‘You Would Have Been Better Off Not Investing at All’: CPA Says $150,000 in Interest Triggers $170,000 Tax Bill
A conservative bond portfolio posting steady 4% returns sounds like the safe play until a Canadian CPA walks through the tax math and shows how a professional's investment income triggered a bill larger than the income itself.
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“You would have been better off not investing at all.” That’s how David Fagan, a Canadian CPA with 20 years in practice, sums up a saver whose $150,000 in interest income produced a $170,000 tax bill.
He walked through the scenario on We Study Billionaires, from The Investor’s Podcast Network, in an episode released September 27, 2026. The bond portfolio did its job. The tax code turned the gain into a loss.
How $150,000 of Interest Became a $170,000 Liability
Fagan called the setup hypothetical. A specialist doctor in Nova Scotia saves for retirement inside a professional corporation. The company holds $3,750,000 in fixed income and still makes $500,000 a year in regular business income.
- Portfolio yield: 4%
- Interest income: $150,000
- Tax owed, counting the lost small business deduction: $170,000
- After-tax return: “a negative almost 0.5%”
The broker statement shows a steady, conservative 4%. The after-tax figure shows wealth shrinking. Fagan calls that “compounding in reverse.”
A Canadian Rule That Bites Five Dollars for One
This trap applies only to Canadian private corporations, so US investors can’t fall into this trap directly. Canada taxes the first $500,000 of a small corporation’s active business income at a reduced rate. Once passive investment income tops $50,000, that limit shrinks by $5 for every $1 over the line. At $150,000 of passive income, it falls to $0.
Fagan’s hypothetical lands right on that threshold. The bond interest pays its own tax. On top of that, the doctor’s business income loses its preferential rate and gets taxed at the higher general corporate rate. Fagan counts that extra business tax in the $170,000 total, which is how the bill ends up bigger than the interest. Exact rates vary by province.
Why 5% Treasury Yields Make This Timely
The 10-year Treasury yield reached 5.18% on September 24 and rose to 5.29% by September 30. On October 5, it hovers at 5.3%. Meanwhile, the national average 12-month CD paid just 1.73% APY as of September 1. The Fed raised the upper bound of its target range to 4.00% on October 1.
Yields like these pull nervous savers into Treasuries, bonds and top-paying CDs. A higher yield means more taxable interest, and interest gets some of the worst tax treatment of any investment income.
Where US Savers Hit Their Own Interest-Income Traps
The US tax code has its own version of the grind: extra income that sets off rules costing more than the tax on that income alone.
- Ordinary rates: Interest is taxed as ordinary income, at federal rates up to 37% in 2026. It never gets the lower long-term capital gains rates.
- Net investment income tax: A 3.8% surtax applies once modified adjusted gross income (MAGI) tops $200,000 for single filers or $250,000 for joint filers. Those thresholds aren’t indexed for inflation.
- Social Security tax torpedo: Interest counts toward provisional income, which can make up to 85% of your benefits taxable. A dollar of interest can pull extra benefit dollars into taxable income along with it.
- IRMAA: Medicare Part B and D premiums are set by your MAGI from two years earlier. A big interest year in 2026 can raise your premiums in 2028, and the levels are threshold: going $1 over one raises your premium for the whole year.
State tax adds another layer. CD and corporate bond interest is usually taxable at the state level. Treasury interest is exempt from state and local income tax, which matters in high-tax states.
Any one of those rules can often cost a retiree more than the interest that triggered it, and we listed nine of them in a free guide to the IRS traps that drain retirement accounts.
A 1% to 3% Drag Hiding in Plain Sight
Fagan says that tax drag of 1% to 3% a year is academically proven and predictable in advance, since tax rules are generally set at the start of the year. In his view, an average return with low tax drag can beat a higher headline return weighed down by heavy drag.
US savers can cut that drag in a few ways:
- Holding bonds and CDs in traditional IRAs or 401(k)s, while keeping tax-efficient stock funds in taxable accounts.
- Compare Treasurys and CDs on an after-state-tax basis alongside headline yield.
- Look at municipal bonds if you’re in a top bracket.
- Time large CD maturity dates so the interest doesn’t push you over an IRMAA levels or the NIIT threshold.
As Fagan puts it, “you live with after tax outcomes.” Choosing which account holds your bonds is the kind of math worth running with a CPA or fiduciary advisor.
Contact [email protected] for any questions or corrections.
Gerelyn Terzo is the author of dividend investing handbook "Dividend Investing Strategies: How to Have Your Cake & Eat It Too." A veteran financial journalist, she covers agri-finance for outlets like Global AgInvesting and the broader stock market and personal finance for 24/7 Wall Street. She began at CNBC and later helped launch Fox Business in New York. Gerelyn currently resides in Woodland Park, Colorado and dabbles in nature photography as a hobby.
