The Tax Implications of Owning GICs

Before you begin investing, you need to have a clear idea of how your investments will impact your annual filing with the Canada Revenue Agency (CRA). The last thing you want is an unexpected bill when you are done filling out the forms. One of the more popular investment methods is a guaranteed investment certificate (GIC) that ensures a predictable return on the initial investment. Let’s see how they work with your taxes.

Registered or Non-Registered Account Makes a Difference

If you purchase a GIC using a non-registered account, you will have to report the interest earned as part of your highest marginal tax rate. Your total marginal rate is determined by your total income and in which province that you live. You will also have to report the money used to buy the GIC as income. Capital gains accrued by stocks and other less predictable investments are taxed at the lower rate.

Pay on Interest Annually

The interest created by a GIC bought with a non-registered account must be reported as income annually. If you buy a $1,000 certificate earning 3% interest, it will earn you $30 in interest in the first year. Even if you are rolling that interest back into a GIC to continue to grow until the end of the certificate, you still must pay taxes on it each year. You must also report the $1,000 used to buy the GIC as an income.

Delay the Taxes with an RRSP

If you are using a GIC in conjunction with your registered retirement savings plan, you get to delay the taxes on the interest of the certificate until you roll the RRSP into an RRIF. The interest will be taxed as income when you cash out the savings plan or convert it. You do not pay taxes on the money used to buy the GICs when you convert your RRSP, because you paid taxes on it when it was earned.

Pay No Taxes Using a TFSA

Canada also allows its citizens to use a tax-free savings account to buy and manage a GIC. As of 2019, you can place up to $6,000 a year into this savings plan without paying tax on that money. Any interest that you earn on products managed within the TFSA are also tax-free; no matter when you might withdraw the funds. A TFSA also allows you to use the money in the account for any reason. It is not just meant as a retirement fund.

It may seem like the best way to buy and benefit from a GIC is to use a Tax-Free Saving Account (TFSA). While this may be true in some cases, if you have maxed out your contributions to your TFSA and any pension plan, you may want to consider additional investments in a non-registered GIC. You will also want to research GIC rates and terms to find one that delivers the highest interest over a term that works within your budget.