Section 7 – Investments

Interest Income

Taxpayers must pay tax every year on the interest earned on investments (i.e. deposits, certificates, Treasury bills, bonds) on the anniversary date of the acquisition of the investment. This applies to interest received or interest accrued on compound interest investments.

Example: An individual who acquired a compound interest bearing investment on June 30, 2018 that matures in June 2019 does not have to include in 2018 interest accrued as of December 31, 2018. In 2019, the individual is required to report interest earned from July 1, 2018 to June 30, 2019.

When acquiring investments, give priority to those that mature after the year-end.

Treasury Bills

The difference between the purchase cost and the selling price of Treasury bills is deemed to be interest. A capital gain is realized only if market interest rates drop and the Treasury bills are sold before maturity. The capital gain equals the selling price less the purchase cost plus accrued interest up to the date of disposition.

Indexed Securities

Indexed securities are instruments that bear interest at a rate that is below the market rate but for which the amount payable upon maturity is generally adjusted based on the change in the purchasing power determined in accordance with an index, such as the consumer price index.

If there is an upward adjustment, the increase is included in the investor’s income as interest. If there is a downward adjustment, the opposite occurs – the adjustment is deductible by the investor if the conditions governing interest deductibility are met.

Hybrid Financial Instruments

Hybrid financial products provide a capital guarantee, at a determined date, and a return, based on a stock market index, that are paid at maturity. They may also include certain other conditions, such as minimum or maximum interest, an exercise period for freezing the return to maturity, etc. Examples include equity-linked notes, managed future notes, protected indexed notes, etc.

While tax legislation does not specifically provide for this type of transaction, the tax authorities consider that deemed interest must be calculated annually. If the return is not determinable before maturity, no amount has to be included in the taxpayer’s income before it is received or receivable. Moreover, if the maximum amount can be reasonably determined, the interest has to be included in the year where it is determinable.

News and Insights on Tax