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Question for anyone with taxation knowledge – what is the tax treatment on the interest paid from Canadian convertible debentures, i.e. money paid from the debt instrument, prior to any potential conversion to common shares? I’ve always assumed the interest is taxed similar to a conventional corporate bond and therefore convertible debentures should be held in an RRSP. I read somewhere there is preferential tax treatment for convertibles, but I could not recall the source. Thanks in advance.
 

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Question for anyone with taxation knowledge – what is the tax treatment on the interest paid from Canadian convertible debentures, i.e. money paid from the debt instrument, prior to any potential conversion to common shares? I’ve always assumed the interest is taxed similar to a conventional corporate bond and therefore convertible debentures should be held in an RRSP. I read somewhere there is preferential tax treatment for convertibles, but I could not recall the source. Thanks in advance.
Convertible debentures are debt instruments so their payments are considered income, no matter what form it comes to you.

There are times that convertible debentures will make payments in-kind (ie with shares or units in the underlying company) but the $ value of the payment is taxed as income ... any gain that later results would be considered a capital gain. But this is a rarely occurs.

The only advantage to holding convertible debentures outside a registered account would be in the instance where the underlying stock is trading higher than the conversion price. At that point in time the convertible would be trading well over par and, if sold, could result in capital gains. But if you're buying for the income they provide hold them in your RRSP or TFSA.
 

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Convertible debentures are debt instruments so their payments are considered income, no matter what form it comes to you.
I misread the source of my info....Convertibles offer tax advantages to the issuer as fixed interest payments are tax deductible - so advantage to the issuer not the buyer.

Thanks for the clarification :D.
 

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The interest income from a convertible debenture will be taxed as regular interest income at your full marginal tax rate. Upon maturity, the principal amount is paid to the holder in the form of capital equity at a predetermined conversion ratio. There could be a capital gain or loss on the equity securities which would be realized when they are sold, not before. The conversion rate would represent the ACB of the equity securities.
 

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The interest income from a convertible debenture will be taxed as regular interest income at your full marginal tax rate. Upon maturity, the principal amount is paid to the holder in the form of capital equity at a predetermined conversion ratio. There could be a capital gain or loss on the equity securities which would be realized when they are sold, not before. The conversion rate would represent the ACB of the equity securities.
Much appreciated Scomac. Do you hold any yourself? I would think in the current environment, where the economic outlook is perhaps improving, cd's can offer good value, with upside potential and and at least getting a good yield while you wait and see what the common shares are doing. I think the key is to pick a reputable name with good upside potential and decent credit rating. The market seems to agree, as new offerings don't last more than a few minutes on the board.
 
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