.
When you cash in your savings bonds, do you have to pay taxes?
Taxes can be paid when the bond is cashed in, when the bond matures, or when the bond is relinquished to another owner. They could also pay the taxes annually as interest accumulates. 1 The majority of bond owners choose to postpone paying taxes until the bond is redeemed.
Bonds are taxed as either capital gains or income.
Here are a few ideas for avoiding – or at the very least minimizing – bond taxes.
- Invest in a tax-advantaged account for the bond. The earnings on bonds invested in a Roth IRA or Roth 401(k) are tax-free as long as the withdrawal conditions are followed. Bond income and profits on sales earned in a standard IRA or 401(k) are tax-deferred, which means you don’t have to pay taxes on the money until you remove it in retirement.
- Savings bonds can be used for educational reasons. To save for school, choose Series EE or Series I savings bonds. The interest you earn on the bond is tax-free if you use it to pay for qualified higher education expenditures and meet other requirements when you redeem it.
- Keep bonds until they reach maturity. Holding a bond until it matures rather than selling it on the secondary market can save you money on capital gains taxes. However, any taxable interest earned on the bond while you owned it is still owed to you.
Bonds are they taxable?
The majority of bonds are taxed. Only municipal bonds (bonds issued by local and state governments) are generally tax-exempt, and even then, specific regulations may apply. If you redeem a bond before its maturity date, you must pay tax on both interest and capital gains.
In Canada, how are investments taxed?
There’s something you should know before we get into the weeds of capital gains in Canada. This is general capital gains information to help you better grasp how it works. Because everyone’s situation is different, this should not be construed as advise, and you should always seek the guidance of a tax professional to establish what is best for you.
Capital Gains Tax Rate
Capital gains in Canada are taxable to the tune of 50% of their value. If you sell your investments for a higher price than you paid (realized capital gain), you must include 50% of the gain in your income. This implies that the amount of extra tax you pay will vary based on how much money you make and what other sources of income you have.
Are mutual funds considered taxable in Canada?
The most typical examples of “taxable Canadian property” are as follows. In any of the following situations, taxable Canadian property also includes an option, interest, or right.
Real Property
Canadian property, whether mobile or immovable, is taxable in Canada. Residential and commercial properties in Canada, for example, are taxable Canadian property.
Business Assets
The assets of a Canadian-based business are taxable Canadian property. Equipment used in a Canadian firm, for example, is taxable Canadian property.
Shares
A share of a corporation (other than a mutual fund corporation) that is not listed on a designated stock exchange is taxable Canadian property if more than 50% of the fair market value of the share was derived directly or indirectly from any combination of (1) real or immovable property located in Canada; (2) certain Canadian resource properties; and (3) an option, interest, or right in (1) or (2) during the previous 60 months (2). This definition is intended for capturing private company shares. This term can include the shares of a resident or non-resident corporation.
A share of a corporation listed on a designated stock market and a share of a mutual fund corporation are also taxable Canadian property if two conditions are met at any time during the previous 60 months.
First, any combination of the taxpayer who owns the share and parties who do not deal at arm’s length with the taxpayer owned 25% or more of any class of shares in the corporation.
Second, the “greater than 50% of fair market value” condition outlined in the preceding paragraph is met.
Shares of public corporations listed on markets such as the Toronto Stock Exchange, TSX Venture Exchange, New York Stock Exchange, and London Stock Exchange can be included in this definition.
Note that in certain circumstances, such as when a share is purchased through a tax-deferred transaction involving the transfer of taxable Canadian property, a share can be deemed to be taxable Canadian property for 60 months.
Interests in Partnerships and Trusts
An interest in a partnership or a trust (other than a mutual fund trust or an income interest in a trust resident in Canada) is taxable Canadian property if more than half of the fair market value of the interest was derived directly or indirectly from any combination of (1) real or immovable property located in Canada; (2) certain Canadian resource properties; and (3) an option, interest, or right in (1) (2). If a unit of a mutual fund trust meets the standards outlined above for public business shares to be considered taxable Canadian property, it will be regarded taxable Canadian property.
Note that if a partnership interest was acquired in a tax deferred transaction involving the transfer of taxable Canadian property, the interest can be deemed to be taxable Canadian property for 60 months.
In Canada, how much tax do you pay on your investments?
