How GIC Income is Taxed in Canada

Low risk, high interest rates, and guaranteed returns are the features that make guaranteed investment certificates (GICs) very attractive right now.

Guaranteed Investment Certificates (GICs) are popular investment vehicles in Canada that pay interest income. But before investing in anything, GICs included, it’s important to understand how it fits into your overall financial picture from a tax perspective.

What are GICs?

A guaranteed investment certificate is an investment that guarantees the return of your capital plus an annual interest rate that is generally pre-determined. GICs are considered suitable for conservative investors because, unlike stocks, they keep capital safe and have a predictable return.

This makes GICs especially appealing if you’re saving for a planned purchase such as a home down payment, a car, a wedding, or a vacation. GIC terms vary from 30 days up to 10 years, giving investors plenty of flexibility.

GIC deposits are generally eligible for insurance coverage under the Canada Deposit Insurance Corporation (CDIC), giving investors even greater peace of mind.

Investors can choose from several types of GICs, including cashable (redeemable), non-cashable (non-redeemable), and market-linked GICs, whose interest rates are tied to a stock market index’s return over the term, while the principal is guaranteed.

How do GICs work?

When you purchase a GIC, you loan financial institution money for a fixed period (the term) at a fixed or variable annual interest rate. For example, if you buy a one-year GIC for $1,000 with a fixed rate of 5% interest, you’ll receive your principal plus $50 interest at maturity—a total of $1,050.

GIC interest may be compounded annually or semi-annually. Interest payments are usually made yearly or at maturity, but you may be able to receive monthly payments. Additionally, you can automatically reinvest the interest until the lock-in period ends, to benefit from compound interest.

Are GICs Taxed Differently Than Stocks and Mutual Funds?

Products like mutual funds and GICs are different, so they’re not usually taxed in the same way. Any interest you earn on a GIC in a non-registered account is taxable at your marginal tax rate. In case you’re not familiar with this term, your marginal tax rate is the federal and provincial tax brackets you fall into given your annual income. This is similar to the way employment income is taxed when you earn a salary.

To lessen your tax burden, you might consider holding your GICs inside a registered account, while holding mutual funds, ETFs, and dividend-paying stocks in your non-registered accounts. That’s because capital gains and dividends are taxed more favorably by the government than interest income.

Step-Wise Guide on How To Report GIC Interest Income?

1) Receive Your T5 Slip

  • T5 Slip (Statement of Investment Income): Financial institutions issue a T5 slip to report any interest earned on GICs and other investments if the total interest earned in a year is $50 or more. You should receive your T5 slip by the end of February of the following year.
  • Multiple T5 Slips: If you have multiple GICs or accounts with different institutions, you may receive multiple T5 slips.

2) Identify the Relevant Boxes on the T5 Slip

Box 13 - Interest from Canadian sources: This box typically shows the total interest income earned from your GICs and other investments.

3) Reporting Interest Income on Your Tax Return

  • Line 12100 (Interest and Other Investment Income): Transfer the amount from Box 13 of your T5 slip(s) to Line 12100 on your federal tax return (Form T1).
  • Foreign Interest Income: If you earned interest from GICs held with foreign institutions, report this on Line 12100 as well, and specify the foreign income details on Form T1135 (Foreign Income Verification Statement) if required.

4) Include All Interest Income

  • Less than $50: If the interest earned is less than $50 and you didn't receive a T5 slip, you still need to report the interest income. Maintain accurate records of all your GIC investments and any interest earned, even if no T5 slip is issued.
  • Joint Accounts: If the GIC is held jointly with someone else, report only your share of the interest income. Usually, the split is based on the percentage of the contribution made by each holder unless there is an agreement stating otherwise.

5)Foreign Exchange Considerations

Foreign Currency GICs: If your GICs are in a foreign currency, convert the interest income to Canadian dollars using the exchange rate in effect on the day you received the interest or an average annual rate if the interest was paid periodically throughout the year.

6) Filing Deadlines and Penalties

  • Filing Deadline: The deadline for filing your tax return is usually April 30th of the following year. If you or your spouse/common-law partner is self-employed, the deadline is June 15th, but any taxes owing are still due by April 30th.
  • Penalties: Failure to report interest income can result in penalties and interest charges on any unpaid tax.

7) Use Tax Software or a Tax Professional

  • Tax Software: Most tax software programs in Canada can automatically handle the entry and reporting of T5 slip information. Input the details as prompted, and the software will populate the correct fields.
  • Tax Professional: Consider hiring a tax professional if you have multiple GICs or complex investment income. They can ensure accurate reporting and help you with tax planning strategies to minimize taxes.

How are GIC Returns Taxed in Canada?

How a GIC is taxed depends on what type of account it’s held in—registered or non-registered. Let’s take a look at both scenarios.

How GIC Returns are Taxed for Registered Accounts

If your GICs are held in a registered account such as a tax-free savings account (TFSA), the interest income earned is not taxable. If your GICs are held in a registered retirement savings plan (RRSP) or a registered retirement income fund (RRIF), the interest you earn is tax-deferred, meaning the interest you earn is not taxable as long as these earnings are not withdrawn. (Contributions to registered accounts are subject to your contribution limits.)

