High Interest Savings Accounts in Canada: How they work
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High interest savings accounts (HISAs) in Canada typically have no minimum deposit requirement and can offer interest rates of over 3.00%, particularly at online banks and some credit unions. By comparison, a regular savings account often pays much less – around 0.30% – making it more difficult for your money to grow over time. Financial institutions offer higher rates on HISAs to attract deposits, which they use to help fund loans and other lending activities. Here, we'll explain how HISAs work, what they cost, how the interest is taxed, how they compare to GICs, and when one makes sense. If you want to compare rates side by side, see our best high interest savings accounts in Canada.
What are high interest savings accounts?
A high interest savings account is a deposit account that pays a premium rate of interest in exchange for limited transaction activity. It works like a regular savings account, but the rate is several times higher and it is meant for money you do not need to touch often, such as an emergency fund or a down payment.
Financial institutions are able to offer these rates for a few different reasons:
- Many are offered by branchless or online-only banks, which carry lower overhead costs.
- Most customers don’t use these accounts for daily activity, so from the bank’s end there aren’t many transactions to process (which also keeps costs low), and
- A competitive rate is an effective way to acquire new customers.
What types of transactions can you perform with high interest savings accounts?
With a high interest savings account, you can make:
- Deposits (cash and cheques)
- Withdrawals (at ATMs, bank tellers, in stores, etc.)
- One-time payments for goods and services
- One-time bill payments
- Pre-authorized payments (insurance, mortgage, rent, utilities, etc.)
- Transfers (between two users of same financial institution)
- Interac e-Transfers (both send and receive)
Summary of high interest savings account fees
As with a regular savings account, there is usually no monthly fee associated with maintaining a high interest savings account. However, there are often banking fees associated with some of the transactions you perform:
Regular savings account vs. high interest savings account
As you can imagine, high interest savings accounts can become very expensive, if you are completing a large number of transactions from your account each month. For many of these accounts in Canada, you will be charged $5 every time you make such a transaction, and there may be no debit transactions included each month. If you need an account for transactional purposes, you may want to consider a chequing account instead.
Case study: HISA vs Regular savings account
Margaret has $10,000 in a regular savings account that is currently earning 0.35% interest. She learns about a high interest savings account that pays 3.00% annually. Assuming she transfers her money to the HISA, pays no fees, and neither deposits nor withdraws any additional funds, how much more interest will she earn over five years? (In both cases, interest is calculated and compounds monthly, with no additional deposits or withdrawals.)
Note: Interest rates are used for illustrative purposes only. Actual HISA rates are variable and may change over time.
Over five years, the high interest savings account would provide a return of $1,616.17, or approximately 16.16%, on Margaret's original deposit. By comparison, the regular savings account would accumulate just $176.51 in interest, or approximately 1.77%. By moving her money into the high interest savings account, Margaret would earn $1,439.65 more over five years.
Watch out for short-term promotions: They’re good (but not as good as they seem)
Some financial institutions have begun advertising reasonably higher interest rates in order to convince savers to switch over from their current bank. The advantage of these offers is obvious: you’ll receive more interest on your savings. Who wouldn’t want to make more money? There is a downside, though.
Enticing as these higher rates are, these promotions generally only last for an introductory period (usually 3-6 months), after which the interest rate generally reverts to a more standard rate. When evaluating these opportunities it’s important to find out what interest rate you’ll receive after the introductory period. Once you know that, run your numbers to see if you’ll actually make more money in the new account versus the old one.
Are high interest savings accounts taxable in Canada?
Yes, interest earned in a high interest savings account (HISA) is generally considered taxable income in Canada. If you hold your HISA in a non-registered account, the interest you earn must be reported on your income tax return and is taxed at your marginal tax rate. Unlike eligible dividends or capital gains, interest income doesn't receive preferential tax treatment. This means you'll pay tax on the full amount of interest you earn, based on your personal tax bracket.
One important exception is a tax-free savings account (TFSA). If your HISA is held within a TFSA, any interest earned grows tax-free, and you won't pay tax on that income as long as you stay within your TFSA contribution limits.
Should you open a high interest savings account?
For day-to-day transactions, a chequing account is your best option. And for small amounts over and above what you need for daily use, a regular savings account is a good choice. But if you have money that you just want to park in a bank account and earn a higher rate of interest on for a period of time, a high interest savings account is the better bet. You won’t pay fees if you don’t use it for debit transactions, and the interest is significantly higher than what you could get with any regular savings account.
If you can find a rate close to 3.00%, the annual return on a high interest savings account does something very important for your financial future: it can maintain your purchasing power. If consumer prices are rising each year (also known as inflation), you at least need to obtain that return on your savings just to keep pace with inflation. Depending on the rate of return you’re being offered and the rate of inflation, a good high interest savings account can achieve this.
Are high interest savings accounts CDIC insured?
Yes, most high interest savings accounts (HISAs) offered by banks that are members of the Canada Deposit Insurance Corporation (CDIC) are protected by deposit insurance. Eligible deposits are insured for up to $100,000 per insured category, per member institution, helping protect your savings if a CDIC member institution were to fail.
It's important to note that not all financial institutions are CDIC members. If you're opening a HISA with a credit union, your deposits may instead be covered by your province's deposit insurance program, which may offer different coverage limits and protections.
Before opening a HISA, it's a good idea to verify whether the financial institution is a CDIC member (or covered by a provincial deposit insurer) and confirm that your account qualifies for deposit protection. While CDIC insurance helps protect your eligible deposits, it doesn't cover investment losses or amounts above the applicable coverage limits.