My children have some Canada Premium Savings Bonds that were given to them when they were very young. Some of the bonds matured last month, so it’s past time to get the money out. Which left me with the question: how can my kids cash out their Canada Savings Bonds?
Who Pays Tax on the Interest Earned by CSBs, the Giver Or the Child?
I’d better clarify the income tax issues caused by the gift of bonds.
First of all, income tax has to be paid on the interest the bonds earn each year even if the income is not received until the bonds mature.
Second, if your children are given bonds by their
- parents
- grandparents
- aunts
- uncles
- or other non-arms length relative
even if they do *not* live in the same household
then the person who gave the children the bonds has to pay the income tax each year on the interest earned the previous year.
What If the Child Didn’t Get a T5 for the Interest?
T5’s are issued only when the interest earned is more than $50 for a year.
That does *not* mean no tax is owed if there is no T5!
You can phone the Canada Savings Bond office at any time and ask what the interest earned the previous year was. You will need to know the name of the bond holder and their SIN, or they can help you with the calculation if you know the series number of the bonds and the face values. The CSB office can be reached at 1 800 575 5151.
Who Pays the Tax After the Bonds Have Matured?
If your child is 18 or older, they can start to declare the annual interest on their own income tax form in April. They will have to pay tax on the interest if they have a high income. Most teens don’t and will not have to pay any tax.
After the Bond Matures and Is Cashed Out Who Pays the Tax on Re-investing the Money?
It’s trickier if your child is still under 18 at the time the bond matures.
Any new interest earned by the principal (the face value of the bond) when it is re-invested must be declared on an income tax return by the person who gave the bond to the child.
But interest (or other income) can also be earned on the interest already paid on the bond. Any interest earned on the original interest is, in theory, taxed in the hands of the child. The minor would have to file an income tax report in April and report the interest (or other income). Because the minor likely has no or little other income, the child would not usually have to actually pay tax on that interest (or other income.)
How does one know which interest is which? Well, you’d better keep very careful, very accurate records, because the government can demand to see them. Like all tax records, you’d have to keep the information for about 7 years.
For simplicity, often the original giver or the parent just keeps reporting all of the income until the child turns 18.
I would like to get some clearer information on how this income attribution works before I change how we file our taxes.
How Can My Children Cash Their Canada Savings Bonds? Can The Bank Place a Hold on the Money?
In the meantime, we need to get the matured Premium bonds cashed as they are not earning anything anymore.
Before heading to the bank, I called the Canada Savings Bond office to clarify the rules.
I already knew from their website that if the child is too young to cash the bonds by signing, the parent, with proof of guardianship, can cash them on the child’s behalf. You’d need proof that the child is the person named on the bond and proof of your relationship to the child.
(This is one example of where a “bricks and mortar” bank can be handy: at our bank, they’ve seen our children banking with me for a very long time. The kids even get special treats on some holidays from the tellers. There’s much less suspicion when we try to prove our relationship after they’ve watched the same child for years interrupting and pulling on your sleeve saying “Mummy, mummy, mummy!”)
I phoned, though, to clarify whether the bank is allowed to put a hold on the money after the bond is cashed.
Somewhat to my surprise, yes, they are. Apparently there have been instances where people have reported a bond certificate as lost and cashed it, then found the bond certificate and tried to cash it again. So the bank is within its rights to require you to deposit the money from the matured bond and to place a hold on that money until the bond clears.
A Reminder to Parents to Teach Their Children Cursive
As we head off to the bank, I’d just like to remind parents that despite the new curriculum in many jurisdictions, it’s worth your child learning some cursive. Banks still expect a signature on monetary documents. The sooner your children can learn to make the same scrawl the same way for their name, the easier they will find banking.
At least until they start scanning our retinas.
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Do your children have monetary gifts that are earning interest or income? How do you handle the attribution rules for second-generation income earned on the first-generation income? Please share your experiences with a comment.