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Email this9:23 pm
August 9, 2014
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I know that the interest pay for borrowing use for investing is tax deductible, and I know zero coupon bonds is taxed using as capital gain instead of income. What happen if these 2 aspects are combined ?
Let say I purchase large quantity of federal government's (or provincial government's) zero coupon bonds, and I use them as collateral to borrow money from banks and invest them in things that will give income (dividend, rent, interest etc). Are there any problems with this method, and are there any risk of having the loan call, consider the credit risk of such collateral are very low ?
9:55 am
April 6, 2013
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Zero coupon bonds are not taxed as capital gains. Expected increase in value over time is deemed income and needs to be reported annually.
Yes, there can be significant problems with using government strip bonds as collateral. Lender can give a margin call on the loan if the market value of the strip bonds drop. That could happen if interest rates go up. It could also happen when there is an imbalance of buyers and sellers in the bonds.
11:53 am
April 19, 2019
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What is the expected increase in value if it's a zero coupon bonds? does the value increase over time?
Is there anything else one can buy and then take out as margin and invest and save on taxes someway?
1:34 pm
April 15, 2020
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butterflycharm said
What is the expected increase in value if it's a zero coupon bonds? does the value increase over time?Is there anything else one can buy and then take out as margin and invest and save on taxes someway?
Strip bonds are purchased at a discount to future value.
Assume you purchase a zero coupon bond with 4 years to maturity yield 1%. Purchase price 96.09. Value at maturity 100. The price will fluctuate depending on interest rates over the next 4 years.
2:51 pm
April 6, 2013
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There is a deemed increase in value, for tax purposes, that represents taxable interest earned, as the strip bond ages towards maturity.
This deemed value is just for tax purposes and can be different from its market value. If one sells the strip bond for above its deemed value for tax purposes, then one has a capital gain. If one sells the strip bond for below the deemed value for taxes, then one has a capital loss.
I put more details in separate topic Strip bond taxation.
It works the same way for other discount notes, like treasury bills and banker's acceptances.
6:53 pm
April 19, 2019
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Norman1 said
There is a deemed increase in value, for tax purposes, that represents taxable interest earned, as the strip bond ages towards maturity.This deemed value is just for tax purposes and can be different from its market value. If one sells the strip bond for above its deemed value for tax purposes, then one has a capital gain. If one sells the strip bond for below the deemed value for taxes, then one has a capital loss.
I put more details in separate topic Strip bond taxation.
It works the same way for other discount notes, like treasury bills and banker's acceptances.
Isn't anything bond related with a return of ~1% VS 5.5% in a GIC? The total of return from a GIC (after taxes paid) will be higher than the the total amount of return from a bond or bond derivative (after taxes paid).
Topic of this thread should be "A tax efficient way to invest that is low to medium risk with high rate of return"
8:34 pm
April 6, 2013
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This thread was started in May 2020 on an error that the gains from zero coupon bonds were taxed as capital gains.
GIC's weren't 5.5% in May 2020. Oaken was offering to pay only 2% to 3% on its five-year GIC's at that time.
9:12 pm
April 19, 2019
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Norman1 said
This thread was started in May 2020 on an error that the gains from zero coupon bonds were taxed as capital gains.GIC's weren't 5.5% in May 2020. Oaken was offering to pay only 2% to 3% on its five-year GIC's at that time.
Even so, weren't bonds always lagging behind in yields compared to other products by about 1% to 3% vs GICs and way behind vs market?
Maybe bond yields were showing at 1% or less then.
All in, 1% vs 3% is a big difference and tax is a very small portion compared to total income.
From a total income perspective bonds yield would probably never beat other investments. Has there been other instances in history that this proved to be wrong?
5:55 am
March 30, 2017
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butterflycharm said
Even so, weren't bonds always lagging behind in yields compared to other products by about 1% to 3% vs GICs and way behind vs market?
Maybe bond yields were showing at 1% or less then.
All in, 1% vs 3% is a big difference and tax is a very small portion compared to total income.
From a total income perspective bonds yield would probably never beat other investments. Has there been other instances in history that this proved to be wrong?
totally wrong
10:23 am
April 6, 2013
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I agree.
BMO InvestorLine has been offering Government of Canada treasury bills, 21 days to 77 days maturity, for around 4.1%, after commissions. That's ahead of many short term GIC rates, like Oaken's 2.25% and EQ Bank's 2.65% to 3.75%.
They also had a small quantity of municipal bonds available that matured in about 30 days yielding 4.65%. Some of the yield would be capital gains as the price was below face value. I bought them.
One needs to look and see what's really out there instead of relying on vague generalities.
10:57 am
October 27, 2013
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Investment grade corporate bonds are also sometimes competitive. I have had a mix of them along with GICs in my 5 year GIC ladder in the past.
It is also complicated when comparing the total return (not just yield) of bonds vs GICs since bonds are market-to-market on a daily basis based on the secondary market where GICs have no effective secondary market except at major discounts. That 2% GIC one still holds does not remotely have a market value close to face value if it had to be sold. Bonds have capital gains (or losses) associated with them should they be sold, or allowed to mature at $100 face value.
The calendar year performance of XSB (short term bond ETF of a similar duration of a 5 year GIC ladder) https://www.blackrock.com/ca/investors/en/products/239491/ishares-canadian-short-term-bond-index-etf varies considerably. Compare 2020 return with 2022 return. Most of the variation is due to mark-to-market valuations of the underlying bonds.
That said, a GIC ladder is simple to implement, and will often outperform many other fixed income products but as Norman has said, no one can make broad generalizations without the risk of being taken out to the woodshed.
Please write your comments in the forum.