Newbie Tax Questions on Strips

[ColdCanuck]

In the not too distant future I will start moving part of my FI portfolio to discrete bonds from bond ETFs. So I thought I would try to understand some of the mechanics involved. Since I do not need the current income, this may involve creating a ladder of strip bonds.

If I buy a strip, I assume the income is taxed as interest, not a capital gain, even though I really only receive it at maturity. I also assume since it is interest, it is accrued and taxed every year. So my tax question:

Does the brokerage (where the strip is held) supply annual tax information slips on this accrued interest or at least indicate the amount which must be reported ?

I will be posting other questions in a more appropriate forum about strips, after I have worn out the search button.

Edited: While I hope the bonds are discreet, after all who likes a bond who blabs, I really meant for them to be discrete

[Peculiar_Investor]

You might also want to check out http://www.finiki.org/index.php?title=C ... onal_Bonds

The essential advice from almost all sources is DON'T hold Strips in a taxable account. Also the Hank Cunningham book is well worth the read as it is specific to the Canadian market.

[ColdCanuck]

You might also want to check out http://www.finiki.org/index.php?title=C ... onal_Bonds

The essential advice from almost all sources is DON'T hold Strips in a taxable account. Also the Hank Cunningham book is well worth the read as it is specific to the Canadian market.

Duly noted, but given the meager size of the TFSA ($10k), and the fact that the RRSP is already full of the FI part of my portfolio, I think it likely that there will be some non-registered holding of bonds, with the inevitable less than optimal tax implications.

Does this advice pertain particularly to strips, or is it more generally the advantage holding of FI in registered plans. In other words are there significant negative tax implications of strips over other FI instruments held in non-registered plans?

[Shakespeare]

Don't hold strips in non-registered plans because you will be required to pay tax on income that is imputed but not received. If you must hold fixed income in non-registered plans, hold normal (unstripped) bonds or GICs.

Also, pay attention to whether the bond is in premium, since you will only be able to use 1/2 of a capital loss.

[Peculiar_Investor]

In other words are there significant negative tax implications of strips over other FI instruments held in non-registered plans?

I am not an accountant, and don't play one on FWF. AFAIK if you must hold fixed income in a taxable account, you don't want it to be in the from of Strips due to the tax treatment. If you hold a bond in a taxable account, you'll be receiving income from it and then will be taxed on that income. The problem with Strips is that you receive no income, yet you must pay tax as if the income had been received. Another source to review is http://stripbonds.info/public/taxation.htm and http://www.taxtips.ca/personaltax/inves ... pbonds.htm

[ColdCanuck]

Don't hold strips in non-registered plans because you will be required to pay tax on income that is imputed but not received. If you must hold fixed income in non-registered plans, hold normal (unstripped) bonds or GICs.

Also, pay attention to whether the bond is in premium, since you will only be able to use 1/2 of a capital loss.

To the first point, imputed interest on the strip, would be no different than a compounding GIC, right . Prepaying the tax may be advantageous in my current position as I will have a very low MTR (early retirement, sufficient non-taxed income to live), for the next few years, rising significantly as OAS and mandated LIF payments kick in. However I will do the numbers very carefully before I head down this path.

I understand your second point, but is not half a loss better than no loss (sorry couldn't resist ), which is what would happen to a loss in a registered plan. I guess the take home message is not to buy strips trading at a premium, which in turn may limit the selection.

Thanks to PI and Shakes for the responses so far, does anyone have an answer to the original question

[Shakespeare]

I understand your second point, but is not half a loss better than no loss (sorry couldn't resist ), which is what would happen to a loss in a registered plan. I guess the take home message is not to buy strips trading at a premium, which in turn may limit the selection.

See this post. But only unstripped bonds trade at a premium; strips always trade at a discount.

It is usually up to the investor to compute imputed interest on a strip held in a non-registered account.

[ColdCanuck]

But only unstripped bonds trade at a premium; strips always trade at a discount.

You mean I can't give someone $120 so they will give me back $100 at a future date, I thought that was the definition of a mutual fund Silly me, not enough caffeine

It is usually up to the investor to compute imputed interest on a strip held in a non-registered account.

Thanks, that's what I needed; do we use a linear progression where all imputed interest payments equal or a geometric one where the imputed interest grows by the yield, or does it matter as long as I'm consistent.

Later:
The link provided by PI (http://www.taxtips.ca/personaltax/inves ... pbonds.htm) indicates that it is a geometric progression, that is the imputed interest grows by the yield every year.

Thanks for to all for the answers, I'll go do some digging and will be starting a few other threads after I get my head around this.

[IdOp]

There is a 7-page brochure by IIROC about strip bonds that I've been given every time I open an account at TD-W. It gives quite a bit of good information with examples, how to calculate imputed interest (yes, geometrical) and capital gain on early disposition, etc. The title is Strip Bonds and Strip Bond Packages Information Statement.

You can find out about it here

It seems they will mail you a physical copy if you order it (I didn't check if it costs money, it may), but seems they will also email you a free PDF. I guess they haven't learned how to link those to a web site yet.

You could check your brokerage account opening package to see if they already gave you one! It's worth a read even if you decide not to do it.

[thegov]

I have a strip bond that matured in 2011 in a non-registered account. I have been reporting the estimated interest yearly per the documentation on Sched 4 - Line 121 -- no probs.
What I wonder about is on maturity the bond shows as redeemed -- just like any regular bond -- and I'm assuming will show up on the T5008 as a redemption. As this would show an increase in total proceeds -- do I need to report the maturity on Sched 3 like a regular bond -- and put in a cost equal to the face value (zero cap gain) -- just to keep things adding up correctly? Makes no difference at all to tax payable, of course.
Any thoughts?

[thegov]

edited ...answer to my own question above.. found someone way up in CRA who says yes -- you do need a line item in Sched 3 with no cap gain to keep things tidy as the proceeds show up on the T5008.