How to Buy Treasury Bills in Canada

When you purchase a T-bill, you can get it at a maturity anywhere between 1 month and 1 year. Once they’ve reached their maturity, the government will repurchase them from you. The reason you make money on these is that they’re sold at a discount, and the government repurchases them at par value, giving you a profit. Because the government issues T-bills, they’re considered to be one of the safest investments to purchase. 

Purchasing T-bills is similar to buying other securities. Let’s take a look at where you can purchase them, how much they cost and if there are any taxes involved. 

Treasury Bills Vs GICS

Treasury Bills and GICS (Guaranteed Income Certificates) may seem like the same thing, but they’re different for many different reasons. Let’s take a look at how they work and what makes them different. 

Similarities

When it comes to T-bills and GICs, they do seem very similar. This is because they’re both fixed-term investments that come at a much lower risk than many other securities. Both T-bills and GICs are also considered to be short-term investments. They’re both locked in for short-term periods, and once the term has ended, you come out with a profit. This is where the similarities between the two end, though. 

Differences

Even though the basis of T-bills and GICs is the same, the way they work is very different. GICs are purchased through banks and can be locked in for a longer period of time; GICs have a much longer maturity time than T-bills. T-bills typically range from a few weeks to a year, whereas GICs can have a maturity period much longer. The most common options for GIC maturity are 1 year, 3 years and 5 years. 

Another difference between GICs and T-bills is that GICs are purchased through banks, credit unions and other financial institutions. T-bills are government bonds; they’re issued directly from the government of Canada. For this reason, T-bills are considered to be more secure than GICs. Also, the shorter maturity times allow you to reinvest if rates increase, whereas you could miss out on this with GICs' longer maturity rates. 

With both GICs and T-bills, you earn interest income on your investment. That said, how the interest works is different. With GICs, you invest the allotted amount of money you wish at guaranteed interest rates. You’ll earn that rate on your investment until it reaches maturity. You can then reinvest when the maturity ends, or you can choose to keep the money. 

With T-bills, the interest you earn on your investment is the difference between what you purchase the T-bill for and the resale price (face value) of the T-bill. When you purchase a T-bill, the rate is how much below face value you purchase the T-bill for. Once the T-bill has reached maturity, it will be purchased back from you at face value. What you earn is the difference between the purchase price and face value. It’s important to note that T-bills are one of the only securities where both your principal and interest are guaranteed. Due to this, they’re one of the only debt securities issued that are also considered to be fixed-income securities.

Where You Can Purchase Treasury Bills

In Canada, there are plenty of ways you can purchase T-bills. These include financial institutions, brokerages and investment advisors. Let’s take a look at how you would go about purchasing them using these methods. 

Bank of Canada

In order to buy T-bills directly from the Bank of Canada, it can be a bit complex, but you would be purchasing them directly from their source. In order to do this, you would need to submit a bid in one of their public auctions. The T-bill will then be awarded to the highest bidder. 

With that in mind, it’s important to remember that institutional investors also participate in these auctions. It can be a very difficult process for new investors, but many seasoned individual investors do choose to participate in these auctions as well. They also have a T-bill buyback program if you don’t want to participate in the auction. 

In order to buy Treasury bills from the Bank of Canada, you have to have a Canadian bank account as well as a valid Social Insurance Number. If you don’t have these, you’ll be unable to do so. 

Financial Institutions

Instead of purchasing T-bills directly from the Bank of Canada, you can purchase them from your financial institution or an independent investment firm. They can be purchased individually or included in an investment portfolio. A plus side to buying T-bills this way is that you have access to opinions and research from investment advisors. If you’re unsure what to purchase or how to go about purchasing, this can be a great way to get started in the market. It’s also a good option for conservative investors. 

Brokerages

If you choose to purchase from brokerages, whether these are online or discount, you’re choosing to purchase through the secondary market. This means that the T-bills have already been purchased through the primary market by an investor and are now being re-sold. 

In order to start purchasing through a brokerage, you first need to create an account. Once you have done this, you’re then able to start purchasing through their trading platform. From here, you are to choose the types of T-bills you’d like to invest in. You get to decide how much you want to invest and choose the maturity date that works best for you. The minimum amount the brokers require when you buy T-bills varies depending on the broker. 

If you aren’t comfortable with making investment purchases online, many brokerages also have a phone number you can call to make your investment decisions. These brokerages tend to be more low cost than other investment firms, which is why so many investors choose to use them. 

Investment Advisors

If you’re okay with spending a little bit more when making your investment purchases, an investment advisor is a great way to start investing. They can offer you professional investment advice when purchasing investments from the secondary market. It’s a much more hands-off approach to investing, but if you aren’t 100% confident in getting started, it can be a great way to begin with expert advice. 

Rates on Treasury Bills in Canada

Rates on T-bills in Canada change frequently. Sometimes, they’re even different from day to day. One of the key factors on T-bill rates in Canada is monetary policy and the prime rate in Canada. Generally, the lower the prime rate, the lower the rate on T-bills, and vice versa.

