Advertisem*nt
By Aditya Nain on February 6, 2023
Estimated reading time: 5 minutes
Sponsored By
Scotiabank
By Aditya Nain on February 6, 2023
Estimated reading time: 5 minutes
GIC interest rates are incredibly high—should you invest? Find out how GICs work and how GIC interest is taxed so you can keep more of your money.
Advertisem*nt
Image by steamerpik on Freepik
Low risk, high interest rates and guaranteed returns are the features making guaranteed investment certificates (GICs) very attractive right now. When stocks were riding high two years ago and interest rates were under 1%, few investors were interested in GICs. In 2022, they made a remarkable comeback, helped by Canada’s astonishing rise in interest rates. For context, Canada’s average deposit interest rate has risen to over 4.5%, from a historic low of -0.1% in October 2020.
Advertisem*nt
Advertisem*nt
With some GICs now offering over 5% interest per year, investors are paying attention—especially since North American stock markets saw corrections of 15% to 30% in 2022, depending on which major index you track. If you’re in the market for GICs, read on to learn how they work and how they are generally taxed—plus how you can save money by holding GICs in a registered account.
What are GICs?
A guaranteed investment certificate is an investment that guarantees the return of your capital plus an annual interest rate that is generally pre-determined. GICs are considered suitable for conservative investors because, unlike stocks, they keep capital safe and have a predictable return.
This makes GICs especially appealing if you’re saving for a planned purchase such as a home down payment, a car, a wedding or a vacation. GIC terms vary from 30 days up to 10 years, giving investors plenty of flexibility.
GIC deposits are generally eligible for insurance coverage under the Canada Deposit Insurance Corporation (CDIC), giving investors even greater peace of mind.
Investors can choose from several types of GICs, including cashable (redeemable), non-cashable (non-redeemable) and market-linked GICs, whose interest rates are tied to a stock market index’s return over the term, while the principal is guaranteed. Learn more about the different types of GICs.
How do GICs work?
When you purchase a GIC, you loan a financial institution money for a fixed period (the term) at a fixed or variable annual interest rate. For example, if you buy a one-year GIC for $1,000 with a fixed rate of 3% interest, you’ll receive your principal plus $30 interest at maturity—a total of $1,030.
GIC interest may be compounded annually or semi-annually. Interest payments are usually made yearly or at maturity, but you may be able to receive monthly payments. Additionally, you can automatically reinvest the interest until the lock-in period ends, to benefit from compound interest.
What to consider when choosing a GIC
When choosing a GIC, you’ll need to think about:
Advertisem*nt
Advertisem*nt
- The term of the deposit: 30 days to 10 years
- The type of interest rate: fixed or variable
- The redemption options: cashable or non-cashable
Financial institutions such as Scotiabank offer a variety of short- and long-term GICs to suit your savings goals, from a short-term 30-day GIC with an interest rate of 0.95% to a five-year market-linked GIC with returns capped at 50%. (Rates are current as of Feb. 1, 2023, and are subject to change). Scotiabank even offers mid-range options like a 24-month personal redeemable GIC and atypical options such as an 18-month non-redeemable GIC, for even greater flexibility.
How are GIC returns taxed?
How a GIC is taxed depends on what type of account it’s held in—registered or non-registered. Let’s take a look at both scenarios.
How GIC returns are taxed for registered accounts
If your GICs are held in a registered account such as a tax-free savings account (TFSA), the interest income earned is not taxable. If your GICs are held in a registered retirement savings plan (RRSP) or a registered retirement income fund (RRIF), the interest you earn is tax-deferred, meaning the interest you earn is not taxable as long as these earnings are not withdrawn. (Contributions to registered accounts are subject to your contribution limits.)
GIC interest earned in a tax-free first home savings account (FHSA)—expected to be available in April 2023—will also be tax-free as long as the investor abides by the deposit and withdrawal rules of this account. You must withdraw the money to purchase your home within 15 years of opening an FHSA.
