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Is there a guaranteed capital gain product that is not in TFSA or RRSP?
January 19, 2023
7:32 pm
RAV4guy
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butterfly charm said:
"Anyone has ever bought secondary GICs and has a contact to share or pm me?"

I have an investment account with RBC Dominion Securities. When I first heard about discounted GICs on this forum, in 2022, I asked my advisor and he said yes they have them. He offered me one and the yield to maturity was significantly less (roughly 1%) than the best rates on this site. I also pay my advisor 1.1% of my assets with RBCDS per year. So I chose to not buy a discounted GIC from him, even though there would be some tax savings with a capital gains as portion of the income. He said these things quickly sell. The rate being offered was likely similar to the rates of new Royal Bank GICs or the third party GICs that RBCDS can offer.

So, I believe to get to talk about these discounted GICs you need to have enough investable assets to have an investment account with an advisor with a company that buys these issued, nonredeemable GICs back from customers, in extraordinary circumstances, such as a death. Then you also need ready cash to buy what is offered when it is offered.

That is my small story. I have no GICs with RBCDS. I can do better elsewhere. I can get better rates with the term and face value I choose.

In short, I can not provide a contact for you.

January 20, 2023
12:21 am
Loonie
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You are paying this "advisor" an enormous amount of money annually. I don't understand why you are coming to this forum with so many questions. For that kind of money, I'd expect him to have answers I could rely on rather than strangers'.

January 20, 2023
8:59 am
butterflycharm
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RAV4guy said
So I chose to not buy a discounted GIC from him, even though there would be some tax savings with a capital gains as portion of the income.

Thanks.

Above what you said is in regards to GICs and capital gain? How are the two related? Was the GICs wrapped in a mutual fund or something market linked?

January 20, 2023
10:26 am
Norman1
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No wrapping is needed.

The document from RBC Dominion Securities I mentioned earlier explains how the capital gains can arise with GIC's and bonds.

As RAV4guy shared, one isn't going to be referred by an RBC Royal Bank branch, for example, to their full-service brokerage RBC Dominion Securities unless one has a certain amount of funds to invest.

Usually, that is around $50,000 to $100,000 of investable assets. Less than that, the full-service brokerage will send the client back to the mutual funds people at the bank branch.

January 20, 2023
4:58 pm
RetirEd
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Secondhand GICs:

butterflycharm: These second-hand GICs (and bonds, and even coupons sometimes) trade at higher or lower than face value because their interest rates may not be the same as current ones at any purchase point during their term. For example, you may have a 2% bond with a year left on it, and the prospective buyer can get a 1-year bond or GIC at 5%, say. To unload the 2% paper, the seller will have to drop the price so that its final value will return to the buyer about the same amount at at maturity that the 5% option would have provided. Similarly, a 7% bond would sell at over its face value because it would mature at a value higher a new GIC bought at rates current at the time of sale.

Such a seller might, for example, need to get cash out of the term, and the buyer would benefit as well. But if interest rose, the buyer would be stuck at the face rate and lost what they might have made on new higher-rate investments; if rates fell, they would benefit from the face value, which would not have dropped. Similarly, a buyer may want to buy something with a shorter term than what they'd have to pay to get the better rate at time of purchase.

TFSA rules: BILL said it best. I will try to point out possibly misleading notes.

HermanH and butterflycharm:

HermanH said:

So gain interest, cash out, and *recontribute the full amount with the interest gained again

Any cash one takes out of a TFSA can be re-contributed in the following year. That withdrawn registered amount may or may not have included interest/capital gain earned inside the TFSA. BUT any interest earned outside the TFSA CANNOT be re-contributed, though it can fit into the new year's contribution room.

That is, one can keep accruing interest within the TFSA and one can add new amounts (to the yearly maximums) every new year. BUT any withdrawals can only be re-contributed in the withdrawn amount.

If one has deposited $x as maximum allowable contributions into one's TFSA and earned some sort of interest or equity gain of $y, one will be able to withdraw it all - and thus get out of the TFSA more than one put in ($x+y) and pay no tax. And one can re-contribute that total amount the following year. (In which there will be new contribution room as well.)

Let's be clear and try to distinguish between (unused) contribution room and re-contribution room!