That said, the maturity time also makes a difference in the rate. While there are many different investment options when it comes to maturity, there are a few maturity options that are auctioned off more frequently than others. Let’s look at these current T-bill rates as of October 25, 2023.

• 1 month - 4.96
• 3 months - 5.08
• 6 months - 5.11
• 1 year - 5.12

To show you how frequently T-bill rates can change, let’s take a look at the rates from just a week before on October 18, 2023.

• 1 month - 4.96
• 3 months - 5.11
• 6 months - 5.15
• 1 year - 5.16

While the 1-month rates have stayed the same, the rates for 3 months, 6 months and 1 year have all decreased. 

Treasury Bill ETFs

In Canada, instead of purchasing T-bills, you can invest in ETFs that track them. How does that work exactly? Well, ETFs, also known as exchange-traded funds, are investments that are traded on the stock exchange. Specifically, they track indexes, but instead of trying to outperform them, they replicate their performance. 

Just like mutual funds, ETFs are a type of index fund. They differ from mutual funds, though, because they trade like traditional stocks. The cost of an ETF continually fluctuates throughout the day and represents the net value of the indexes they represent. 

When it comes to T-bills, there are plenty of ETFs that represent them and all of their different types. ETFs typically represent a collection of T-bills that are similar. Before choosing to invest in these ETFs, you can see a breakdown of them, their potential yield, the cost, and what T-bills the specific ETF represents. 

To give you an idea of a government bond ETF, let's take a look at one. The one we’re going to discuss is the Canadian Vanguard Government Bond Index ETF (VGV). This specific ETF tracks the Bloomberg Global Aggregate Canadian Government Float Adjusted Bond Index. This index invests primarily in investment-grade (public) government fixed-income securities. The management fees on this ETF are 0.15%, and the Management Expense Ratio is 0.17%. It has a monthly distribution frequency. 

The Cost of Treasury Bills in Canada

When it comes to purchasing Treasury bills in Canada, they’re usually sold at a minimum purchase of a thousand dollars. This is if you’re purchasing the T-bills singularity. If you’re investing in a T-bill ETF or mutual fund, you can spend less depending on their current cost. They also come in money market funds, which are a type of mutual fund that deals in high-quality, short-term debt instruments. 

While $1,000 can seem like a lot upfront, it’s important to remember that T-bills are a guaranteed investment because the government backs them. It’s also important to remember that the government of Canada isn’t the only government where T-bills are issued. Provincial governments also sell T-bills, so you have plenty of options when deciding where to distribute your funds. The general rules of T-bills are the same for all issuing governments. 

T-BIll Yield Calculations

When treasury bills are sold, they’re sold at a discounted price, and then the government pays face value when they’re repurchased. This is how you make a return on your investment. That said, you may want to calculate what percentage you’ll earn. Here’s an example of how you would calculate this. 

For example, let's say you purchase a T-bill with a face value of $1000 for $986.00, with a maturity of 3 months. The first thing you’re going to do is calculate 1000 - 986 and divide it by 986. You’ll then calculate 365 days in a year divided by 90. Once you have those 2 numbers and multiply them together, you’ll get the percentage of yield. In this example, the yield is 5.8%. This means on a 3-month investment, you’ve earned a 5.8% return. You can use this same formula to calculate the yield on any investment amount.

(Face Value - Purchase Amount) / Purchase Amount x (Days in a Year / Days to Mature) = Yield Percentage

In our particular example, this formula looks like this: (1000 - 986)/986 x (365/90) = 5.8%

Treasury Bills and Taxes

Taxes on T-bills work the same as any other earnings on investments. You have to pay taxes on your earnings, also known as capital gains. If you hold your T-bill until maturity, you’ll have capital gains on that amount. If you sell before maturity, you’ll then claim any capital gains or capital losses. 

The only instances you may not have to pay taxes on your capital gains is if you hold them in a registered account or a Tax-Free Savings Account. If you’re required to pay capital gains, though, you’ll total up your total capital gains for the year and divide them by half. You’ll then pay tax on that 50%.

It’s important to remember, though, that capital gains only include your earnings. So that’s the difference between the purchase price and the sale price. For example, If you purchase a T-bill for $900, and the face value it was purchased back at was $1000, your capital gains are $100, and you’ll be taxed on $50. Any of your capital gains can be offset with capital losses, though. 

Overview

Investors in Canada have a variety of securities to choose from when making their portfolios. While investors do like to have some higher-risk and long-term investments in their portfolios, they offset these higher-risk investments with those that are low-risk. One of these low-risk investments is T-bills. 

The reason that T-bills are considered to be lower risk is because the government backs them. Both provincial and federal governments offer T-bills, and they come in different maturities that don’t usually go longer than a year. The rate you’ll receive on a T-bill varies day to day, but once you lock in, you’re held for the maturity time you agreed to. While they do tend to have a low yield, they’re guaranteed and can help you offset any losses in your portfolio. 

When it comes to purchasing T-bills, there are plenty of options out there. You can go through the Bank of Canada, a brokerage, or your financial institution. No matter how you choose to purchase T-bills, though, they're a great way to diversify your investments and gain a small return.