Taxing deferred interest

Let's say that you invested $1000 in Stock Market-Indexed Guaranteed Investments outside of your RRSP in 1998 for a three-year period. At maturity, the return was determined to be $450 in 2001. Since the return was not known until 2001, nothing was added to your income for 1998, 1999 or 2000. Therefore, the $450 in interest income should be added to your income for 2001.

You will receive tax information from your caisse, indicating the amount to use for the calculations of your taxable income. It would be to your advantage to defer the taxation of this income for three years. However, you wouldn't be able to spread the taxation of the interest retroactively over the three year holding period.

As per the product characteristics, when the return is fully or partially-known, before maturity, the interest incurred on the anniversary date of the investment must be taxed. This is the case of Stock Market Bonus Guaranteed Investments,which guarantee a minimum return paid at a predetermined frequency (monthly or annually).

This could also occur if there is a return freeze option, which means that the return can be fixed before maturity, in accordance with the status of the stock index at the time of the freeze. This protects you from a possible market decline. Exercising this option triggers the taxation of the interest incurred on the anniversary date and annually thereafter. For each year, you will receive information about the amount to include in your taxable income. At maturity, only the interest incurred since the last anniversary will be added to your income, even if you are paid the entire return.

Before you choose this option, be aware that you will have to pay taxes as of the year the return is frozen.