Stocks, Bonds etc. -> Investing Tax Issues -> Strip bonds
Tax Treatment of Income From Investments in Non-Interest Paying Bonds (Strip Bonds)
Tax Act s. 12(4), 12(9), s. 12(11), s. 52(1)
This results in an interest rate of 4.01% in the calculator, which is actually slightly higher than the actual rate of 4%, due to the time period not being exactly 54 months.. The table below uses a rate of 4%. If 4.01% were used, the ACB at the end of 2013 would be $10,004.34. This would be resolved by reducing the 2013 income by $4.34.
|Year||ACB of strip
bond at start
end of year
In 2009, the starting ACB is the purchase price on June 30. The annual income amount is $8,379.08 x 4% x 184/365 = $168.96, because the interest is accrued for the period July 1 to December 31 inclusive.
As you see, the ACB is increased each year by the amount of notional interest accrued to be included in taxable income. The interest each year is calculated based on the ACB at the beginning of the year.
Interest is reported up to the anniversary day each year. For instance, if the bond is purchased on March 31, and the anniversary day is June 30, only 3 months of interest would be reported for the year of purchase. If the same bond was purchased on July 1, no interest would be reported for the year of purchase. In the following year 12 months of interest income would be reported. If the bond is not held to maturity, the date that the bond is sold is an anniversary day, and interest income for the year of sale would be reported up to that date.
See the Canada Revenue Agency (CRA) Technical Interpretation 2002-01231650 (pdf file) regarding annual taxation of interest on stripped bonds.
Tax Tip: Keep bonds (especially strip bonds) inside a registered account (RRSP, RRIF, TFSA, etc.). They are not tax efficient, and the bookkeeping is complicated! No bookkeeping is required when they are inside a registered account.
Revised: September 19, 2017
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