Is there a guaranteed capital gain product that is not in TFSA or RRSP? | Page 3 | General financial discussion | Discussion forum

butterfly charm said:
"Anyone has ever bought secondary GICs and has a contact to share or pm me?"

I have an investment account with RBC Dominion Securities. When I first heard about discounted GICs on this forum, in 2022, I asked my advisor and he said yes they have them. He offered me one and the yield to maturity was significantly less (roughly 1%) than the best rates on this site. I also pay my advisor 1.1% of my assets with RBCDS per year. So I chose to not buy a discounted GIC from him, even though there would be some tax savings with a capital gains as portion of the income. He said these things quickly sell. The rate being offered was likely similar to the rates of new Royal Bank GICs or the third party GICs that RBCDS can offer.

So, I believe to get to talk about these discounted GICs you need to have enough investable assets to have an investment account with an advisor with a company that buys these issued, nonredeemable GICs back from customers, in extraordinary circumstances, such as a death. Then you also need ready cash to buy what is offered when it is offered.

That is my small story. I have no GICs with RBCDS. I can do better elsewhere. I can get better rates with the term and face value I choose.

In short, I can not provide a contact for you.

Secondhand GICs:

butterflycharm: These second-hand GICs (and bonds, and even coupons sometimes) trade at higher or lower than face value because their interest rates may not be the same as current ones at any purchase point during their term. For example, you may have a 2% bond with a year left on it, and the prospective buyer can get a 1-year bond or GIC at 5%, say. To unload the 2% paper, the seller will have to drop the price so that its final value will return to the buyer about the same amount at at maturity that the 5% option would have provided. Similarly, a 7% bond would sell at over its face value because it would mature at a value higher a new GIC bought at rates current at the time of sale.

Such a seller might, for example, need to get cash out of the term, and the buyer would benefit as well. But if interest rose, the buyer would be stuck at the face rate and lost what they might have made on new higher-rate investments; if rates fell, they would benefit from the face value, which would not have dropped. Similarly, a buyer may want to buy something with a shorter term than what they'd have to pay to get the better rate at time of purchase.

TFSA rules: BILL said it best. I will try to point out possibly misleading notes.

HermanH and butterflycharm:

HermanH said:

So gain interest, cash out, and *recontribute the full amount with the interest gained again

Any cash one takes out of a TFSA can be re-contributed in the following year. That withdrawn registered amount may or may not have included interest/capital gain earned inside the TFSA. BUT any interest earned outside the TFSA CANNOT be re-contributed, though it can fit into the new year's contribution room.

That is, one can keep accruing interest within the TFSA and one can add new amounts (to the yearly maximums) every new year. BUT any withdrawals can only be re-contributed in the withdrawn amount.

If one has deposited $x as maximum allowable contributions into one's TFSA and earned some sort of interest or equity gain of $y, one will be able to withdraw it all - and thus get out of the TFSA more than one put in ($x+y) and pay no tax. And one can re-contribute that total amount the following year. (In which there will be new contribution room as well.)

Let's be clear and try to distinguish between (unused) contribution room and re-contribution room!

Assuming I am Brayden, I purchase a second-hand bond on January 4, 2022 at significant discount for $12,000 and place it within the TFSA. This bond will mature on December 30, 2022 for $20,000.

The total value for my TFSA is now $20,000. If this amount is withdrawn on December 31, 2022, it can be re-deposited in the TFSA along with the 2023 annual contribution room of $6,500 for a total of $26,500 on January 1, 2023.

Is this correct?

Yes, this is correct. But whatever interest was earned on the $20K between the two dates can NOT be re-contributed.

butterflycharm:

Yes, that is exactly how TFSA works. It keeps increasing. Never decreases. And capital gain increases are added to the contribution room.

That's misleading. TFSA contribution room may increase with every year's amount if previous room has NOT been used. The AMOUNT in the TFSA can rise or fall below the total contributions, since one may have held losing investments. But nothing can increase TFSA contribution room - capital gains have nothing to do with it.

I suspect you are confusing the total amount in the TFSA with contribution room. They are unrelated. Note how chamnic said:

Butterflycharm, you are confusing "contribution room" with the total value of your TFSA which varies with capital gain (or loss), accrued interest and so on. They're not the same thing. Contribution room is the amount available that you can add to your TFSA without penalty. It increases every year by 6500$ (since 2023) and can also increase if you withdraw some money from your TFSA.

I must clarify that one's contribution room does not increase every year - the yearly contribution room only increases when the government decides to! (After a conservative government upped the limit to $10K for 2015, the next government dropped it back to $5.5K again for 2016.)

If one contributed that to one's TFSA, it cannot be used in the next year. If not, then it carries forward.

mordko:

Yes, unless you withdraw. Then capital gain (or loss) and interest can become contribution room.

This is incorrect. The amount withdrawn - whether it contains interest earned in the TFSA - is the amount that can be recontributed later. Capital gain or loss cannot create contribution room, though it can be part of REcontribution room if withdrawn.

TommyT has a valid point that one must make sure the withdrawal has been noted by Canada Revenue Agency. But one can notify them oneself and let them know it's been done, and they will usually let things stand pending notification by the financial institution. They shouldn't asses penalties until the new year's balances are reviewed in that year's tax return, which is due the FOLLOWING year.
RetirEd

I don’t have the patience to go through the legislation but you don’t need to worry about “advantage” and “taxable income” unless you are doing things you shouldn’t be doing. They are talking about tax evasion where one could be borrowing from own TFSA and paying interest into it to shift non-registered cash under TFSA umbrella, income from over contributions and the like.

Capital losses within TFSA are unpleasant. You can’t offset future gains in your taxable account against them. And your overall TFSA room goes down. But you can’t have gains without risking some occasional losses so its worth it.

HermanH said
Would there be an advantage to buying a second-hand GIC at a discount price to be placed into a TFSA? …

No, there is no tax advantage buying discount GIC's and discount bonds in registered accounts like TFSA, RRSP, RESP, or registered pension plans.

Receiving

1. $150 in interest and $50 in capital gains or
2. $250 in interest and $50 in capital losses

instead of $200 in interest in a registered account makes no difference in taxation.

That's not the case.

One is using up less TFSA contribution room because one is actually contributing less when one is contributing a discounted GIC. One will actually end up with less at maturity because one had invested less than someone who contributed a non-discounted GIC with the same yield to maturity.

The yield to maturity is based on the discounted value, not the face value. One is not going to end up with the same amount of money on maturity when buying a $20,000 second-hand GIC for $19,400 as buying a newly-issued non-discounted $20,000 GIC for $20,000 with the same term and yield to maturity.

That price does not matter.

If one buys a $20,000 2% two-year GIC at a discounted price ($18,884.35) that gives a 5% yield to maturity, one is going to end up at maturity with less money than someone who put $20,000 into a newly-issued two-year 5% GIC.

That's because one had invested $18,884.35 and not $20,000.

No, the face value of the GIC does not change midway.

No-one is going to offer $20,000 for a pre-owned $20,000 2% GIC with two years left when one can place the $20,000 in a newly-issued two-year GIC that pays 5%.

Think what Norman is saying at the end you end up having the same amount of $ (principal + interest) if the YTM is identical.
One is only better off buying a second hand GIC if it yields higher than the market yield and only if you can buy it at a discount.

This is all based on the investment being in a TFSA which is taxed free 100%.