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If bank like Home/Oaken/EQ goes broke... CDIC insurance, tax loss, compound interest, et al topics

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  • May 31st, 2017 7:11 pm
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If bank like Home/Oaken/EQ goes broke... CDIC insurance, tax loss, compound interest, et al topics

This thread has been spun out of the The EQ Bank Savings Account thread thread (from around here if you need more context.)
cessnabmw wrote: Exactly. I would start with $99K instead. That way both you principal and interest are covered by CDIC.
The real issue is with GICs. With HISAs, if you transfer the excess out as suggested, then your risk is at most one month's interest. But if you have a GIC you're leaving up to a year's worth of interest uninsured.

And worst case, a 5-year compounding interest GIC in a taxable account: You could lose up to 5 years' worth of interest. (At 3%/year that's well over $15k on a $100k GIC.) But worse, you'd have been paying income tax on each year's interest as it accrued--even if you never got any of it.
Last edited by bylo on May 31st, 2017 1:05 pm, edited 2 times in total.
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bylo wrote: The real issue is with GICs. With HISAs, if you transfer the excess out as suggested, then your risk is at most one month's interest. But if you have a GIC you're leaving up to a year's worth of interest uninsured.

And worst case, a 5-year compounding interest GIC in a taxable account: You could lose up to 5 years' worth of interest. (At 3%/year that's well over $15k on a $100k GIC.) But worse, you'd have been paying income tax on each year's interest as it accrued--even if you never got any of it.
That brings up an interesting question ...
Would a loss of interest income due to FI failure be eligible for a deduction on your taxes as either negative income or a capital loss?

Capital loss wouldn't fully negate your income taxes on the interest but better than nothing. There should be some way to claim the loss on taxes though.
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ace604 wrote: That brings up an interesting question ...
Would a loss of interest income due to FI failure be eligible for a deduction on your taxes as either negative income or a capital loss?
AFAIK lost principal would qualify as a capital loss, i.e. 50% inclusion. Foregone interest would probably qualify as an income loss and be fully claimable since, after all, the interest would have been taxed at ordinary income rates if it had been received. But I'm not 100% sure on this.

Another issue concerns tax paid in previous years on accrued interest on compound GICs. Presumably you could file a T1-Adj for those previous years. But again I'm not a tax pro.
Capital loss wouldn't fully negate your income taxes on the interest but better than nothing. There should be some way to claim the loss on taxes though.
All of this discussion about claiming losses applies to deposits in taxable accounts. Depositors in tax-sheltered accounts like RRSPs and TFSAs wouldn't be able to make such claims at all. Ironically it's in those types of accounts that people are most likely to stash 5-year/compounding GICs. So in those cases it's particularly important to keep the principal sufficiently under $100k so that interest payments are also CDIC-covered.
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bylo wrote: Temporary post (please ignore for now)
uh ... neato, so you made a new post and then mod moved our posts out here instead of deleting them into the "off-topic" void?

Should update the title :)
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bylo wrote: This thread has been spun out of the The EQ Bank Savings Account thread thread (from around here if you need more context.)



The real issue is with GICs. With HISAs, if you transfer the excess out as suggested, then your risk is at most one month's interest. But if you have a GIC you're leaving up to a year's worth of interest uninsured.

And worst case, a 5-year compounding interest GIC in a taxable account: You could lose up to 5 years' worth of interest. (At 3%/year that's well over $15k on a $100k GIC.) But worse, you'd have been paying income tax on each year's interest as it accrued--even if you never got any of it.
Just to be clear, CDIC covers both principal and interest up to the account/registration limit of $100,000.

The only people who will lose any of their interest are those who's combined total of principal & interest exceeds the limit.

Anybody with a principal balance of $80,000 or less will not be at risk of doing any interest at all.

Only those between $80,000 & $100,000 may be at any risk of losing some or all of their interest depending their rate, their term, how and when interest is paid, and when their deposit was made.
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CanadianLurker wrote: Just to be clear, CDIC covers both principal and interest up to the account/registration limit of $100,000.
Correct. This thread got spun out of another by a Mod. This is what happens when stuff gets posted out of context.
The only people who will lose any of their interest are those who's combined total of principal & interest exceeds the limit.

Correct.
Anybody with a principal balance of $80,000 or less will not be at risk of doing any interest at all.
At current interest rates even $97k will do on a one year $100k GIC at 3% interest. You only need to go lower if you elect to compound interest on a multi-year GIC. I imagine relatively few people do that.
Only those between $80,000 & $100,000 may be at any risk of losing some or all of their interest depending their rate, their term, how and when interest is paid, and when their deposit was made.
As I understand CDIC, accrued interest is covered within the $100k limit. So if you have a $97k 1-year GIC that pays 3% interest and the FI goes bust the day before the GIC matures, you'd still get $97k plus ($97,000 x 364/365 x 0.03).
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bylo wrote: This thread got spun out of another by a Mod. This is what happens when stuff gets posted out of context.
......

As I understand CDIC, accrued interest is covered within the $100k limit. So if you have a $97k 1-year GIC that pays 3% interest and the FI goes bust the day before the GIC matures, you'd still get $97k plus ($97,000 x 364/365 x 0.03).
Got it - in response the bolded section I was worried that a future reader would misunderstand their coverage and potentially make I'll-informed decisions.

To expand on your example, you would get paid out by CDIC as follows:

$97,000.00 (return of principal)
+ 2,902.03 (364 days interest)
----------------
$99,902.03 Total CDIC Payout

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