Assuming I am Brayden, I purchase a second-hand bond on January 4, 2022 at significant discount for $12,000 and place it within the TFSA. This bond will mature on December 30, 2022 for $20,000.

The total value for my TFSA is now $20,000. If this amount is withdrawn on December 31, 2022, it can be re-deposited in the TFSA along with the 2023 annual contribution room of $6,500 for a total of $26,500 on January 1, 2023.

Is this correct?

Yes, this is correct. But whatever interest was earned on the $20K between the two dates can NOT be re-contributed.

butterflycharm:

Yes, that is exactly how TFSA works. It keeps increasing. Never decreases. And capital gain increases are added to the contribution room.

That's misleading. TFSA contribution room may increase with every year's amount if previous room has NOT been used. The AMOUNT in the TFSA can rise or fall below the total contributions, since one may have held losing investments. But nothing can increase TFSA contribution room - capital gains have nothing to do with it.

I suspect you are confusing the total amount in the TFSA with contribution room. They are unrelated. Note how chamnic said:

Butterflycharm, you are confusing "contribution room" with the total value of your TFSA which varies with capital gain (or loss), accrued interest and so on. They're not the same thing. Contribution room is the amount available that you can add to your TFSA without penalty. It increases every year by 6500$ (since 2023) and can also increase if you withdraw some money from your TFSA.

I must clarify that one's contribution room does not increase every year - the yearly contribution room only increases when the government decides to! (After a conservative government upped the limit to $10K for 2015, the next government dropped it back to $5.5K again for 2016.)

If one contributed that to one's TFSA, it cannot be used in the next year. If not, then it carries forward.

mordko:

Yes, unless you withdraw. Then capital gain (or loss) and interest can become contribution room.

This is incorrect. The amount withdrawn - whether it contains interest earned in the TFSA - is the amount that can be recontributed later. Capital gain or loss cannot create contribution room, though it can be part of REcontribution room if withdrawn.

TommyT has a valid point that one must make sure the withdrawal has been noted by Canada Revenue Agency. But one can notify them oneself and let them know it's been done, and they will usually let things stand pending notification by the financial institution. They shouldn't asses penalties until the new year's balances are reviewed in that year's tax return, which is due the FOLLOWING year.
RetirEd

January 20, 2023
6:10 pm
mordko
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“Contribution room” is incorrect? That’s a major problem. You really need to tell that to CRA.

Withdrawals, excluding qualifying transfers and specified distributions, made from your TFSA in the year will only be added back to your TFSA contribution room at the beginning of the following year.

Note how they say “added back to your CONTRIBUTION ROOM”.

https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/making-replacing-withdrawals-a-tfsa.html#:~:text=Withdrawing%20funds%20from%20your%20TFSA,beginning%20of%20the%20following%20year.

January 20, 2023
7:34 pm
butterflycharm
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RetirEd said
Secondhand GICs:

butterflycharm: These second-hand GICs (and bonds, and even coupons sometimes) trade at higher or lower than face value because their interest rates may not be the same as current ones at any purchase point during their term. For example, you may have a 2% bond with a year left on it, and the prospective buyer can get a 1-year bond or GIC at 5%, say. To unload the 2% paper, the seller will have to drop the price so that its final value will return to the buyer about the same amount at at maturity that the 5% option would have provided. Similarly, a 7% bond would sell at over its face value because it would mature at a value higher a new GIC bought at rates current at the time of sale.

Such a seller might, for example, need to get cash out of the term, and the buyer would benefit as well. But if interest rose, the buyer would be stuck at the face rate and lost what they might have made on new higher-rate investments; if rates fell, they would benefit from the face value, which would not have dropped. Similarly, a buyer may want to buy something with a shorter term than what they'd have to pay to get the better rate at time of purchase.


RetirEd  

Thanks.

Let's not talk about bonds (unless they are same as secondary GICs) to keep this simple to understand.

