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Published April 4, 2022

How to Hold a GIC in a TFSA

Holding a guaranteed investment certificate in a tax-free savings account is a way to avoid paying taxes on earned interest.

Guaranteed investment certificates, or GICs,  are an investment product that can be a good fit for people who are saving for short-term goals or are reluctant to invest in stocks. The interest earned on GICs can be heavily taxed depending on the type of account that holds it. To avoid paying taxes on any interest earned, consider holding your GICs in a tax-free savings account, or TFSA, instead.

» MORE: When is a GIC investment worth your money?

TFSAs vs. GICs

A TFSA is a government-registered account that allows you to save money without paying taxes on any earned interest. Any Canadian resident who is over the age of 18 and has a social insurance number, orSIN, is eligible to open a TFSA.

There are no rules regarding when you can withdraw your money from a TFSA, although you do need to be mindful of annual contribution limits.

A GIC is a type of investment. GICs are considered to be very safe because your money is guaranteed. With a GIC, you deposit funds for a set amount of time (the term) and earn interest for keeping the money locked in. Once the term is up, you regain access to your original investment plus any interest earned. With a typical GIC, earned interest is subject to both federal income tax and provincial taxes.

If you break your GIC contract by withdrawing the fund before the term is up, you’ll pay penalties. GICs can be held in both registered and non-registered accounts.

» MORE: Registered vs. non-registered GICs

How to hold a GIC in a TFSA

One way to avoid paying taxes on interest earned by a GIC is to hold it in a TFSA.

You can purchase a TFSA GIC at any financial institutions that offers these products, including traditional banks, credit unions, and online-only banks.

You’ll make a deposit (making sure it doesn’t put you over your TFSA contribution limits), choose the term, and then leave your money to mature. Since a TFSA is a registered account, it benefits from tax sheltering so you do not need to pay taxes on the interest you earn, even when you eventually withdraw it.

Typical GIC rules apply, which means that you must let the GIC mature to get the full payout. If you withdraw your money early, you may be penalized. However, since there are no rules about when and how you can withdraw money from your TFSA, you can withdraw money from a mature GIC and spend it as you please, or reinvest it in a new TFSA GIC.

» See our picks: Canada’s Best High-Interest TFSAs

At many financial institutions, your TFSA GIC options include cashable, redeemable, or non-redeemable GICs. Cashable and redeemable GICs are more liquid options.

  • A cashable GIC has a short 30- to 90-day locked-in period during which you can’t access your funds, but after it ends, you can withdraw the money anytime and still earn full interest for the time you held the GIC.
  • A redeemable GIC has no locked-in period, so you can cash out at any time but you’ll receive a lower early-redemption interest rate rather than the rate you would have earned by keeping your GIC for its full term.
  • A non-redeemable GIC locks your money in for the full term but rewards you with a higher interest rate.

» MORE: What is a market-linked GIC?

Pros and cons of a TFSA GIC

A TFSA GIC is one way to maximize your investment. However, there are pros and cons to be aware of before stashing your money in a GIC.

Pros

  • TFSAs are tax-free. You won’t pay tax on any interest earned on your GIC in a TFSA.
  • GICs are low-risk investments because your principal is guaranteed.
  • Good for long- or short-term investments.
  • Funds can be withdrawn or reinvested as soon as the GIC matures.

Cons

  • Lower earning potential compared to other investment options.
  • TFSAs come with contribution limits and age restrictions.
  • If you choose a non-redeemable GIC, your money is locked in.

About the Author

Hannah Logan
Hannah Logan

Hannah Logan is a writer and blogger who specializes in personal finance and travel. You can follow her personal travel blog EatSleepBreatheTravel.com or find her on Instagram @hannahlogan21.

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