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Published November 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. They can be particularly attractive when the stock market is trending downward or interest rates are on the rise, as they have been for much of 2022.

But 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 interest earned, consider holding your GICs in a tax-free savings account.

TFSAs vs. GICs

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, or 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, earned interest is subject to both federal income tax and provincial taxes.

How to hold a GIC in a TFSA

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.

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

You’ll make a deposit (which counts toward your annual TFSA contribution limit), 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.

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.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.

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. This can be particularly valuable when interest rates — and GIC returns — are rising.
  • GICs are low-risk investments because your principal is guaranteed.
  • They’re suitable 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 for the full term.

Frequently asked questions about TFSA GICs

Which is better, a TFSA or a GIC?

TFSAs and GICs are very different things. A GIC is an investment that pays a modest, fixed interest rate, while a TFSA is an account that can hold multiple investments. A GIC might pay a higher interest rate than a TFSA, but a TFSA can hold assets like stocks and real estate, which can appreciate quickly depending on the state of the economy.

Are TFSA GICs a good idea?

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

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 editor and senior writer for four publications, including the leading website for the country’s mortgage industry, Mortgage Broker News. Clay has written 30,000-word examinations of Canada’s real estate investment market, interviewed the industry’s most powerful leaders and analysts, and has helped choose both the nation’s top realtors and mortgage brokers. He is based in Toronto, Ontario.

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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