Reporting Earned Interest

Interest income is common to most investors. It can often accrue on a compounding basis (that is, interest is reinvested rather than paid out to the investor during the term of the contract).

The following are examples of “debt obligations” which are investment contracts that pay interest income:

• A Guaranteed Investment Certificate (GIC) which features a fixed interest rate for a term spanning generally one to five years.
• A Canada Savings Bond (CSB).
• A treasury bill or zero coupon bond which provides no stated interest, but is sold at a discount to its maturity value.
• A strip bond or coupon.
• A Guaranteed Investment Certificate offering interest rates that rise as time goes on. These are also known as deferred interest obligations.
• An income bond or debenture where the interest paid is linked to a corporation’s profit or cash flow.
• An indexed debt obligation instrument that is linked to inflation rates, such as Government of Canada Real Return Bonds.

Interest reporting follows two basic tax rules:

1. You must report the interest in the taxation year when it is actually received or receivable.
2. Compounding investments allow you to earn interest on interest during the term of the contract, paying out the income at the end of the term. However, you must report all interest income that accrues on an annual basis, in the year ending on the debt’s anniversary date. An issue date in November of one year, for example, does not require interest reporting until the following year. In other words, the accrual of interest for the period November to December 31 is not required.

These reporting rules stemmed from a tax reform back in the early '80s. For investments acquired in the period 1981 up to and including 1989, a three-year reporting cycle was required, but you could switch to annual accrual reporting if desired. After 1989, investors must report accrued interest annually.