Let's say someone bought a $100K non-redeemable GIC for 5 years at 2% interest (non compoundable to keep things simple). After one year they want to get out of their position (and have already collected $2K interest for the first year with a cheque). Now, the interest rates found for a 4 year GIC is at low of 1% so the seller wants to sell his GIC at $108K - $5000 discount = $103K. If the buyer pays $103K they will still make $5K interest by the end of the 4th year. This is a good deal still for the buyer because if the buyer paid $103K for today's 1% rate they would make only ~$4K in interest after four years (for a non-redeemable GIC). So buyer is ahead $1K and seller got their cash but they are also ahead one and half year (the $3K profits)

The principle value of this GIC never changes so why is this capital gain or loss? just the amount of interest differs. Bond markets can go up and down but the interest will stay as it was promised to the original buyer.

More importantly, isn't a T5 issued for the final owner of the GIC on the maturity disregarding whatever took place in between? (i.e. the transfer of the GIC). Probably the GIC issuer won't even issue a T5 to the original buyer...And if a T5 is issued specifically showing GIC interest one has to explain to CRA that it is capital gain? how to even file it?

*I understand rates examples above may not be what happens in the market and GICs might be sold at more discount (based on what others said) but the situation about principle not changing with the market stays the same so how can it be capital gain?

Also, so far I have not found anyone selling secondary GICs. Maybe it was a thing of old times. I don't think one should be paying a broker percentages to be able to buy these. This sounds like they make it to be a highly sought after product which is probably never a good purchase. But if being a favorite of a broker only gets you the GICs then this is probably a business opportunity for tech to disrupt. But then again most banks say their GICs are not transferable.

January 20, 2023
7:41 pm
butterflycharm
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mordko said
“Contribution room” is incorrect? That’s a major problem. You really need to tell that to CRA.

Withdrawals, excluding qualifying transfers and specified distributions, made from your TFSA in the year will only be added back to your TFSA contribution room at the beginning of the following year.

Note how they say “added back to your CONTRIBUTION ROOM”.

https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/making-replacing-withdrawals-a-tfsa.html#:~:text=Withdrawing%20funds%20from%20your%20TFSA,beginning%20of%20the%20following%20year.  

Good find ^^^.

Yeah, the play on these words won't change the facts that whatever cashed out can be put back in. Call it contribution room or don't. It is all the same so long as one does not get penalties. I did not think of losses in the capital as RetirEd mentioned correctly?!

Interesting to know what "specified distribution" means:

Specified distribution
A distribution from the TFSA to the extent that it is, or is reasonably attributable to, an amount that is any of the following:

- an advantage
- specified non-qualified investment income
- income that is taxable in the TFSA trust
- income earned on excess contributions or non-resident contributions

A specified distribution does not create or increase unused TFSA contribution room in the following year, nor does it reduce or eliminate an excess TFSA amount.

1- What is "an advantage"? (broad definition in favor of CRA?)

2- What could be income that is taxable in the TFSA trust example? All FIs don't allow anything other than what is allowed so what is this for?

January 20, 2023
9:31 pm
mordko
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I don’t have the patience to go through the legislation but you don’t need to worry about “advantage” and “taxable income” unless you are doing things you shouldn’t be doing. They are talking about tax evasion where one could be borrowing from own TFSA and paying interest into it to shift non-registered cash under TFSA umbrella, income from over contributions and the like.

Capital losses within TFSA are unpleasant. You can’t offset future gains in your taxable account against them. And your overall TFSA room goes down. But you can’t have gains without risking some occasional losses so its worth it.

January 21, 2023
7:20 am
Bill
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Capital losses within a TFSA have no impact on your TFSA "room", though they may well lower your TFSA account balance. As long as those assets stay within the TFSA there is zero impact on future TFSA contribution room, whether they explode or crater in value. "Contribution room" has a specific definition in the TFSA world, it makes no reference to changes of value within a TFSA.

However withdrawals change things. If you withdraw any amount from a TFSA, whether the withdrawal is provoked by a capital loss or for any other reason that has caused you to trigger the withdrawal, than that withdrawal amount actually ADDS to future contribution room.

For example, if I contribute $6500 to my TFSA this year, the investment later goes to $2,000 in value, that has zero impact on my TFSA "room". But if I withdraw $2,000 then my future contribution room is actually increased by $2,000.

January 21, 2023
8:53 am
Norman1
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HermanH said
Would there be an advantage to buying a second-hand GIC at a discount price to be placed into a TFSA? …

No, there is no tax advantage buying discount GIC's and discount bonds in registered accounts like TFSA, RRSP, RESP, or registered pension plans.

