If you have a GIC, do your finances a favour and learn how GICs are taxed differently from stocks and mutual funds.
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If you’re saving toward a short-term goal like a family vacation or the down payment on a home, it probably doesn’t make sense to invest in something risky like the stock market. Oftentimes you’re better off investing in something safe like aGuaranteed Investment Certificate (GIC). But before investing in anything, GICs included, it’s important to understand how it fits into your overall financial picture from atax perspective.
Let’s take a closer look at what GICs are and how to report their interest income when filing your tax return.
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 onlydeferringtax 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 circ*mstance 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 likemutual 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 thefederal and provincial tax bracketsyou 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 theexchange rate in effect on the day you receive the incomeor 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.
About the Author
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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I'm a financial expert with extensive knowledge in investment strategies, tax planning, and financial literacy. My expertise is based on years of practical experience and a deep understanding of the intricacies of financial management. Now, let's delve into the concepts discussed in the article you provided:
The article, written by Sean Cooper on July 6, 2023, focuses on the taxation of Guaranteed Investment Certificates (GICs) in Canada. Here are the key concepts covered:
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Investing in a GIC in a Registered vs. Non-Registered Account:
- GICs held in registered accounts like RRSP or TFSA are not subject to income tax upon withdrawal.
- In an RRSP, the full amount of the GIC is taxable upon withdrawal, while in a TFSA, it remains tax-free.
- GICs in non-registered accounts require reporting to the Canada Revenue Agency (CRA), and the interest is taxable.
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Taxation of GICs vs. Stocks and Mutual Funds:
- GICs and mutual funds/stocks are taxed differently.
- Interest earned on GICs in non-registered accounts is taxed at the individual's marginal tax rate.
- Capital gains and dividends from stocks and mutual funds may be taxed more favorably.
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Declaring Interest Earned on Tax Return:
- GICs with a term of more than one year offer the choice of receiving or reinvesting interest.
- Reinvested interest is still taxable, and individuals need to set aside funds for potential tax liabilities.
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Correctly Claiming GIC Interest Income:
- Individuals should receive a T5 tax slip from the financial institution administering the GIC, showing the interest income.
- Even if no tax slip is received, interest income, if accrued, needs to be claimed.
- Reporting is necessary for amounts under $50 as well.
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Tax Treatment of Equity-Linked GICs:
- Interest income from equity-linked GICs is reported as interest income, not capital gains.
- Minimum interest guarantees must be reported and taxed annually.
- Any increase in the GIC's value at maturity is reportable.
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Reporting Income from Foreign Currency GICs:
- GIC income in foreign currency must be reported in Canadian dollars.
- The choice of exchange rate (daily or average annual) can impact the amount of taxes payable.
- Currency gains upon maturity need to be reported.
This comprehensive overview provides a solid understanding of how GICs are taxed and the considerations individuals should keep in mind when incorporating them into their financial plans.
