TAX SEASON IS HERE AGAIN: A Reminder of How Interest Income Is Taxed

by | Apr 23, 2024 | Articles

With rising rates, there has been increasing interest in guaranteed investment certificates (GICs). Now that tax season has arrived, here is a reminder of their tax treatment, as well as the taxation of bonds.

The taxation of GICs — GICs are often “locked in” and cannot be cashed in until their maturity date. As an example, for a five-year GIC purchased on July 1, 2023, the invested capital must remain in place until July 1, 2028, in order to receive the interest earned. However, this doesn’t mean that there isn’t a tax liability. For non-registered accounts, any accrued interest must be reported on an annual basis, even if it has yet to be received.

Accrued interest is reported based on the anniversary date of the GIC’s issue. So, for the five-year GIC noted above, the interest accrued during 2023 would be the equivalent of six months: July 1 to Dec. 31, 2023. For 2024, a full year of accrued interest would be reported.
The exact amount would depend on when interest is calculated and compounded; in most cases, interest is calculated every six months, though some products may compound interest daily or monthly. AT 5 information slip will be issued for interest amounts of $50 or more. This interest income is fully taxed at your marginal rate in the year it is earned.

The taxation of bonds — Interest income is also generated from bonds. Interest earned in non-registered accounts, often paid semi-annually, must be reported each year on a tax return.

The rapid rise in bond yields has resulted in many “discounted bonds”  that may offer greater tax efficiency when compared to a GIC. When purchased on the open market, a bond’s price can fluctuate based on changes to its stated interest rate. If the bond is purchased at a lower price and sold at maturity, a portion of the return will be a capital gain, taxed at a lower rate than interest income. Also notable, when accrued interest is paid at the time of purchase, it is deductible as an investment expense on a tax return for the year in which you bought the bond.

Share This Article:

Dave Cooper, CFP®, CIM®
Senior Investment Advisor Portfolio Manager
780.484.5777
[email protected]

Tyler Cockbain, BA, CFP®, CIM®
Senior Investment Advisor Portfolio Manager
780.484.5777
[email protected]

 

Justin Nekechuk, B. Ed
Associate Investment Advisor
780.484.5777
[email protected]

 Tower Wealth Advisory
212, 1524 91 St. SW, Edmonton, Alberta T6X 1M5
780.484.5777 ext. 1 or 891
Email: [email protected]
www.towerwealth.com
advisor.wellington-altus.ca/towerwealthadvisory/

The information contained herein has been provided for information purposes only. Graphs, charts and other numbers are used for illustrative purposes only and do not reflect future values or future performance of any investment. The information has been provided by J. Hirasawa & Associates and is drawn from sources believed to be reliable.

The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance. This does not constitute a recommendation or solicitation to buy or sell securities of any kind. Market conditions may change which may impact the information contained in this document. Wellington-Altus Private Wealth Inc. (WAPW) and the authors do not guarantee the accuracy or completeness of the information contained herein, nor does WAPW, nor the authors, assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Before acting on any of the above, please contact me for individual financial advice based on your personal circumstances.
©️ 2023, Wellington-Altus Private Wealth Inc. ALL RIGHTS RESERVED. NO USE OR REPRODUCTION WITHOUT PERMISSION