Bond interests

[PeteH]

Hi,

Was wondering how do one report bond interest income? Is it reported only when it's actually received? Or does it fall under "accrued interest" rule (ie. report partial interest at year end, even though its only receivable in the next tax year) ? 

Thanks,

[Curmudgeon]

Interest that is payed out is taxed when received. If the interest is accruing and not paid out until maturity, the interest is earned for tax purposes for each 12-month period the bond is owned. If the bond was purchased in the bond market, you paid price plus accrued interest to compensate the seller for the interest accrued since the last payment date. This accrued interest becomes part of the bond's ACB and is deducted from the interest received next year, i.e., it is not considered interest for tax purposes.

[PeteH]

5 hours ago, Curmudgeon said:

Interest that is payed out is taxed when received. If the interest is accruing and not paid out until maturity, the interest is earned for tax purposes for each 12-month period the bond is owned. If the bond was purchased in the bond market, you paid price plus accrued interest to compensate the seller for the interest accrued since the last payment date. This accrued interest becomes part of the bond's ACB and is deducted from the interest received next year, i.e., it is not considered interest for tax purposes.

Thanks - to clarify a bond that pays interests semi-annually then is only reported as income when received (ie. I do not need to pro-rate the interest as of December 31 for the tax year) correct ? 

In your last sentence - you meant the accrued interest is NOT part of the ACB, and it IS considered as interest income for tax purpose, right? Since I will be removing the accrued interest from capital gain/loss at disposition, while deducting it from the total interest received as income, right ? 

[Curmudgeon]

Quote

Thanks - to clarify a bond that pays interests semi-annually then is only reported as income when received (ie. I do not need to pro-rate the interest as of December 31 for the tax year) correct ? 

That is correct.

Quote

In your last sentence - you meant the accrued interest is NOT part of the ACB, and it IS considered as interest income for tax purpose, right? Since I will be removing the accrued interest from capital gain/loss at disposition, while deducting it from the total interest received as income, right ? 

Say the interest payment is $12 and the bond was purchased @ $800 two months after the semi-annual interest period began (four months before your first interest receipt). Two-sixths of the $12 is added to the purchase price so the cost to you is $804, which is the ACB. The $4 is the interest that has accrued since the last payment. When the $12 payment is received, only 12 - 4 = $8 is declared as interest.

If the bond had accrued interest, the same calculation applies. All interest accrued on the bond up to the trade date in incorporated into the price and the buyer subtracts it when declaring accrued interest.

[PeteH]

2 minutes ago, Curmudgeon said:

That is correct.

Say the interest payment is $12 and the bond was purchased @ $800 two months after the semi-annual interest period began (four months before your first interest receipt). Two-sixths of the $12 is added to the purchase price so the cost to you is $804, which is the ACB. The $4 is the interest that has accrued since the last payment. When the $12 payment is received, only 12 - 4 = $8 is declared as interest.

If the bond had accrued interest, the same calculation applies. All interest accrued on the bond up to the trade date in incorporated into the price and the buyer subtracts it when declaring accrued interest.

Got it, thank you so much ! 👍