GIC interest earned in a tax-free first home savings account (FHSA)— available in April 2023—will also be tax-free as long as the investor abides by the deposit and withdrawal rules of this account. You must withdraw the money to purchase your home within 15 years of opening an FHSA.

How GIC Returns are Taxed for Non-Registered Accounts

When you hold GICs in a non-registered account, the interest earned is fully taxable. Since GIC earnings are considered “interest,” they’re taxed at your marginal tax rate—the rate at which your last dollar earned is taxed. Unlike capital gains or dividend income from stocks, the government does not provide tax breaks for interest income.

For example, if you earned $100 in interest on a GIC, the entire amount is added to your other sources of income. If your marginal tax rate is 40%, you’ll pay $40 in tax on that $100 of interest.

Your GIC provider will issue a T5 tax slip—Statement of Investment Income—with details of your investment income in a non-registered account. Box 13 of the T5 tax slip will specify how much interest income you earned on your GICs, which will help you calculate your tax liability based on your marginal tax rate. If you buy a multi-year GIC, it is worth mentioning your GIC interest must be accrued at least once every year and taxed, even if it is not paid to you or withdrawn.

Declaring Interest Earned on Your Tax Return

With GICs, it’s possible that you’ll have to pay income tax on interest that you’ve earned, but haven’t yet received. For GICs with a term of more than one year, you often have the choice of receiving the interest or reinvesting it (typically compounding monthly). If you automatically reinvest the interest—which is what a lot of Canadians do to take advantage of the power of compound interest—it’s important to note that you’ll be required to pay income tax on the interest you’ve earned (accrued), even though you haven’t yet received an actual payout. Because of this, you’ll want to make sure you set enough money aside to cover the income tax liability at the end of each year. (Since the interest rates on most GICs are fixed, you can estimate how much interest you’ll earn for the year. This can easily be done in Microsoft Excel, for instance.)

This causes a lot of confusion among Canadians, so it’s important to make sure you claim your interest income correctly, otherwise, you could face penalties and interest from the CRA.

How to Correctly Claim GIC Interest Income

For any interest earned from a GIC in a non-registered account, you should receive a T5 tax slip—a Statement of Investment Income—from the financial institution that administers your GIC. The amount of interest income earned appears in box 13 on this slip.

Even if you don’t receive a tax slip, you may need to claim interest income. For example, if interest is accrued and not paid out to you, you won’t get a T5 slip, but you’ll still need to claim it. Likewise, if you earn less than $50 in interest in a year, you won’t get a tax slip, but you’ll still need to claim it on your tax return. To determine the amount of interest you’ll need to claim on your tax return, you can check with your financial institution.

The Tax Treatment of Equity-Linked GICs

If you own an equity-linked GIC (sometimes referred to as a market-linked GIC), your gut instinct may be to report the interest income as a capital gain. However, any interest you earn on an equity-linked GIC must be reported as interest income. If the equity-linked GIC has a minimum interest guarantee, you’re required to report it and pay tax on it each year. Furthermore, if your investment goes up in value upon maturity due to a rise in the market, you must report this on your tax return for the last year of your GIC.

Reporting Income from Foreign Currency GICs

Reporting GIC income when filing your taxes is a little more complicated when you have a foreign currency GIC. For example, you might have a GIC that pays you interest in U.S. dollars, you’re nonetheless required to report the interest in Canadian dollars to the CRA.

To determine the exchange rate, you can use the exchange rate in effect on the day you receive the income, or you can use the average annual exchange rate for the year of your tax return. This lets you choose the exchange rate that’s most advantageous for you, helping you minimize the amount of taxes payable.

When your foreign currency GIC matures, you may be required to report a gain on the foreign currency if you converted it back to Canadian dollars, so this is something important to be aware of before buying a foreign currency GIC.

When Do You Have to Report Income on a GIC?

For non-registered GICs, you must report accrued interest as income every year. Interest earned on GICs in a registered TFSA doesn’t have to be reported on a tax return. The same goes for registered RRSPs unless you cash in your GIC. Then, the full amount is taxable.

When You Do Not Report Interest

If you hold your GIC inside a tax-sheltered account like your Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA), you are not required to report interest income earned on your tax return. When you cash out your GIC from your TFSA, you do not need to pay any further income tax. However, when you cash out your GIC from your RRSP, the full amount is taxable at your marginal tax rate. Also, when cashing out your GIC, withholding taxes may apply.

Still, Have Questions?

For all questions and inquiries, feel free to reach out to Filing Taxes at 416-479-8532. Schedule an NTR engagement appointment with us and take the first step toward proper management of your finances.

Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.

Written By:
Salman Rundhawa
Salman Rundhawa is the founder of Filing Taxes. Salman provides valuable tax planning, accounting, and income tax preparation services in Toronto, Mississauga, Oakville, and Hamilton.

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