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How To Decide If You Should Get a Registered GIC

No one likes paying taxes. It’s unfortunate then, that GICs are some of the least tax-advantaged investments available. As they earn interest, you’re taxed at your full marginal rate, which could be as high as 54% if you make over $206,000 in Nova Scotia.

The easiest way to avoid paying taxes on your GICs is to put them in a registered account, whether it’s your RRSP, TFSA, or an RESP. That way the GICs will grow tax-free.

 

RRSP GICs

RRSP stands for Registered Retirement Savings Plan, and is the most well-known and most-used registered accounts in Canada.

You can only contribute 18% of your income or $26,230 per year, whichever is less. Any unused contribution room from previous years gets carried over indefinitely, so you can always use that room later.

The ability to delay contributions is great because you can use RRSP contributions to reduce your taxable income for that year, which means you get a larger refund (or owe less in tax). It’s not as useful when you’ve just started working and have a low income, but can really help when you get a large raise or bonus in the future.

You aren’t taxed on the growth of your investments held within an RRSP, so you get to keep all the interest you earn on your GICs.

However, you are taxed when you want to withdraw the money from your RRSP, unless you take advantage of the Home Buyers Plan (HBP) that lets you withdraw up to $25,000 (but you must put it back over 15 years).

If you withdraw from your RRSP before retirement, you face something called the withholding tax. Depending on how much you withdraw, you’ll immediately lose a percentage of it. Below is a table for your reference:

Amount Withdrawn

Withholding Tax Deducted

Up to $5,000

10%

$5,000 to $15,000

20%

Over $15,000

30%

 

 

You don’t have to take out your RRSP GIC when it matures. You have a couple options. The first, and easiest, would be renewing your GIC with the same institution that you had the GIC with originally. There’s no fees or taxes for doing so, and you can go right back to earning interest.

The second option is to invest the money into a different account at the same institution, if they allow it. You don’t have to withdraw it, and you can put the money into riskier, but more rewarding, investments.

Finally, you can transfer it to another account at a different institution. Your current institution may charge you some fees for transferring out, but you aren’t taxed on the transfer.

 

TFSA GICs

There’s a lot of debate as to whether your Tax-Free Savings Accounts (TFSA) is a good place to hold your GICs.

On one hand, interest income is the most heavily-taxed form of investing. You’re always taxed at your marginal rate, which is your highest tax rate for that year. Other forms of investment income, like capital gains or dividends, are taxed more favourably. If you made $1,000 through interest and another $1,000 through selling stocks, you would keep more of the money you made from stocks after taxes every time.

Since you never pay any tax on any investments in a TFSA, including interest, an argument could be made that GICs should definitely be held inside them, as you’ll reduce your tax burden the most.

One the other hand, GICs have very low interest rates, especially when compared to the possible returns on other, riskier investments. The argument that you should hold GICs in your TFSA assumes that you’ll earn an equal amount on GIC interest as you would with your other investments.

Let’s say you make $1,000 from a GIC and another $1,000 from selling stocks and your marginal tax rate is 29.65% - the rate for a single Ontarian making $50,000 a year. If neither of those accounts are registered, you’d have to pay the following taxes:

Account

Tax Owed

GIC

$296.50

Stocks

$148.25

 

Total tax owing = $444.75

By putting your GIC in a TFSA, you would save $296.50, which is double the tax owed on capital gains.

But in order to earn $1,000 in interest at the best TFSA GIC rate of 3.25% you’d have to invest $30,769 for 5 years. At the end of the 5-year term, you’d have earned $5,000 and saved $1,482.50 in taxes.

Instead, if your stocks increased in value by 6% per year, you’d only have to invest $16,667 to make $1,000 in one year. By investing $30,769 into stocks or ETFs, you take a higher risk, but could earn nearly $800 more!

Unless you’re completely terrified of losing money, or you are nearing retirement age, more of your portfolio should be in equities than in fixed income because of the potential for growth. It’s better to pay 29.65% in taxes on $1,000 than it is to pay 14.83% on $5,000.

 

RRIF GICs

Registered Retirement Income Funds (RRIFs) are converted from RRSPs whenever you want, otherwise automatically at 71. One key difference between an RRIF and an RRSP is that you can’t make any additional contributions to an RRIF after it’s been made. You can hold multiple RRIFs, but can’t contribute money to any others. In addition, since you can’t open an RRSP after 71, it effectively means you can’t make any more contributions to any of your RRIFs after 71.

RRIFs require you to withdraw a certain amount of money annually, which increases every year. There are no maximum withdrawal limits. Like RRSPs, you don’t pay any tax on the gains, just on your withdrawals, which are considered income.

When a GIC matures while inside an RRIF, you can reinvest it however you like, whether that’s in equities, another GIC, or even just leaving it as cash. You can’t make any more contributions to an RRIF but you can invest the money within like you would with any other account.

 

Should I get a registered GIC?

If you have a lot of money to invest, it can often be better to use your TFSA to invest in riskier investments than GICs because of the growth potential. If your portfolio has a reason to have large amounts of fixed-income assets like GICs, such as you’re nearing or over retirement age, it makes more sense to have GICs in your registered accounts.

Whatever your decision, be sure to check the best GIC rates before you purchase a GIC so you know you’re getting the most money.


Chris Chris 01/26/2019
Canadian personal finance buff and all-around writing enthusiast, Chris loves breaking down complicated money ideas to show that they're really not so complex. 
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