GIC vs TFSA: What You Need To Know

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Written by Baggio Ma


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Canadians are fortunate enough to have a wide selection of tax-advantaged investment methods at their disposal.

The Tax-Free Savings Account (TFSA) is a versatile tool for investors, benefiting those with both short-term and long-term financial goals. Within a TFSA, individuals can hold various investment products, including Guaranteed Investment Certificates (GICs), which offer stability and a guaranteed return, especially during market volatility.

These two financial instruments, the TFSA and GIC, can complement each other and help Canadians build wealth in a low-risk, tax-free way. However, it is essential to understand the distinctions between them.

This article will discuss the pros and cons of each so that you can decide if one or both belong in your diversified investment portfolio.

GIC vs TFSA: Differences

Investment vs. Account

The primary difference between the two is that a GIC is a type of investment product, whereas a TFSA is a registered account that holds investments.

Fixed Returns vs. Capital Gains

A GIC is a fixed-income asset which provides a consistent return via interest payments. A TFSA is an account where your investments can provide capital gains, dividends, and earned interest. Both assets can grow your wealth but in different ways.

Low Risk vs. Self-Directed Investing

GICs are considered low-risk investments because there is no chance of losing money on your investment. A TFSA can be a self-directed investment account where there is potential for higher returns but also the risk of losing money as well.

GIC vs TFSA: Similarities

Both Pay Interest Rate Returns

Like other savings accounts, a TFSA can pay you an interest rate on the cash you hold in the account if you are not utilizing it for other investments. Similarly, GICs pay you interest payments on the principle that you invested.

Both Can be Tax-Free

We know that a TFSA is tax-free, but how can you pay no taxes on the interest that GICs pay? In Canada, you can invest in a GIC within a TFSA. Your principal investment will count towards your TFSA contribution limit, but any interest earned is tax-free.

GICs in Summary

GICs or Guaranteed Investment Certificates are investments that are sold by financial institutions in Canada.

The keyword in their name is ‘guaranteed,’ as this product will provide a guaranteed fixed return over a predetermined period. At the end of that period, you receive back the principal used to buy the GIC initially, as well as whatever interest was earned.

There are several different types of GICs in Canada. The most common type of GIC is the Non-Redeemable GIC, which works as explained above. Here are a few more types of GICs that you can buy in Canada:

Redeemable GICs

Also referred to as cashable GICs, these can be redeemed before the expiry date for some or all of your principals. Of course, once you redeem your GIC, you will not earn any additional interest payments. There can be a penalty for early redemption, depending on the bank. As well, non-redeemable GICs usually have a higher interest rate than redeemable GICs.

Market-Linked GICs

These GICs are, as their name suggests, linked to the equities market. The benefit of these GICs is that you are guaranteed a minimum return with the potential to earn more if the stock market outperforms the interest rate.

Short-Term GICs

Short-term GICs allow you to invest money for between 30 and 364 days. These are helpful when you know you might need the money within the next year.

Long-Term GICs

For periods of anywhere between 1 and 10 years, long-term GICs allow you to lock in a fixed rate of return for a steady income. These can be useful for retirees who want a low-risk way to invest with a consistent distribution.

TFSA Overview

A TFSA or Tax-Free Savings Account is a registered account for Canadians who wish to save or invest without any tax consequences. Any interest, dividends, distributions, or capital gains from Canadian investment assets are 100% tax-free.

As of 2024, the lifetime TFSA contribution limit is $95,000. There is an annual contribution limit each year ($6,500 for 2023 and $7,000 in 2024). TFSAs cannot be shared by spouses, and contributions are not tax-deductible like they are with an RRSP.

In a TFSA, you can hold most investment assets that can be held in a non-registered account. This includes stocks, ETFs, mutual funds, bonds, and the aforementioned GICs.

You can hold American stocks or ETFs in your TFSA, but any dividends earned are subject to a 15% withholding tax. In contrast, any capital gains on American stocks or ETFs are not taxed in a TFSA.

Related: Pros and Cons of TFSAs.

Should I Use GICs in my TFSA?

GICs are a great asset to hold in your TFSA because the interest you earn is tax-free. If you hold GICs in a non-registered account, the interest is taxed at your marginal tax rate. The more income you earn, the higher your marginal tax rate is.

And the higher your marginal tax rate is, the less you get to keep from your GIC interest payments. This is why holding any interest-bearing or dividend-paying asset in a TFSA is a sound and tax-friendly investment strategy.

Pros and Cons of GICs

GICs are low-risk investments that provide a guaranteed return on your investment. The interest payments are guaranteed regardless of how the stock market or economy performs.

They are also easy to manage and can be bought in short-term or long-term durations. For most GICs, there are no fees involved either.

The downside to GICs is that they provide a low level of return compared to the potential of other assets like stocks. GICs are not inflation-adjusted, so you could be earning less than the current optimal interest rates if you lock your investment in.

Pros and Cons of TFSAs

TFSAs are tax-free for capital gains, interest, or dividends from Canadian assets.

These accounts are also flexible, and the funds in your TFSA can be used without any restrictions or fees.

The contribution amount is limited for TFSAs each year, and as of 2023, there is a lifetime maximum of $88,000. Any foreign dividends earned in a TFSA are subject to withholding taxes, so not all investments are tax-free.

GICs vs Mutual Funds

Mutual funds are pools of investor money that invest in a fund of assets like stocks or bonds. These funds are offered by financial institutions like banks or investment management companies.

Typically, mutual funds are actively managed by professional fund managers. In exchange, investors pay an MER or Management Expense Ratio for owning the fund. A high MER can have an impact on total long-term gains.

Canadian investors can own mutual funds in both registered and non-registered accounts.

Related: GICs vs Mutual Funds

Frequently Asked Questions

Is it worth putting money into a GIC?

If a GIC aligns with your personal investment strategy and risk tolerance, then they can be well worth putting your money into. During times of market volatility, GICs can provide a guaranteed return on your money without the stress of an up-and-down stock market.

Are GICs better than savings accounts?

Yes, GICs can provide a much better interest rate of return than your typical savings account. Unless it is a High-Interest Savings account, Canadian savings accounts will usually pay less than 2.0% in interest. GICs in Canada will often offer an interest rate between 3.0% and 6.0%, depending on the institution.

Can you lose money in a GIC?

No, there is no risk of losing money in a regular, non-redeemable GIC. You can be penalized in a redeemable GIC for early redemption. If you hold GICs in a non-registered account, you will also be taxed on the interest you earn at your marginal tax rate. The only other way to ‘lose’ on the value of your money is if inflation suddenly surges while your money is locked into a GIC, or if the bank collapses and your deposit exceeds the maximum insured by the CDIC.

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Editorial Disclaimer: The investing information provided here is for informational purposes only and is not intended as individual investment advice or recommendation to invest in any specific security or investment product. Investors should always conduct their own independent research before making investment decisions or executing investment strategies. Savvy New Canadians does not offer advisory or brokerage services. Note that past investment performance does not guarantee future returns.

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Baggio Ma

Baggio Ma has written extensively on financial topics over the past several years. His work experience in the private, public, and not-for-profit sectors has led to a special interest in personal finance-related topics. Baggio has written for several Canadian finance sites such as PiggyBank and Tech Daily. Baggio holds a Bachelor of Arts degree from the University of British Columbia and a Master of Public Administration Degree from the University of Victoria.

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