What Are T-Bills? Treasury Bills in Canada Explained

Treasury bills, or T-bills, are one of the lowest-risk investment products available because they’re issued by the government. While the rate of return may not be very high, there’s zero chance that you’ll lose any money.

That said, even guaranteed investments come with pros and cons, which is why you need to understand how T-bills work before you decide if they fit into your financial plans.

What are T-bills in Canada?

When provincial and federal governments need to raise capital, they issue T-bills that the public can purchase. These debt securities are 100% guaranteed. Both your principal and interest are backed by the government, regardless of how much you invest.

You can purchase T-bills directly from most financial institutions and investment firms. In most cases, T-bills are issued in denominations starting at $1,000. That said, some mutual funds focus on fixed-income products, including T-bills, so it’s possible to invest at a lower cost of entry.

It’s best to think of T-bills as a form of fixed income since they’re fully guaranteed. They’re great for short-term investments or if you want to keep your money safe, but they provide little growth opportunity. For this reason, T-bills are often lumped together with bonds, term deposits and money market funds.

How do T-bills in Canada work?

Even though you get a guaranteed rate of return when purchasing T-bills, you’re not technically earning interest like you would with a guaranteed investment certificate. The yield you get is the difference between what you bought the T-bill for and what you sell it for when it matures.

Some new investors may be confused about how this works, but essentially, T-bills are sold at a discount. What that means is you buy T-bills at below their actual value. When you sell them back to the financial institution at the maturity date, they’ll be at “par value,” or their actual value. Since T-bills are worth more when you sell them, you’ll have made money.

For example, let’s say you bought a T-bill for $950. After one year, it matures and is worth $1,000. When you sell it, you’ll have made $50 on your investment. The capital gains made on T-bills are fully taxable if you hold them outside of a non-taxable account, such as your Tax-Free Savings Account (TFSA).

How T-bill yields work

As mentioned, the yield of T-bills is the difference between its value at the time you bought it compared to the time you sell it. This is known as the effective yield rate. However, if you decide to sell your T-bill early, you need to calculate how much interest you’ve earned while you held the T-bill. You can do this by using the following formula.

Purchase price × Effective yield rate × Number of days T-bill held ÷ Number of days in the year sold = Interest earned as income

Since T-bills are a form of fixed income, the overnight interest rate set by the Bank of Canada affects T-bill interest rates. Basically, when the Bank of Canada has a low prime rate, you should expect low yield rates from T-bills.

Pros and cons of T-bills in Canada

T-bills can be a good investment product for your portfolio. However, they still have some pros and cons that you’ll want to consider.

Pros of T-bills

Guaranteed interest and principal
Can sell at any time
Available for purchase in non-taxable accounts

Cons of T-bills

Low potential rate of return compared to equities
Yields provided may not beat inflation
Fully taxable when held in a taxable account

Treasury bills are a safe investment that provides you with some fixed income in your portfolio. You won’t get rich from them, but they will give you some security and can balance out other, riskier investments.