“Zero coupon” debt instruments

If you own a debt instrument like a bond, term deposit, or even a bank account, you often receive interest at least once a year. Normally, you just report the interest on your tax return in the year that you receive it.

However, there are some debt instruments that do not pay interest annually. For example, you might purchase a zero-coupon bond or term deposit that pays all the interest upon maturity.

In these cases, you must report the interest income annually on an accrual basis. The general rule is that you report the accrued interest income in a taxation year that accrues to each “anniversary date” that ends in the taxation year. Each anniversary date is basically 12 months from the date of the issue and each 12-month period after that. Due to the 12-month rule, there typically will be a deferral of tax, as illustrated in the example.