GICs tend to be fairly straightforward and easily understandable, but there are a couple issues that do become very confusing. We tackled one of those in a prior post, where we explained the differences between cashable GICs and redeemable GIC s. In this post, we’ll look at another somewhat confusing topic: how to purchase registered GICs in structures such as TFSAs or RRSPs.
Many people believe that tax-free savings accounts (TFSAs) and registered retirement savings accounts (RRSPs) are just tax-sheltered savings accounts, but this isn’t true. They are tax-sheltered investment vehicles that can be used as savings accounts, but are in fact able to hold a wide variety of products such as bonds and equities.
Similarly, when some hear the term TFSA GIC, they mistakenly assume that it is a special kind of TFSA devoted solely to a GIC. In actual fact, a TFSA GIC is merely a GIC purchased within the overall TFSA structure. Say you have a TFSA with CIBC. That TFSA may hold GICs as well as any other TFSA-eligible investment.
Many financial institutions advertise different rates for registered and non-registered GICs. The rates for the registered GICs tend to be slightly higher, partly because it’s common to see annual fees for maintaining a TFSA at a bank. In other words, if the bank is making $100 off you just for having a TFSA with them then they can afford to offer you a better GIC rate.
One thing to keep in mind is that, for the most part, if you want to hold a GIC in a registered account, you have to purchase the product through the institution with whom the account is set up.
So let’s say you have an RRSP at a major Canadian bank, and you’re looking to add a GIC to it. You find a really great rate at an online bank, a rate that exceeds what the major bank is offering. Unfortunately, you’re limited in what you can do in this scenario. You can’t simply buy the non-registered GIC from the online bank and transfer it to the RRSP you hold at the major bank. What you can do is one of two things. First, you can simply buy the major bank’s registered GIC offering for your RRSP. It will likely have a better rate than the non-registered GIC at the same bank but may not match the online bank’s rate.
The second option is for you to open a second RRSP account, this time at the online bank itself, if they offer one. As long as your overall RRSP contributions (i.e. among all your RRSP accounts) don’t exceed your allowable maximum, there’s not a problem in doing this, aside from maybe a bit of extra work on your part.
As always, check out the GIC rates on our site to make sure you’re getting the biggest bang for your registered (and non-registered) buck.