A Guaranteed Investment Certificate (GIC) can be great for safe growth in the short term, but you need to be thoughtful about the GIC account used so you can maximize your wealth.
GICs provide guaranteed growth in exchange for leaving your money in the account for a specified period of time. Just like any other income generating investment, the growth can be subject to tax. As such, you want to be thoughtful about using registered accounts to minimize taxes.
But not all registered accounts make sense with GICs, and they may only make sense in certain circumstances.
We’re going to explore the different account types and see when it makes sense to hold GICs in these accounts.
Taxes on GICs
Interest earned on a GIC is treated as taxable income by the CRA, and is taxed at your marginal interest rate (just like income from your employer).
As such, if you have $10,000 in a 1 year GIC that pays 2% interest, the $200 dollars of interest will be taxed as if you made it at your job. This means that holding a GIC in a tax-advantaged account could help you save some money. That said, the return on a GIC is going to be lower than investing in the stock market, so in general you’re better to save the tax on your investment gains. For example, let’s imagine you have $10,000 in GICs at 2%, and $10,000 in the stock market returning on average 10% per year. On your GIC you’d make $200, vs. $1,000 on your stock market investment – if I could only choose to save the tax on one I would choose the stock market investment.
Typically, you want to save your registered accounts for investments, but in some cases it may make sense to hold a GIC in a registered account.
Different Options For Your GIC Account
Let’s have a look at the different registered accounts and outline when it makes sense to use it for a GIC account.
With registered accounts, make sure you meet the criteria to withdraw the money. And make sure the purchase you’re earmarking the GIC for qualifies for the usage of any registered account.
RRSP
Because an RRSP is meant to save for retirement, typically using it for GICs don’t make sense.
GICs are best for short- to medium-term growth where you’ll need the money at the end of the term. If you’re saving for retirement, you are typically looking at a longer time horizon, and as such you want to allow room for that greater long-term growth in the form of investments. The one exception is if you are planning to either retire or purchase your first home in the next 1-2 years – then it may make sense to put your funds into GICs to prevent losses.
Except for very specific circumstances, I wouldn’t recommend using an RRSP for GICs.
RESP
With RESPs, the only time you would want to use it to hold GICs are if your child is going to school at the end of the GIC term.
GICs have the guaranteed growth, so if your child is going to school in 1-2 years time it could make sense to protect your capital. If so, just make sure the term ends before tuition is due. If post-secondary is more than a couple years out, I’d recommend investing the money to get better growth.
GICs can make sense in a RESP when your child is nearing post-secondary, but otherwise use it for investments.
FHSA
Similar to RRSPs and RESPs, if you know you’ll need the money in the next 1-2 years, a FHSA can make sense for a GIC account.
If you know you want to purchase a home next year and you want to get some growth while protecting your capital, a GIC could make sense. As with the RESP, make sure your term ends before you’ll need the money. Also, to qualify for a mortgage sometimes the banks want to see the money in your account for at least 90 days, so be thoughtful when selecting GIC terms.
As you’re nearing time to purchase your first home, holding a GIC in an FHSA could make sense.
TFSA
TFSAs can be a great option for a GIC account, so long as a) you are not preventing yourself from investing, and b) you are willing to sacrifice the contribution room until the next year when withdrawing.
TFSAs have limited contribution room. If you aren’t using all your contribution room and you want to use a GIC, a TFSA can be a great place to hold it. That said, TFSA allows you to save the taxes on growth, so I would always prioritize my TFSA room for higher return investments (i.e. stock market) when I can. The other consideration is that you lose your contribution room until the next year whenever you withdraw from your TFSA. So if you’re using that GIC for an upcoming purchase, you need to be willing to sacrifice the contribution room until the next year.
If you’re not using all your contribution room and are willing to lose it until the next year, TFSAs can serve well as a GIC account. Otherwise, you can maximize your tax-free growth by holding investments in your TFSA.
Non-Registered Accounts as a GIC Account
Typically I would recommend holding a GIC in a non-registered account.
The growth on a GIC is never going to be mind-blowing (typically a couple percent), and so the taxes you pay on any gains will be small. I would almost never prioritize a GIC over stock market investments in a registered accounts, as the returns on investments (and thus the tax savings) will be much higher. That said, as mentioned in the above sections, there are circumstances where holding a GIC in a registered account could make sense.
Holding a GIC in a non-registered account means you have more flexibility, and you can save your registered accounts for greater tax savings.
Conclusion – Best GIC Account
Except for certain exceptions, it usually makes sense to hold a GIC in a non-registered account.
If you’re nearing the time you’ll need the money in your registered accounts (e.g. retirement for RRSP, tuition for RESP, or home purchase for FHSA), it could make sense to put money into a GIC for the short term. For TFSAs, if you’re not using all the contribution room for investments, holding a GIC could also make sense, so long as you know the implications. In general though, registered accounts are best used for long-term growth of investments.
The GIC gains will be much lower than an investment, so to maximize your wealth, take advantage of the benefits of registered accounts with investments instead .