The Canadian government reduced the capital gains inclusion rate (the percentage of gains that must be “taken into income”) from 75 percent to 50 percent a few years ago.
For example, if an investor buys $1,000 worth of stock and subsequently sells it for $2,000, they will have made a $1,000 profit. Investors in Canada must pay capital gains tax on 50% of their capital gains. This means that if you make $1,000 in capital gains and are in the highest tax bracket in your province (53.53 percent), you will pay $267.65 in Canadian capital gains tax on those gains.
Interest and dividends are the other types of investment income. In Canada, interest income is taxed at 100%, whereas dividend income is eligible for a dividend tax credit. You’ll pay $535.30 in taxes on $1,000 in interest income and $393.40 on $1,000 in dividend income if you’re in the 53.53 percent tax bracket.
So far, does that make sense? Download The Canadian Guide on How to Invest in Stocks Successfully (it’s free) if you need a refresher on investing fundamentals like these. Let’s talk about three capital-gains tactics if you haven’t before.
The capital gains tax in Canada is lower than the tax on interest and dividends. As a result, capital gains are a tax-advantaged source of income. However, because most investors earn all three types of income, here are three tax-saving options for structuring investment portfolios.
- It’s normally advisable to keep common stocks outside of an RRSP (since dividend and capital gains taxes are lower than interest taxes) and interest-paying investments inside an RRSP. (However, holding shares in an RRSP is fine–especially if you don’t have any fixed-income investments.)
- Outside of an RRSP, it’s advisable to keep more speculative investments. If they are held in an RRSP and fall in value, investors will not only lose money, but they will also be unable to use the losses to offset any taxed gains from other assets.
- The key consideration when investing in mutual funds outside of an RRSP is that mutual funds generate annual capital gains distributions even if investors continue to hold the fund units. Then, on half of any realized capital gains, investors must pay Canadian capital gains tax. As a result, you should invest in mutual funds in an RRSP and common stocks outside of it. Capital gains on common stocks aren’t realized until you sell them.
You can take advantage of the low tax rate on capital gains and dividends if you have a well-structured investment portfolio. Simultaneously, it places your higher-taxed interest income in an RRSP. If you invest dividends or capital gains in an RRSP, you benefit from the RRSP’s tax shelter. When you remove money from your RRSP, however, it is taxed at the same rate as interest income. As a result, you would miss out on the lower tax rates available.
Stock prices fluctuate in quick bursts, punctuated by long periods of mostly horizontal movement. As a result, investors who are solely concerned with pricing may overlook the strength of their investments’ fundamentals. They may then make changes solely for the purpose of making changes.
If you sell stocks because you are bored with them, you may not suffer immediate losses. However, you’ll undoubtedly reduce your long-term profits. The reason for this is because the market’s top achievers might irritate you for months or even years at a time. Even if they stay sideways for a long period, these stocks have the potential to explode higher. If you sell because you’re bored, you’ll miss out on the climb.
Use these three tips to see if you should be selling your stocks in the first place.
- Sell low-quality stocks quickly, but hold off on selling high-quality stock shares.
- Before you sell, consider whether the stock has a negative fundamental outlook. Or are you looking to sell since it isn’t rising fast enough (see above)?
- Avoid tampering with your portfolio, especially when it comes to selling equities that have climbed too much and too quickly. You need a big winner in your portfolio from time to time to succeed as an investor. One of the most important characteristics of great winners is that they tend to rise further and faster than most investors anticipate. They’ll be able to do it for years, if not decades.
If you’re thinking of selling a tax loss to reduce your capital gains in Canada, you should be aware of the “superficial loss rule.” It specifies that an investor, their spouse, or a firm they control cannot claim a capital loss if they purchase back a stock or mutual fund within 30 days after selling it. The capital loss will be disallowed if the 30-day rule is not followed.
Are the Canada Savings Bonds being phased out?
The Government of Canada declared in its most recent federal budget, presented on March 22, 2017, that the sale of Canada Savings Bonds (CSB) and Canada Premium Bonds (CPB) will end in November 2017.
On behalf of the Government of Canada, a formal notification was delivered to all Payroll Savings Plan owners and contributors from the Canada Savings Bonds Program.
Until October 2017, your CSB contributions will be deducted from your monthly pension.
To learn more about what this announcement implies for bondholders, go to the Canada Savings Bonds Program’s website and look under “Questions and Answers.”