How to calculate OID on C$ bonds

This is our main tax information forum which deals with topics concerning Canadians living and working in the U.S., U.S. citizens contemplating working in Canada, and all aspects of Canadian and U.S. income tax and related adminstrative issues.

Moderator: Mark T Serbinski CA CPA

Post Reply
pyt
Posts: 7
Joined: Fri Sep 08, 2017 5:17 pm

How to calculate OID on C$ bonds

Post by pyt »

Hi,

I'm a Canadian citizen residing full-time in the US. This year, I have to start reporting accrued interest on Original Issue Discount (OID) bonds for the first time and my Canadian broker unfortunately does not provide me with a 1099-OID. I got it figured out for US T-Bills but I can't find any reference anywhere on calculating how much accrued interest to report to the IRS on Provincial Bonds held in Canadian $$, taking in account the currency fluctuations.

Here's an example:

5-Year C$3,000 Quebec Bond maturing on 31 Dec 2023 purchased on 1 Jan 2019 for C$3,918, therefore effective interest rate of 5%/year. Suppose an exchange rate (CAD-US) of 0.80 on 1 Jan 2019 and 0.77 on 31 Dec 2019.

Purchase Cost on 1 Jan 2019: C$3,918 x 0.80 = US$3,134.
Adjusted Cost Base on 1 Jan 2020: C$3,918 x 1.05 x 0.77 = US$3,168.
Accrued OID interest to report to IRS: US$34.

Any help would be really appreciated.
pyt
Posts: 7
Joined: Fri Sep 08, 2017 5:17 pm

Re: How to calculate OID on C$ bonds

Post by pyt »

Sorry for the typo...
Should have said: 5-Year C$5,000 Quebec Bond maturing on 31 Dec 2023...
nelsona
Posts: 18311
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: How to calculate OID on C$ bonds

Post by nelsona »

First, do realize that in US you are not obligated to report accrued interest yearly , so this should not worry you. You report when interest is received. Same for your T-bills, etc.

Moreover, the bond interest is not subject to Cdn taxation while you are non-resident of Canada.

But, for calculation purposes, simply take whatever interest you would have had to pay if you lived in Canada (I'm sure its pretty close to your calculation, rev Quebec could tell you), and convert at the yearly exchange rate.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
pyt
Posts: 7
Joined: Fri Sep 08, 2017 5:17 pm

Re: How to calculate OID on C$ bonds

Post by pyt »

Thanks Nelsona,

That's also what I thought (that interest income is only taxable by the IRS when received) until I came across publication P1212 from the IRS (https://www.irs.gov/publications/p1212). It states that accrued interest must be reported yearly on any multi-year bond purchased at a discount from face value. It provides many sample calculations but none for bonds purchased in a foreign currency.

I guess my modified formula is as good as any and adequately reflect the currency variations.

Appreciate any follow up advise.
nelsona
Posts: 18311
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: How to calculate OID on C$ bonds

Post by nelsona »

That is too bad, because if you were only planning to stay in US for a few years you could hold a bond and not pay taxes in US nor in Canada, for theperiod you lived in US.

You might consider selling and getting 'ordinary' bonds.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
Post Reply