# How do I reason this bond sale?



## james4beach (Nov 15, 2012)

I hold some Government of Canada bonds (paying large coupons, like 4%) within my TFSA. Everything was fine of course until I became a "US Person". Now, however, I have to pay an accountant to fill some complicated disclosures to the IRS. Basically it's no longer worth having the TFSA; it costs me accountant fees and I'd rather avoid the IRS hassle entirely, because they scare me. The less I deal with them, the better.

I can move some of those high-coupon bonds into my RRSP, but I'll have some bonds remaining. The choice I have with those remaining ones is either: sell them (and instead hold a non-reg GIC), or transfer them out and continue to hold them in non-registered. If one option is dramatically more profitable, I'll do it. If the two options are close, then I'll keep the bonds because they are good quality assets.

How do I reason this out? I know how to calculate bond cashflows but I'm not sure what the right methodology is. If I hold the bond non-registered, I'll pay taxes on its interest income (the big coupon payments). On the other hand, if I sell the bonds, I lose some value on the spread and the broker fee. Plus because I'll be keeping the money in fixed income, selling the bond means the cash goes into a GIC which still has taxable interest income.

All of this is making me struggle to figure out _how to calculate_ my best option. Here's what I thought of - will this work to compare like this?

If "sell": look at net proceeds of bond sale after fees. Assume this goes into a GIC equivalent to the original maturity of the bonds. Calculates taxes paid on the GIC interest income and figure out net gain by the time the original maturity is reached.

If "hold non-reg": calculate taxes paid on coupons each year until maturity. Then look at maturity value. Figure out net gain at the time of maturity.


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## Eclectic12 (Oct 20, 2010)

As I understand it ... interest income whether from a GIC or bond is taxable at the same tax rate. 

With five year GICs coming up between 1.4% through 2.7%, won't a higher coupon rate (almost 4%) plus the tax advantaged CG (or CL) automatically mean the bond wins? 

Unless I'm missing something, the net proceeds from the bond sale would have to provide enough additional capital to overcome the coupon rate differential ... plus some factor for in the tax advantaged portion at maturity providing a better after-tax return.


If you want to figure out the net after-tax gain of the two choices, as long as the "look at maturity value" includes estimating the CG income/taxes, it looks to me that this would be comparable.


I've never bought anything but a GIC or Canada Savings Bond so I've never had to worry about a CG (or CL) from a bond.


Cheers


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## james4beach (Nov 15, 2012)

The complication is that coupon is not the same as yield. When I bought the bonds they had yields of 3.x% or even 2.x% maybe. The higher coupon does not translate to higher yield; it all depends on the price.

I can look up the yield-to-maturity of my bonds, but the yield isn't too useful from a tax perspective because it's a combination of capital gain and interest income.


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## Eder (Feb 16, 2011)

Perhaps you can swap the bonds into your RRSP replacing some favorably taxed ETF's or stocks? Not sure this is allowed but seems reasonable.


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## Guban (Jul 5, 2011)

^ +1
Don't hold the premium bond in your taxable account.
http://canadiancouchpotato.com/2013/03/06/why-gics-beat-bond-etfs-in-taxable-accounts/


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## Woz (Sep 5, 2013)

I would calculate your after tax YTM for each option.

For GICs it’s straight forward:

Ex: Interest = 2%, Marginal Tax Rate = 40%, 
After tax yield is 2%*(1-40%) = 1.2%

For bonds:

Ex: Initial Amount $110, Coupon = 4%, Marginal Tax Rate = 40%, Final Amount = $100, Term = 5
=rate( 5, $100*4%*(1-40%), -$110, $100 + ($110-$100)*40%/2 ) = 0.75%


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## Franz Josef (Jun 5, 2015)

TFSAs haven't been around all that long so we're not talking vast sums. One way to deal with TFSAs and the IRS is to keep shtum about them. They are non-reportable. Otherwise you are right. It's not worth having them. There won't be a dramatic difference. Certainly less than the accounting fees. Transfer them out if you think 4% is a good yield. Sell them and buy BCE (pay 4.75% , better tax rate or a bank (RY pays 3.94% tax advantaged)


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## Guban (Jul 5, 2011)

^ but they are reportable to the IRS, and taxable too if you don't have enough foreign tax credits to offset what is payable.

James is a bit (or a lot) paranoid. He is a conservative fellow, who sticks to GICs/fixed income to a large degree, if I recall. Knowingly misrepresenting something to a government is not in his nature, I suspect.


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## james4beach (Nov 15, 2012)

That's right, I'm not trying to hide the TFSA accounts. I already disclosed the accounts on both the FATCA and FBAR reportings, so the "cat's out of the bag" now.

Thanks both for the link, and the sample after tax YTM calculation. I'll crunch through those numbers... but as said above there might not be a material difference in the end.


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> The complication is that coupon is not the same as yield. When I bought the bonds they had yields of 3.x% or even 2.x% maybe. The higher coupon does not translate to higher yield; it all depends on the price.


Hmmm ... I thought the coupon rate was paid out regardless of what happens with the CG part. 
You are making me glad I've never bought these and that I didn't get a green card when I worked in the US for a while. 




james4beach said:


> I can look up the yield-to-maturity of my bonds, but the yield isn't too useful from a tax perspective because it's a combination of capital gain and interest income.


Is the CG part a moving target?
If so, it's all going to be an estimate.


Curious to know what the numbers work out for you but I won't lose any sleep over it. :biggrin:


Cheers


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## lonewolf (Jun 12, 2012)

James I would be inclined to sell the bonds based strictly on the fact that @ some point the government of Canada will most likely default on the bonds. All the government workers want their promised pensions etc the conflict of interest will not be in favour of the bond holders by those making decisions. Government bonds have no backing of assets only taxing the tax payers more. The police, fire department, hospitals & schools will be taxing enough to the tax payers the bond h olders are not first on the list in a financial & economic shaking. Trying to find safety is not easy,


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## james4beach (Nov 15, 2012)

lonewolf, I agree there is risk of default (as with any bond) but that angle doesn't concern me. Of all the places you can put fixed income, I think Govt of Canada bonds is the safest (that means safer than GICs)

This is starting to feel like one of those "optimization" problems where the effort of optimization may not be worth the effort. I could spend X hours of my time figuring this out, or just make a coin toss 

... Probably the 35 C weather making me say that ...


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