GICs in TFSAs
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let’s get started!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 and has since changed to $10,000 in 2015, $5,500 from 2016 to 2018, to where it currently stands at $6,000 since 2019 . Your available contribution room carries forward to future years. You can quickly find your personal TFSA contribution room with Ratehub.ca's TFSA limit calculator.
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:
- Your money grows tax-free. Both the interest and capital gains are tax-free.
- Your withdrawals are also tax-free. Unlike an RRSP, when you make a withdrawal from your TFSA, it is also tax-free.
- 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
| Year | Beginning Principal | Interest Earned | Tax Payable | Ending 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
| Year | Beginning Principal | Interest Earned | Ending 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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