Hemisphere Capital Management Inc.

Treasury Bills: Understanding Short-Term Government Debt

Treasury bills, often called “T-bills”, are a key part of the financial markets. They serve a crucial role in both government borrowing and investment portfolios. These securities offer investors a low-risk opportunity to earn income.

What is a Treasury Bill?

A T-bill is a debt obligation issued by a government with a maturity period of less than one year. It represents a promise by the issuing government to repay the face value (also known as par value) upon maturity. When issued by a stable and fiscally-sound government, they are generally considered a low-risk investment.

Why Own Treasury Bills?

T-bills are held by a diverse array of investors, owing to their safety and liquidity. Due to the short-term nature of T-bills and the fact that they are issued by governments, they are typically very easy to transact (very liquid) and are considered a cash-like investment. T-bills are a good place to park any cash and still earn modest interest.

How do I Earn Money on a Treasury Bill?

Unlike other debt or bond holdings, T-bills do not pay an interest coupon. Rather than paying an interest coupon, T-bills are purchased at a discount to par (i.e. less than $100 face value). When held to maturity, the T-bill is redeemed at par ($100 face value) and the difference between the par value and the purchase price is the interest income earned. This differs from many other types of investments where the difference between the face value and the purchase price would be considered a capital gain or loss.

The yield on a T-bill refers to the annualized return that an investor would receive on their investment if they held the T-bill until maturity. Due to the short-term nature of T-bills, the yield when buying a T-bill is directly impacted by the interest rate set by central banks. If a central bank decides to cut (raise) interest rates, T-bill yields will typically fall (rise).

What are the Tax Implications of Holding Treasury Bills?

Interest income earned on T-bills is taxable as regular income at the investor’s marginal tax rate. Investors holding T-bills within tax-advantaged accounts, such as Tax-Free Savings Accounts (TFSA) or Registered Retirement Savings Plans (RRSP), can eliminate or defer tax on the interest income.

When a T-bill is sold before the maturity date, the tax implications can become a bit more complicated. This is because one component of the transaction will be interest income and the other component will typically be a small capital gain or loss. This calculation can become more complex when multiple transactions occur or for US Treasury bills since foreign exchange (FX) rates need to be considered.

Are Tax Slips provided for Treasury Bills?

Unfortunately, interest income from T-bills is typically not reported on a T5 tax slip. T-bill transactions are shown on a T5008 tax slip (Statement of Securities Transactions). An investor must calculate their income and capital gains/losses from their T-bill transactions to include in their tax filing.

How Does Hemisphere Manage Treasury Bills?

Hemisphere has transacted T-bills for many years. We find that T-bills can often provide higher yields than other short-term investments like money market funds or high interest savings accounts. This can provide a material benefit for larger cash holdings, including those from asset sales, transfers-in, contributions or donations. 

Our financial advisors in Calgary recognize that T-bills can create complexities when it comes time to file your taxes. As part of our annual tax packages, we include a T-bill summary sheet. This simplifies the calculation process for our clients and details the respective income and capital gains components for each transaction.

Understanding the tax implications is crucial for clients to effectively incorporate T-bills into their overall strategy for investments and wealth management in Calgary. To learn more about T-bills and how we can help you on your financial journey, speak to one of our financial advisors in Calgary.

The content in this article is provided for the benefit of our clients based on information we believe to be accurate and complete. Although every effort has been made to ensure its correctness, the ultimate accuracy cannot be guaranteed. This does not constitute tax or legal advice. Hemisphere Capital Management Inc. is not a professional tax services firm. Readers should consult a qualified professional prior to implementing a strategy. Interest rates, market conditions, tax rules and other factors are subject to change. This information is not investment advice and should only be used in conjunction with a discussion with your financial advisor.