By Aditya Nain on August 9, 2024
Estimated reading time: 4 minutes

Registered or non-registered GICs: Which should you buy?

By Aditya Nain on August 9, 2024
Estimated reading time: 4 minutes

GICs offer investors safety and flexibility. Here’s what to consider when deciding whether to hold your GICs in registered or non-registered accounts.

A young man sits on a sofa and buys GICs on his laptop

Image by marymarkevich on Freepik

GICs have made a big comeback. The current higher-than-usual interest rates on guaranteed investment certificates have been one of the few bright spots in personal finance news. GICs may be a good place to set aside your money while you save towards a financial goal. Not only are they safe and secure, but you can select from a menu of different terms, interest rates and types—including registered and non-registered GICs, depending on where you plan to hold your investment.

Generally, the longer the GIC term, the higher the interest rate. You can also choose from redeemable and non-redeemable options. Redeemable GICs are more flexible—you can cash them in anytime without penalty—but they tend to pay lower interest rates. (Learn more about how GICs work.)

Registered vs non-registered GICs: Which should you choose?

You can hold GICs in a registered or non-registered account, and you’ll need to indicate which one when you purchase the investment.

Registered accounts offer the benefit of tax sheltering, meaning that you won’t pay tax on your earnings until you withdraw them from your account—and in the case of a tax-free savings account (TFSA), you never have to pay tax.

Other registered account options include a registered retirement savings plan (RRSP), registered education savings plan (RESP), the first home savings account (FHSA) and more. You can use existing registered savings or make a new contribution.

In an RRSP, once the account is converted into a registered retirement income fund (RRIF), the withdrawals are taxed at your marginal tax rate. However, if you withdraw the money from an RRSP before it has been converted into a RRIF, this will attract withholding taxes of 10% to 30%, depending on the amount withdrawn. In an RESP, the interest accumulates tax-deferred, and withdrawals are taxed in the hands of the RESP beneficiary.

If you hold a GIC in a non-registered account, your interest income will be taxed at your marginal income tax rate in the tax year in which you earned it. (See Canada’s current tax brackets.) In the case of multi-year GICs, you may owe tax in the year the interest accrued to you, even if it was automatically reinvested. GIC interest must be accrued and taxed annually.

Why invest in GICs?

GICs are one of the safest investments available in Canada. Your principal is guaranteed, plus GICs are eligible for coverage from the Canada Deposit Insurance Corporation (CDIC) up to $100,000 (in the unlikely event that a financial institution fails).

GICs could be suitable for your investment portfolio if:

You’re saving towards a short-term or medium-term goal.
You want to grow your savings without risking losses.
You want to generate guaranteed interest from your investment.
You want to allocate part of your portfolio to fixed-income assets.

GICs also offer significant flexibility, with terms from 30 days to 10 years. Typically, investors opt for terms of one to five years, but you may find other options to fit your needs.

If you want regular income from your GICs, you can choose from multiple payout options, including monthly, semi-annual and annual. On the other hand, if you want to maximize your investment return, you can benefit from compound interest by automatically reinvesting your earnings. In this case, the interest would be paid with your principal at the end of the term.

MCAN Wealth 1-year non-registered GIC

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Interest rate: 4.05%
Minimum amount: $1,000
Eligible for CDIC coverage: Yes

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GICs and asset allocation

If part of your investment portfolio is allocated to fixed income, consider whether adding GICs is right for you.

While often overlooked by investors, fixed income investments like GICs or bonds can add a safety cushion to your portfolio when the stock market falls. Also, they could generate regular investment income. Unlike bonds, which lost money in 2022, GICs do not fluctuate in value.

The percentage of your portfolio allocated to fixed income will depend on your stage of life, risk appetite, level of debt and other personal considerations. But as a general rule, the closer you are to retirement, the more fixed income you may want to hold. So, while a 30-year-old may allocate just a small percentage of their portfolio to bonds or GICs, a 65-year-old may opt for much more. If you need advice on asset allocation, it’s a good idea to consult a financial advisor.

How to start investing in GICs

If you’re ready to get started, you can invest in a GIC in-person at your bank or another financial institution.

Find a qualified advisor near you USE TOOL

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About Aditya Nain

Aditya Nain is an author, speaker and educator who writes about Canadian investments, personal finance and crypto. He has co-authored two books and taught at universities for 12 years.

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