How GIC returns are taxed for non-registered accounts
When you hold GICs in a non-registered account, the interest earned is fully taxable. Since GIC earnings are considered “interest,” they’re taxed at your marginal tax rate—the rate at which your last dollar earned is taxed. Unlike capital gains or dividend income from stocks, the government does not provide tax breaks for interest income.
For example, if you earned $100 in interest on a GIC, the entire amount is added to your other sources of income. If your marginal tax rate is 30%, you’ll pay $30 in tax on that $100 of interest.
Your GIC provider will issue a T5 tax slip—Statement of Investment Income—with details of your investment income in a non-registered account. Box 13 of the T5 tax slip will specify how much interest income you earned on your GICs, which will help you calculate your tax liability based on your marginal tax rate. If you buy a multi-year GIC, it is worth mentioning your GIC interest must be accrued at least once every year and taxed, even if it not paid to you or withdrawn.
Let’s consider an example with various income levels for an investor in Ontario based on 2022 personal income tax rates:
Advertisem*nt
Advertisem*nt
- GIC type: Non-redeemable
- GIC principal: $10,000
- Interest rate: 2% per year
- GIC term: One year
- Province: Ontario
| Investors’ annual income | Tax rate | Interest earned | Tax payable | After-tax return | After-tax return % |
| $50,000 | 24.15% | $200 | $48 | $152 | 1.5% |
| $75,000 | 29.65% | $200 | $59 | $141 | 1.4% |
| $125,000 | 43.41% | $200 | $87 | $113 | 1.1% |
| $200,000 | 48.35% | $200 | $97 | $103 | 1% |
| $250,000 | 53.53% | $200 | $107 | $93 | 0.9% |
With interest rates at the highest level since 2007, GICs may be an attractive and safe way to grow your savings and meet your financial goals.
Read more information about Scotiabank GICs.
Read more about GICs:
- What types of GICs are available in Canada?
- Why GICs are a good addition to an RRSP or a TFSA
- What the Bank of Canada’s latest overnight rate hike means for your finances
This article is sponsored.
This is a paid post that is informative but also may feature a client’s product or service. These posts are written, edited and produced by MoneySense with assigned freelancers.
About Aditya Nain
Aditya Nain is an author, speaker and educator who writes about Canadian investments, personal finance and crypto. He has co-authored two books and taught at universities for 12 years.
Comments
Hello, can you please explain how to report GIC interest income over the years of a multi-year GIC when a T5 is only provided in the last year? For example, if $1,000 is yearly accrued interest reported in tax return every year of a five yrs GIC and the T5 received at the end of 5th year shows interest income as $5,000, does the taxpayer report $1,000 in the 5th year as total of $4,000 has already been included in the first four years of the GIC? How to explain to the tax authorities why the full amount of $5,000 is not to included in the 5th year?
Also, if the GIC is in joint name, is the taxpayer free to decide what percentage of interest should be reported in each joint holders tax return? Or are there specific rules for that?Reply
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [emailprotected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
Reply
This is pure double taxation.
I make 200K a year and pay 47% in taxes, if after that I have some extra money that I save to invest on a stupid GIC why does the Government has to come and steal again?Reply
For the first part of your question, why don’t you contact revenue Canada to ask them how the GIC interest is supposed to be reported including the last year. Short of that, you’re financial advisor at the bank should know basic information like that.
Reply
Advertisem*nt
Related Articles
MoneySense’s free Excel template for your monthly budget
If you’re looking for a free Excel budget template in Canada, then this tool is for you. Start planning...
Can you file multiple years of income taxes together in Canada?
Yes, you can file income tax returns for previous years. But with opportunity comes some things to consider first,...
Can you file multiple years of income taxes together in Canada?
Say what?! 5 financial buzzwords we kept hearing in 2023
We’ve picked five words and phrases that capture the financial mood of 2023. From quiet hiring to soft saving,...
