How are Principal Protected Notes (PPNs) taxed?

How the Canada Revenue Agency taxes the investment returns earned from PPNs is an important consideration for investors.

If the PPN is held within a taxable investment account, the PPN’s variable returns, if any, are classified and taxed as interest income. The variable return represents all of the income earned by the PPN over its term and all of the returns are taxed as a single amount in the year of maturity.

Beginning January 1, 2017, if you sell the PPN prior to it’s maturity date, any increase in the note’s value, above your invested amount, is classified as interest income and will be taxed as such. Note: Prior to January 1, 2017, any increase in the note’s value was classified as Capital Gains and taxed as such.

If the PPN is held in a income tax deferred (RSP, RRIF, etc) or a tax-free account (TFSA), variable income or capital gains/losses are not taxable at the date of maturity or sale.

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Investment considerations of PPNs