TFSA GICs: Why and How to Use Them

Guaranteed investment certificates (GICs) can be a good fit for people who are saving for short-term goals or are reluctant to invest in stocks — especially, in an unpredictable stock market or in a rising interest rate environment, as we saw in 2023.

However, the interest earned on GICs can be heavily taxed depending on the type of account they’re held in. To avoid paying taxes on any gains, consider holding your GICs in a tax-free savings account (TFSA).

How TFSAs and GICs work

A TFSA is a government-registered account that allows you to invest the money you save in it without having to pay taxes on any gains. Any Canadian resident who is over the age of 18 and has a Social Insurance Number (SIN) is eligible to open a TFSA.

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, earnings are subject to both federal income tax and provincial taxes.

GIC vs. TFSA

The main difference between a TFSA and a GIC is that a GIC is a type of fixed-rate investment and a TFSA is an account that can hold various types of investments. Other dissimilarities include:

GIC	TFSA
Flexibility
Less flexible. A penalty may be charged for early withdrawals from your non-redeemable GIC.	More flexible. You can withdraw funds from your TFSA at any time, provided it’s held in cash. Note that you will get that contribution room back the following year.
Tax on earnings
You will have to pay tax on any interest earned on GICs, unless your investments are held in a registered account like a TFSA, RRSP, RESP or RIFF.	Generally, you do not pay tax on any interest earned on your TFSA.
Contribution limit
No contribution limit for non-registered GICs.	Limit applies. The set annual contribution limit for 2024 is $7,000 — that is added to any unused contributions since 2009. Your total contribution room is $95,000.

Why invest in a TFSA GIC?

A GIC can be held in both registered and non-registered accounts, but only by holding your GIC in a registered account, like a TFSA, can you avoid paying taxes on the interest it earns. A few key reasons Canadians may consider holding a GIC in a TFSA, include:

Tax-free growth. For those who are in a higher tax bracket, buying a TFSA GIC is one way to maximize their investment as it earns guaranteed returns and offers tax sheltering — even when the funds are eventually withdrawn. For early withdrawals, however, standard GIC rules may apply.
Low-risk investment. For risk-averse investors, a TFSA GIC can be a favourable tax-advantage investment as it guarantees their principal investment and often earns a predictably fixed rate of return. Plus, GICs and TFSAs held at Canada Deposit Insurance Corporation (CDIC) member banks offer insurance up to $100,000.
Suitability for various investment goals. For investors who want to take advantage of their TFSA contribution room to manage savings goals at different times, TFSA term deposits can be a suitable investment option. Terms ranging from a few days to several years offer flexibility to accommodate a variety of personal goals. Withdrawals made at maturity can be used for near-term large expenses, such as a vacation or reinvested to build future retirement savings.
Diversifying the portfolio. Anyone who is eligible to invest in a TFSA, holds other market-linked investments, and wishes to expand their portfolio by investing in a low-risk option can consider a TFSA GIC. As we discussed, tax benefits, security of your investments, including the returns and choice of term lengths — are some noteworthy benefits to explore through TFSA GICs.

But, before you buy a TFSA GIC, remember that it comes with some drawbacks. GICs held in TFSAs generally have a lower earning potential compared to other investment options. TFSAs come with limitations, such as contribution limits and age restrictions. If you hold a non-redeemable GIC in a TFSA, your money is locked in for the full term — and early withdrawals are subject to penalties.

How to hold a GIC in a TFSA

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

Depending on how comfortable you are with locking away your savings, you can choose a financial institution that offers cashable, redeemable or non-redeemable TFSA GIC options. Cashable and redeemable GICs are more liquid options and typically earn a lower interest rate compared to non-redeemable GICs.

Flexibility with cashable GICs. Cashable GICs have 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.
Flexibility with redeemable GICs. A redeemable GIC has no locked-in period. You can cash out at any time, but you’ll receive the early-redemption interest rate, which will be lower than the rate you’d earn by keeping the GIC for its full term.

Once you’ve picked the GIC of your choice, you’ll make a deposit (which counts toward your annual TFSA contribution limit), choose the term, and then leave your money to mature in your TFSA GIC.

What happens when a TFSA GIC matures?

You must let the lock-in period end or have 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.

It depends on your investment goals. A GIC is an investment that pays a modest, fixed interest rate, while a TFSA is an account that can hold diverse investments. A GIC might pay a higher interest rate than a TFSA, but a TFSA can hold a variety of assets like stocks and bonds, which can appreciate quickly depending on the state of the economy.

Yes, if you’re going to invest in a GIC, doing so through your TFSA will save you from paying tax on the interest earned. Just remember to keep your TFSA contribution limits and GIC requirements in mind so you can get the most out of your investment and avoid paying any penalties.

No, gains from your TFSA are typically not taxed. So, your interest, dividends or capital gains earned within your account and your withdrawals are often tax-free.

About the Authors

Clay Jarvis

Clay Jarvis is NerdWallet’s mortgage and real estate expert in Canada. Thus far, his entire professional writing career has revolved around real estate. Prior to joining NerdWallet, he was the…

Siddhi Bagwe

Siddhi Bagwe is a content management specialist at NerdWallet Canada. Treating content marketing as an educational medium for readers, Siddhi believes in empowering them with the knowledge of personal finance…

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