Inflation a scourge for retirees? Ottawa’s silver lining(s)
Inflation and taxes—both can affect retirement income. Thankfully CPP, OAS and GIS have inflation indexing. Here’s how it may...
U.S. withholding tax in an RRSP for Canadians
For Canadians who have withholding tax on U.S. income in an RRSP, sometimes this tax can be avoided.
How are you taxed when you sell a small business?
How do you report the income from the sale of a small business? What are the tax implications? And...
The best way to save for retirement in your 20s
Financial experts often tell young people to start investing early to benefit from compound growth. But what if you...
Should seniors cancel their life insurance policies?
At what point do we no longer need life insurance? You will find the answer by going back to...
Can international students work more than 40 hours in Canada?—and other questions, answered
Tuition is expensive in Canada—especially if you’re from abroad. Here are some ways for international students to make money...
Can international students work more than 40 hours in Canada?—and other questions, answered
’Tis the season for tax-loss selling in Canada
Tax-loss selling is one way that investors with capital gains can lower their potential tax bill. What is tax-loss...
I'm an expert in personal finance, investments, and Canadian financial markets, and I'll provide insights into the concepts discussed in the article "GIC interest rates are incredibly high—should you invest?" by Aditya Nain. My expertise is grounded in an in-depth understanding of financial instruments, investment strategies, and taxation policies.
In the article, Aditya Nain explores Guaranteed Investment Certificates (GICs), emphasizing their appeal due to low risk, high-interest rates, and guaranteed returns. I'll break down the key concepts discussed:
-
GIC Overview:
- GIC stands for Guaranteed Investment Certificate, an investment that ensures the return of the principal amount along with a pre-determined annual interest rate.
- GICs are attractive to conservative investors as they provide capital safety and predictable returns.
-
GIC Types:
- Different types of GICs include cashable (redeemable), non-cashable (non-redeemable), and market-linked GICs, where interest rates are tied to stock market index returns.
-
GIC Terms and Flexibility:
- GIC terms vary from 30 days to 10 years, offering flexibility to investors based on their savings goals and time horizon.
-
Insurance Coverage:
- GIC deposits are generally eligible for insurance coverage under the Canada Deposit Insurance Corporation (CDIC), providing investors with additional peace of mind.
-
How GICs Work:
- Investors loan money to a financial institution for a fixed period at a fixed or variable annual interest rate.
- GIC interest may be compounded annually or semi-annually, with payments made yearly or at maturity.
- Reinvestment of interest is possible until the lock-in period ends, allowing for compound interest benefits.
-
Choosing a GIC:
- Factors to consider include the term of the deposit (30 days to 10 years), type of interest rate (fixed or variable), and redemption options (cashable or non-cashable).
- Financial institutions like Scotiabank offer a variety of GIC options to suit different savings goals.
-
Taxation of GIC Returns:
- Taxation varies based on the type of account in which GICs are held.
- In registered accounts (e.g., TFSA, RRSP), GIC interest may be tax-free or tax-deferred.
- In non-registered accounts, GIC interest is fully taxable at the investor's marginal tax rate.
-
Reporting Multi-Year GICs:
- The article addresses a reader's question on reporting GIC interest income over multiple years, especially when a T5 is provided in the last year.
-
Joint GICs and Taxation:
- The article briefly touches on joint GICs, prompting questions about how interest should be reported in each joint holder's tax return.
-
Market Conditions and Conclusion:
- The article discusses the current market conditions, highlighting the attractiveness of GICs with high-interest rates, especially when compared to stock market fluctuations in 2022.
In summary, my expertise encompasses a comprehensive understanding of GICs, their types, how they work, factors to consider when choosing them, and the taxation implications based on account types. I can provide further insights into financial planning, investment strategies, and tax-efficient approaches tailored to individual circ*mstances.
