The point? If a GIC investor is looking to lock in a good long-term interest rate, they may want to consider some bond exposure as well to diversify. If rates do in fact fall, bonds could do very well.

Regardless, for a conservative investor, earning a return in the 6% range from a GIC is pretty enticing.

Tax paid on GIC returns in 2024

If you’re buying a GIC or bond in a tax-sheltered account, the tax implications do not matter. Interest income in a registered retirement savings plan (RRSP) or tax-free savings account (TFSA) is tax-free, although RRSP withdrawals are eventually taxable.

If you are considering a GIC in a taxable account like a personal non-registered account or a corporate investment account, tax is a factor.

If an Ontario investor with $100,000 of income earns a dollar of interest income, they pay a marginal tax rate on that dollar of about 31%. So, buying a 6% GIC leaves only about 4.1% after tax.

If that same investor bought Canadian stocks and earned a 6% return with 2% from dividends and 4% from capital gains, selling after a year, the tax would be less. The tax rate on the dividend income would be about 9% and on the capital gain would be about 16%. The after-tax return would be about 5.2%, over 1% higher than the GIC investor earning the same 6%.

Depending on the dollar value of the GIC or stock, the income could push the investor into a higher tax bracket than the marginal rates referenced above, but the outcome would be similar, with stocks being more tax efficient. The tax savings for stocks over GICs would also apply in other provinces.

As a result, a stock investor could earn a lower rate of return than a GIC investor in a taxable account and still keep more of their after-tax return. Stocks generally return more than GICs or bonds over the long run, despite the year to year volatility. This is an important consideration for a GIC investor when tax is considered. After all, it is your after-tax return that really matters.

Jason Heath, CFP

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