Are GICs Taxable? (2024)

A GIC is an investment that guarantees returns on your money for a set period of time (the term), ranging from 30 days to 10 years. Essentially, the bank agrees to pay your initial deposit back, plus a certain amount of interest, once the term is over.

GICs generally have fixed interest rates that stay the same throughout the term. Some GICs have variable interest rates that can change at any time, depending on your bank’s prime rate. This can work in your favour when interest rates are high, but you won’t earn much (or anything at all) if rates drop. That said, all GICs guarantee your principal investment returned to you at the end of the term.

Learn more: What Is A Guaranteed Investment Certificate (GIC)?

GICs work like a savings account: You put money in a bank, and it earns interest over time. However, once money is in a GIC, it’s not easy to get out. Most GICs are non-redeemable, meaning funds are locked in for the full term. Pulling your money out early usually results in a monetary penalty.

If you can’t commit to tying your money up, consider a cashable or redeemable GIC. There’s no set term, so you can access your investment whenever you need cash. The trade-off for this flexibility is a lower interest rate.

Pros:

• Low-risk: GICs are low-risk investments that guarantee your principal investment.
• Guaranteed returns: Choose a fixed or variable interest rate. Either way, you’ll make money.
• Deposits are insured: Your initial investment is insured up to $100,000 through the CDIC.
• No fees: Generally, there are no fees to buy or store funds in GICs.

Cons:

• Limited access: It’s hard to take money out of non-redeemable GICs before the term ends.
• Redemption penalties: You may have to pay a penalty fee to access funds early.
• High inflation: Fixed-rate GIC returns may drop if inflation outpaces the interest rate.
• Taxable income: Some GIC interest is subject to taxes, which lowers your overall return.

Related: What Is Taxable Income And How Does It Work?

In general, any interest earned on GIC investments will be taxed. However, there are some exceptions depending on the type of account a GIC is held in—a registered account or a non-registered account.

Registered Account

GICs held in a registered account, such as a tax-free savings account (TFSA) or registered retirement savings plan (RRSP), are not taxed on interest earnings to varying degrees. A TFSA is never taxed on deposit or withdrawal, while an RRSP’s proceeds are tax-deferred. This means as long as your money is in an RRSP it is tax-sheltered, but as soon as you take it out, the money is taxed as income. You also have to be mindful of your age, contribution limits and withdrawals when managing a registered account, whether it contains a GIC or not.

Non-Registered Account

When you hold a GIC in a non-registered account, the interest you earn is treated like regular income. Unlike capital gains or dividends from stocks, there are no tax breaks on non-registered GIC interest income. Your earnings are subject to federal and provincial taxes.

GIC interest is taxed based on your marginal tax rate. This is the tax amount you pay (federal and provincial) based on your income, where you live, and what tax bracket you’re in.

For example, if you put $1,000 in a GIC that has a 5% interest rate, you will earn $50 in the first year. This amount is added to your other sources of income that you pay marginal tax on. Therefore, if your marginal tax rate is 20%, you will pay $10 in tax on the $50 of interest.

To report GIC investment income, you need to know how much interest you earned. This amount will be on a T5 slip from the bank or credit unit where your GIC is held. You may not receive a T5 if you earn less than $50, but you still have to report this income.

The total amount of GIC interest earned goes on Line 12100—Bank accounts, term deposits, guaranteed investment certificates (GICs), and other similar investments of your Tax Information and Benefit Return.

If you want to avoid losing a portion of your GIC returns to taxes, registered accounts are the way to go. Check the interest rate and whether it’s fixed or variable to maximize your investment.

Also, consider how long you’re comfortable locking your cash up in a GIC. If you need access to funds, stick to shorter terms and redeemable and cashable options. Otherwise, the longer you keep money in a GIC, the more you make.