Taxation of interest income

With the exception of certain investments made before 1990, you’re required to report interest on investments on an annual basis, regardless of when the interest is actually paid. Similar rules apply to certain life insurance policies and annuity contracts. For investments purchased before 1990, you have the option of reporting interest income on either an annual or three-year accrual basis. Once you opt to report annually, however, you must continue to use that method of reporting in subsequent years.

Canada Savings Bonds (CSBs)

There are two different types of Canada Savings Bonds (CSBs): regular and compound interest. With regular bonds, you’ll receive and report the interest each year. Compound bonds, however, are something else entirely. If you own compound bonds, you will not receive the interest until the bond matures or is cashed in. Nevertheless, the interest must still be reported annually. The government will provide you with an information slip indicating the amount of income to be reported.

Tax tip: When you purchase CSBs with a loan that is repaid through a payroll deduction plan, any interest you pay on the loan is tax deductible.

Treasury bills

In general, 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. In such situations, the capital gain equals the selling price minus the purchase cost plus accrued interest up to the date of disposition. Conversely, a capital loss will arise if interest rates increase and the Treasury bills are sold before maturity.