Receiving

  1. $150 in interest and $50 in capital gains or
  2. $250 in interest and $50 in capital losses

instead of $200 in interest in a registered account makes no difference in taxation.

January 21, 2023
10:40 am
savemoresaveoften
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Norman1 said

HermanH said
Would there be an advantage to buying a second-hand GIC at a discount price to be placed into a TFSA? …

No, there is no tax advantage buying discount GIC's and discount bonds in registered accounts like TFSA, RRSP, RESP, or registered pension plans.

Receiving

  1. $150 in interest and $50 in capital gains or
  2. $250 in interest and $50 in capital losses

instead of $200 in interest in a registered account makes no difference in taxation.  

Actually the second hand GIC will trade at below par, so technically it helps to increase the face amount you can contribute. Depends on the discounting, it is like contributing more than $6500 .

January 21, 2023
11:28 am
Norman1
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That's not the case.

One is using up less TFSA contribution room because one is actually contributing less when one is contributing a discounted GIC. One will actually end up with less at maturity because one had invested less than someone who contributed a non-discounted GIC with the same yield to maturity.

The yield to maturity is based on the discounted value, not the face value. One is not going to end up with the same amount of money on maturity when buying a $20,000 second-hand GIC for $19,400 as buying a newly-issued non-discounted $20,000 GIC for $20,000 with the same term and yield to maturity.

January 21, 2023
11:37 am
savemoresaveoften
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Norman1 said
That's not the case.

One is using up less TFSA contribution room because one is actually contributing less when one is contributing a discounted GIC. One will actually end up with less at maturity because one had invested less than someone who contributed a non-discounted GIC with the same yield to maturity.

The yield to maturity is based on the discounted value, not the face value. One is not going to end up with the same amount of money on maturity when buying a $20,000 second-hand GIC for $19,400 as buying a newly-issued non-discounted $20,000 GIC with the same term and yield to maturity.  

u mean cuz the second handed GIC has accrued interest, so a $6500 second hand GIC may be $6700 with accrued interest ?

I am thinking more of second hand GIC with a rate that is below market, and you are able to pick it up at a price that is even lower than the discounted price should be (after adjusting for the rate differerence)

January 21, 2023
7:04 pm
Norman1
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That price does not matter.

If one buys a $20,000 2% two-year GIC at a discounted price ($18,884.35) that gives a 5% yield to maturity, one is going to end up at maturity with less money than someone who put $20,000 into a newly-issued two-year 5% GIC.

That's because one had invested $18,884.35 and not $20,000.

January 21, 2023
11:16 pm
butterflycharm
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Norman1 said
That price does not matter.

If one buys a $20,000 2% two-year GIC at a discounted price ($18,884.35) that gives a 5% yield to maturity, one is going to end up at maturity with less money than someone who put $20,000 into a newly-issued two-year 5% GIC.

That's because one had invested $18,884.35 and not $20,000.  

If one pays ~18K to buy a GIC that is worth $20K they should be getting $20K + interest at maturity. Does the face value of GIC change mid way?

January 22, 2023
7:44 am
Norman1
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No, the face value of the GIC does not change midway.

No-one is going to offer $20,000 for a pre-owned $20,000 2% GIC with two years left when one can place the $20,000 in a newly-issued two-year GIC that pays 5%.

January 22, 2023
7:54 am
Bill
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The discounted GIC yields 5% until maturity, and that 5% is comprised partly of the (lower than 5%) interest rate the GIC carries plus partly of the capital gain (between discounted purchase price and maturity value).

January 22, 2023
9:16 am
savemoresaveoften
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Think what Norman is saying at the end you end up having the same amount of $ (principal + interest) if the YTM is identical.
One is only better off buying a second hand GIC if it yields higher than the market yield and only if you can buy it at a discount.

This is all based on the investment being in a TFSA which is taxed free 100%.

January 22, 2023
10:18 am
Bill
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Pretty hard to find something that yields higher than market yield and that's priced at a discount! I imagine you would have lots of competition trying to buy such an instrument, e.g. the brokerage firm itself.

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