Canada Bond Investing Guide
the bond investing in Canada. The Government of Canada bonds (GoC bonds) are the "federal government debt securities" — the "highest credit rating (AAA)" — the "benchmark for the Canadian fixed-income market". The provincial bonds are issued by the "Ontario, the Quebec, the BC, and the Alberta governments" — the "AA to A credit rating". The corporate bonds are issued by the "Canadian corporations" — the "investment-grade (BBB+ and above)" and the "high-yield (BB+ and below)". The strip bonds are the "zero-coupon bonds" — the "coupon stripped from the principal" — the "phantom interest is taxed annually (the accrued interest is taxable even though NOT received)". The bond ETFs are the "most accessible bond investment for the retail investors" — the "VAB (the Canadian Aggregate Bond Index ETF at the MER 0.09%)", the "XBB (the Core Canadian Universe Bond Index ETF at the MER 0.09%)", and the "ZAG (the Aggregate Bond Index ETF at the MER 0.09%)".
Types of Canadian Bonds
- Government of Canada bonds: The "GoC bonds are the risk-free benchmark" — the "maturities: 2-year, 3-year, 5-year, 7-year, 10-year, 30-year, and the 50-year". The "GoC Real Return Bonds (RRBs)" — the "inflation-indexed bonds" — the "principal adjusted for the CPI".
- Provincial bonds: The "Ontario bonds (the Ontario Electricity Financial Corporation)", the "Quebec bonds (Hydro-Quebec)", the "BC bonds", the "Alberta bonds". The "provincial bonds offer the yield premium over the GoC bonds (the 'provincial spread' — 0.2% to 0.8% depending on the province and the maturity)".
- Corporate bonds: The "investment-grade corporate bonds (the 'BBB+ and above')" — the "Royal Bank, the TD Bank, the Enbridge, the Bell Canada, the Rogers, the Brookfield". The "high-yield corporate bonds (the 'BB+ and below')" — the "higher risk and the higher yield".
- Municipal bonds: The "city and the regional government bonds" — the "less liquid than the GoC and the provincial bonds" — the "tax-exempt status (the interest is NOT subject to the federal tax — the 'municipal bond exemption')".
Strip Bonds
- How strip bonds work: The "investment dealer strips the coupon payments from the bond principal" — the "coupon strips (the 'C-strips')" — the "residual strips (the 'R-strips')". The "strip bond is purchased at the discount and matures at the face value".
- Phantom interest: The "accrued interest on the strip bond is taxed each year even though the interest is NOT received until the maturity" — the "CRA requires the annual reporting of the accrued interest".
- Best account for strip bonds: The "RRSP or the TFSA is the ideal account for the strip bonds" — the "no phantom interest tax in the registered account".
Bond Taxation
- Interest income: The "bond interest is fully taxable at the marginal tax rate" — the "same as the GIC interest and the savings account interest". The "bond interest does NOT receive the preferential tax treatment like the dividends or the capital gains".
- Bond premium: The "bond purchased at the premium (above the face value)" — the "premium can be amortized over the remaining term" — the "amortized premium reduces the annual interest income".
- Bond discount: The "bond purchased at the discount (below the face value)" — the "discount must be reported as the interest income over the term (the 'accrued interest' or the 'deep discount' rules)".
- Capital gains on bonds: The "bond sold before the maturity at the price different from the cost base" — the "capital gain or the capital loss" — the "Gain: 50% inclusion rate".
For the GICs and the fixed-income alternatives, see our GIC Investing Guide →. For the ETF investing and the bond ETFs, see our ETF Investing Guide →.