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GICs in TFSAs

Reading up on personal finance? Looking for ways to maximize your savings and investments? Instantly compare the best accounts in Canada and boost your ROI.

Did you know that guaranteed investment certificates (GICs) can be held in both registered and non-registered accounts? Non-registered accounts are your regular bank accounts, where you are taxed on the interest earned. Registered accounts, on the other hand, refer to tax-sheltered savings plans introduced by the government, including tax-free savings accounts (TFSAs).

Take a look at how TFSA-eligible GICs work.


What are TFSAs?

In 2009, the federal government introduced TFSAs to help Canadians both grow and withdraw their savings tax-free. At first, you could only contribute $5,000 per year. On January 1, 2013, the annual contribution limit was raised to $5,500. Your available contribution room carries forward to future years. For example, if you couldn’t make any contributions in 2011, that $5,000 would’ve been added to your $5,000 limit in 2012, so you could contribute up to $10,000 in 2012.


Benefits of holding GICs in TFSAs

While contributions are not tax-deductible, like with GICs in RRSPs, there are still three major benefits of holding GICs in your TFSAs:

  1. Your money grows tax-free. Both the interest and capital gains are tax-free.
  2. Your withdrawals are also tax-free. Unlike an RRSP, when you make a withdrawal from your TFSA, it is also tax-free.
  3. Your principal is guaranteed. Because it’s in a GIC, you know the principal will always be returned to you, so it’s a safe investment option.

Example: GIC in TFSA vs. non-registered account

Peter has $5,000 to invest and he’s trying to decide between purchasing a regular 2-year non-redeemable GIC in a non-registered account or a 2-year non-redeemable TFSA-eligible GIC. Both GICs pay 1.15%, however, he lives in Ontario and would have to pay tax at a marginal rate of 39.41% (combined federal and provincial) on interest earned in the non-registered savings account. How much will Peter save by purchasing the GIC in his TFSA instead?

Option 1: GIC held in a non-registered savings account

YearBeginning PrincipalInterest EarnedTax PayableEnding Principal
1$5,000.00$75.00$29.55$5,075.00
2$5,075.00$76.12$29.99$5,151.12
Totals$151.12$59.54$5,151.12

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Option 2: GIC held in a TFSA

YearBeginning PrincipalInterest EarnedEnding Principal
1$5,000.00$75.00$5,075.00
2$5,075.00$76.12$5,151.12
Totals$151.12$5,151.12

Peter would be able to save an additional $91.58 ($151.12 - $59.54) because he bought the GIC held in a TFSA, since he wouldn’t have to pay tax on any of the interest earned.

TFSAs are a great vehicle for saving money. While contributions are not tax-deductible, once money has been put into the account it is free to grow and redeem tax-free. Many GIC products are eligible and can help form part of the fixed-income component of a TFSA.

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