In times of economic uncertainty, many investors decide to go with the safety of Guaranteed Investment Certificates (GICs). Unlike stocks and bonds, GICs are considered a safe investment. With a GIC, you are promised a guaranteed interest rate over a period of time. Typically, the longer you lock in the certificate, the higher your interest rate. Report investment income you earn from your GIC on Line 12100 – Bank accounts, term deposits, guaranteed investment certificates (GICs), and other similar investments of your Tax Information and Benefit Return even if you do not receive a T5 tax slip.
What Is a Guaranteed Investment Certificate?
A Guaranteed Investment Certificate (GIC) is an investment that promises to pay out a guaranteed rate of interest over a specific period of time. GICs typically range in length from six months to 10 years. GICs come in different types from cashable to non-cashable. The money earned is considered interest income and fully taxable at your highest marginal tax rate.
Reporting Interest Income
You must report interest income earned during the year on your tax return even if you choose to roll over the interest at the end of each year. You should receive a Form T5, Statement of Investment Income, from your financial institution. If you earn less than $50 in interest in the tax year, you may not receive a tax slip, but you are still required to report the income.
Similar to a term deposit, interest from a GIC builds up over a period of time. Often, you do not receive interest payments until your investment term is up or you cash in your investment. With most GICs, the interest compounds monthly and is reinvested automatically until your GIC matures.
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When You Do Not Report Interest
When you have a GIC, you have the choice of holding it in a non-registered account or a registered account. With a non-registered account, the interest income you earn is fully taxable. For example, if you have a GIC for $1,000 at 2 percent interest and earn $20 in interest in the tax year, you must pay taxes on the full $20.
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.
To minimize your taxes payable, consider holding interest income in registered accounts. That way, interest income from a GIC is tax-sheltered from the government. By holding your GIC in a non-registered account, you subject it to your marginal tax rate. Consider holding stock, mutual funds and investments that pay dividends in non-registered accounts; these investments are taxed more favourably by the Canada Revenue Agency (CRA).
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