Landon, Stuart and Smith, Constance (2008): Taxation and bond market investment strategies: Evidence from the market for Government of Canada bonds.
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This paper shows that, contrary to the suggestion of some investment advisors, for an individual Canadian investor subject to personal income taxation, the after-tax yield on a discount bond is always higher (or, at worse, equal) to the yield on a premium bond. This follows because the tax rate on capital gains is lower than the tax rate on coupon income in Canada. It is also shown that a decline in the capital gains tax rate raises the after-tax yield on discount bonds, but reduces the after-tax yield on premium bonds, and may even cause the yield on premium bonds to become negative. Further, a cut in the tax rate on interest income raises the after-tax yield on all bonds, but raises the yield on premium bonds relative to discount bonds. While the lower after-tax yields on higher coupon bonds might be expected to cause the pre-tax yields on these bonds to rise, no evidence of such tax capitalization is found using a large dataset of matched pairs of Government of Canada bonds for the period 1986-2006. The observed near equality of pre-tax yields since 1995 for bonds with different coupons implies that individuals in Canada earn a significantly smaller after-tax yield from holding premium bonds than discount bonds.
|Item Type:||MPRA Paper|
|Original Title:||Taxation and bond market investment strategies: Evidence from the market for Government of Canada bonds|
|Keywords:||taxation; bonds; after tax returns|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H24 - Personal Income and Other Nonbusiness Taxes and Subsidies
|Depositing User:||Stuart Landon|
|Date Deposited:||11. Aug 2008 00:17|
|Last Modified:||18. Feb 2013 20:20|
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