Are GICs Taxable?
Guaranteed investment certificates (GICs) are now popular due to their low risk, high interest rates, and guaranteed returns. When equities were soaring two years ago and interest rates were below 1%, few investors were interested in GIC.
They made a tremendous comeback in 2022, aided by Canada’s extraordinary interest rate increase. For reference, Canada’s average deposit interest rate has grown to more than 4.5%, up from a historic low of -0.1% in October 2020.
With certain GICs now earning more than 5% per year, investors are taking attentionâespecially because North American stock markets fell 15% to 30% in 2022, depending on which major index you follow.
If you’re looking at GICs, read on to find out how they work and how they’re taxedâas well as how you may save money by keeping them in a registered account.
What are GICs?
A guaranteed investment certificate is an investment that guarantees the return of the money you invest plus an annual interest rate that is typically predetermined. GICs are considered suited for conservative investors since, unlike stocks, they protect money and provide a predictable return.
This makes GICs particularly appealing if you’re saving for a future purchase, such as a down payment on a home, a car, a wedding, or a vacation. GIC periods range from 30 days to 10 years, providing investors lots of options.
GIC deposits are normally insured by the Canada Deposit Insurance Corporation (CDIC), offering investors even more peace of mind.
Investors can select from three varieties of GICs: cashable (redeemable), non-cashable (non-redeemable), and market-linked GICs, which have interest rates related to the return of a stock market index over time while the principal is guaranteed. Learn about the many forms of GICs.
Are GICs taxable?
In general, all interest generated from GIC investments will be taxed. However, several limitations apply depending on whether the GIC is stored in a registered or non-registered account.
Registered Account
GICs maintained in a registered account, such as a tax-free savings account (TFSA) or a registered retirement savings plan (RRSP), are tax-free to variable degrees on interest earnings.
An TFSA is never taxed on deposits or withdrawals, whereas RRSP proceeds are tax-deferred. This implies that your money is tax-sheltered while it is in an RRSP, but if you withdraw it, it is taxed as income.
When maintaining a registered account, it’s also important to consider your age, contribution limitations, and withdrawals.
Non-registered Account
When you have a GIC in a non-registered account, the interest you receive is considered normal income. Non-registered GIC interest income, unlike capital gains or dividends from equities, does not qualify for tax deductions. Your profits are subject to both federal and provincial taxes.
How GIC returns are taxed for non-registered accounts
When you keep GICs in a non-registered account, the interest is completely taxed. Because GIC profits are considered “interest,” they are taxed at your marginal tax rateâthe rate at which your final dollar of income is taxed. Unlike capital gains or dividend income from stocks, the government does not offer tax advantages on interest income.
For example, if you earned $100 in interest from a GIC, the full amount gets added to your other income. If your marginal tax rate is 30%, you’ll pay $30 in taxes on the CAD 100 interest.
Your GIC provider will give you a T5 tax slip (Statement of Investment Income) detailing your investment income in a non-registered account.
Box 13 of the T5 tax slip will show how much interest income you made on your GICs, allowing you to determine your tax due depending on your marginal tax rate. If you purchase a multi-year GIC, keep in mind that your GIC interest must be accumulated and taxed at least once every year, regardless of whether it is paid to you or withdrawn.
What is the difference between registered and non-registered GICs?
What is a Registered GIC?
A registered GIC is maintained in a registered investment account, which might be a TFSA, RRSP, FHSA, or RESP. These accounts serve as a tax shelter for compound interest, which means you won’t have to pay taxes while the investment is in the account.
From there, you can reinvest gains to increase the rate at which your investment grows. Depending on the kind of account, withdrawals may become taxable events.
Registered accounts have varied limits that must be understood before investing in a registered GIC. For example, RRSP and FHSA withdrawals result in taxation.
RESPs are intended to help people save for higher education, and there are penalties for invalid redemptions. Meanwhile, TFSAs do not have withdrawal restrictions, although there are yearly contribution limits.
While registered GICs benefit from tax-free growth, ensure the account restrictions align with your investment objectives.
What Is a Non-Registered GIC?
A non-registered GIC is not kept in a tax-advantaged investment account. This allows you more flexibility, but profits are taxed as income in the year they are earned. The interest earned is taxed at your current marginal tax rate.
Assume you fall into the 35% marginal income tax rate. In such situation, you will only receive 65% of the interest generated that year, reducing a 5% interest rate to 3.25% after taxes.
As you can see, non-registered GICs limit compound interest because you cannot reinvest the whole amount into another GIC. You can only reinvest after-tax income because it is not tax deductible. This is the cost of their adaptability.
In conclusion, if you want to prevent losing some of your GIC returns to taxes, registered accounts are the way to go. To optimize your investment, check the interest rate and determine if it is fixed or variable, Contact Sure Insurance to book a free consultation.
Consider how long you’re willing to tie up your money in a GIC. If you want access to funds, choose shorter periods and redeemable or cashable choices. Otherwise, the longer you keep money in a GIC, the more you’ll earn.
Frequently Asked Questions About Taxable GICs
Are GICs taxable?
In general, all interest generated from GIC investments will be taxed. However, several limitations apply depending on whether the GIC is stored in a registered or non-registered account.
What is a non-registered GIC account?
A non-registered GIC is not held in a tax-advantaged investment account, which allows for greater flexibility. However, profits are taxed as income in the year they are generated, and interest is taxed at your marginal tax rate.
What is the difference between registered and non-registered GICs?
Essentially, money in a registered account can grow tax-free, but money in non-registered accounts is taxed on income and realized capital gains each year. Each investor’s unique circumstances determine the correct investment vehicle.
