Investing in a GIC in a registered vs. non-registered account

You won’t have to pay income tax on or claim a GIC in your tax return if it’s held in a registered account, such as a Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA). When you cash out the GIC from your TFSA, you won’t have to pay tax then either (hence the name “tax-free”).

The RRSP isn’t as generous. You’re only deferring tax by investing in an RRSP, so when you cash out your GIC the full amount is taxable and withholding taxes may apply.

If you hold your GIC in a non-registered account, then you’ll be required to report it to the Canada Revenue Agency (CRA). For example, let’s say you have $5,000 in a non-registered GIC earning 3 percent interest—in this circumstance you’d be required to report the full amount of $150 in interest income on your annual tax return.

Are GICs taxed differently than stocks and mutual funds?

Products like mutual funds and GICs are different, so they’re not usually taxed in the same way. Any interest you earn on a GIC in a non-registered account is taxable at your marginal tax rate. In case you’re not familiar with this term, your marginal tax rate is the federal and provincial tax brackets you fall into given your annual income. This is similar to the way employment income is taxed when you earn a salary.

To lessen your tax burden, you might consider holding your GICs inside a registered account, while holding mutual funds, ETFs and dividend-paying stocks in your non-registered accounts. That’s because capital gains and dividends are taxed more favourably by the government than interest income.

Declaring interest earned on your tax return

With GICs, it’s possible that you’ll have to pay income tax on interest that you’ve earned, but haven’t yet received. For GICs with a term of more than one year, you often have the choice of receiving the interest or reinvesting it (typically compounding on a monthly basis). If you automatically reinvest the interest—which is what a lot of Canadians do to take advantage of the power of compound interest—it’s important to note that you’ll be required to pay income tax on the interest you’ve earned (accrued), even though you haven’t yet received an actual payout. Because of this, you’ll want to make sure you set enough money aside to cover the income tax liability at the end of each year. (Since the interest rates on most GICs is fixed, you can estimate how much interest you’ll earn for the year. This can easily be done in Microsoft Excel, for instance.)

This causes a lot of confusion among Canadians, so it’s important to make sure you claim your interest income correctly, otherwise you could face penalties and interest from the CRA.

How to correctly claim GIC interest income

For any interest earned from a GIC in a non-registered account, you should receive a T5 tax slip—a  Statement of Investment Income—from the financial institution that administers your GIC. The amount of interest income earned appears in box 13 on this slip.

Even if you don’t receive a tax slip, you may need to claim interest income. For example, if interest is accrued and not paid out to you, you won’t get a T5 slip, but you’ll still need to claim it. Likewise, if you earn less than $50 in interest in a year, you won’t get a tax slip, but you’ll still need to claim it on your tax return. To determine the amount of interest you’ll need to claim on your tax return, you can check with your financial institution.

The tax treatment of equity-linked GICs

If you own an equity-linked GIC (sometimes referred as a market-linked GIC), your gut instinct may be to report the interest income as a capital gain. However, any interest you earn on an equity-linked GIC must actually be reported as interest income. If the equity-linked GIC has a minimum interest guarantee, you’re required to report it and pay tax on it each year. Furthermore, if your investment goes up in value upon maturity due to a rise in the market, you must report this on your tax return for the last year of your GIC.

Reporting income from foreign currency GICs

Reporting GIC income when filing your taxes is a little more complicated when you have a foreign currency GIC. For example, you might have a GIC that pays you interest in U.S. dollars, you’re nonetheless required to report the interest in Canadian dollars to the CRA.

To determine the exchange rate, you can use the exchange rate in effect on the day you receive the income or you can use the average annual exchange rate for the year of your tax return. This lets you choose the exchange rate that’s most advantageous for you, helping you minimize the amount of taxes payable.

When your foreign currency GIC matures, you may be required to report a gain on the foreign currency if you converted it back to Canadian dollars, so this is something important to be aware of before buying a foreign currency GIC.

Sean Cooper Freelance Contributor

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail and Financial Post.


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