# How does taxation on laddered GICs work?



## carverman (Nov 8, 2010)

This year, I decided to invest my life's savings (sitting in a low interest bearing savings account, (not my TFSA), which is limited to (current) contributions of $5500 per year, 
unless of course, 
I withdraw some money from it which then can be included in the contributions for the next year.

My understanding is: that on a 1, 2, 3, 4, 5 year (laddered) GIC as they call it, where the interest rate increases the longer it is locked in to a max of 2.5%, giving me a averaged
return of 1.97% over 5 years, any interest earned in the previous year will have to be reported on the next years income tax filing...even if the GIC has not reached maturity and
still locked in until the date of maturity.

Is this correct?


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## FrugalTrader (Oct 13, 2008)

My understanding is that any interest received (in a non registered account) in 2013 is taxable as income.


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## Spudd (Oct 11, 2011)

Your bank should issue you a T5 for the interest accrued (assuming it is >$50). 

https://www.cibc.com/ca/gic/article-tools/you-your-gic-and-your-t5.html


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## stardancer (Apr 26, 2009)

All interest from a GIC, whether received or not, whether from a laddered approach or one of the 'step' gics, must be reported on an accrual basis. It's up to the institution to figure this out and issue a T5; use whatever figures are on the T5.


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## carverman (Nov 8, 2010)

rikk said:


> Out of curiosity, are you describing one of those "rate builder" term deposits? Or a laddered GIC approach ... e.g., taking say $10K and put $2K of it into 1, 2, 3, 4, and 5 year GICs such that at the end of year 1, the 1 year is put into a 5 year, and so on, ending up with 5 year GICs for maximum rates?


Yes. I think that's the way it works with PCF "must have" GICs. I took $50k and put it into GICs set up as $6K and $4k x 5 ($10k per year), in January of 2014.

The first GIC pays interest at (see below) which is compounded since the GIC is locked in.

However PCF GICs earn compounded interest..so the effective rate is:
$10,000 x 5 = $50,000 (invested in a ladder GIC so that $10,000 matures each year
and is available for use and return back to my savings accts.
1yr GIC Simple ----------------- Compound (effective annual interest rate)
1.342 ---------------------- 1.35

2yr Simple ----------------- Compound (effective annual interest rate)
1.737 --------------------------1.75

3yr Simple -------------------- Compound (effective annual interest rate)
1.982 ---------------------------- 2.00

4yr Simple --------------------- Compound (effective annual interest rate)
2.228 --------------------------- 2.25

5yr Simple -------------------- Compound (effective annual interest rate)
2.472 ------------------------- 2.50

Since January 20th, 2014 is the date that I set up these 1->5 year GIC, I should not be seeing any T5s until Feb, 2015. 
Only the first one (1 yr) will be maturing on Jan 20, 2015..the rest will be locked in until each following year.
So my question was: Will I have to report (or the bank will) iinterest earned on the others each year, even if the interest is locked in with the principle? 
Doesn't seem fair, as I won't have access to the interest the others earn until they mature and I will have to add that to my taxable income.


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## carverman (Nov 8, 2010)

stardancer said:


> All interest from a GIC, whether received or not, whether from a laddered approach or one of the 'step' gics, must be reported on an accrual basis. It's up to the institution to figure this out and issue a T5; use whatever figures are on the T5.


Ok, thanks. That how I thought it was setup with CRA. 

The only drawback is that I have to add this unredeemed interest to my gross income for each year that the bank issues the T5, even if I don't have
the interest in hand...bit of a bummer. Moral of this story..CIBC wins..I lose out until the final one is redeemed.


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## rikk (May 28, 2012)

carverman said:


> ... so that $10,000 matures each year and is available for use and return back to my savings accts ...


 Just to say, the idea behind laddering is to purchase a 5 yr GIC each year (or 3 yr, or whatever ... I'm considering a 3 yr ladder for myself) using the one that is maturing so as to eventually hold only 5 yr GICs (or 3 yr, or whatever) to maximize interest (provided rates are rising but also can protect somewhat against falling rates) with one maturing each year. As others have stated, interest earned during a year is to be reported ... PCF will, unfortunately, help you with that ... T5


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## fatcat (Nov 11, 2009)

stardancer said:


> All interest from a GIC, whether received or not, whether from a laddered approach or one of the 'step' gics, must be reported on an accrual basis. It's up to the institution to figure this out and issue a T5; use whatever figures are on the T5.


+1


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## AltaRed (Jun 8, 2009)

carverman said:


> The only drawback is that I have to add this unredeemed interest to my gross income for each year that the bank issues the T5, even if I don't have
> the interest in hand...bit of a bummer. Moral of this story..CIBC wins..I lose out until the final one is redeemed.


There is no winner or loser here. It is your choice when buying a multi-year GIC whether to buy an Annual GIC (interest paid annually) or a Compound GIC (interest paid at maturity). Generally the interest rates are the same whether you buy a 3 yr Annual or a 3 yr Compound. As a matter of principle, I never buy Compound GICs in taxable accounts, only in tax deferred accounts such as TFSAs and RRSPs.


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## warp (Sep 4, 2010)

The real question may be why you would want buy this laddered GIC to average 1.97% over 5 years.

You will most probably be better off to leave your money in a HISA.
There are plenty of places where you will get 1.8%, and your money can be accessed any time you want.

Better yet, add a bit of dividend paying stocks to increase yield, and perhaps even put a small portion into a high yielding junk bond ETF, for the same reason.

Personally I would recommend that you not invest your money into any 5 year product like the one you describe...you will more than likely end up behind, when you factor in taxes and inflation.

Again, just my 2 cents worth


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## carverman (Nov 8, 2010)

fatcat said:


> +1


So the fatcat bankers make money off your measily GIC that you have to wait 1->5 years to realize any growth, and you pay taxes on interest money that you haven't received yet out of your own pocket.
Winners .. banks, CRA...Losers: seniors that are trying to keep above inflation.


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## carverman (Nov 8, 2010)

warp said:


> The real question may be why you would want buy this laddered GIC to average 1.97% over 5 years.
> 
> You will most probably be better off to leave your money in a HISA.
> There are plenty of places where you will get 1.8%, and your money can be accessed any time you want.
> ...


Good advice now..but unfortunately I'm already committed. 
I didn't want the $50k rotting in savings accounts that currently pay less than 1% interest but I wanted a 100% safe "investment"..if you want to call these GICs that. 

I don't need the entire $50k this year, so with $10K of my principle being returned back to me each year for the next 5 years (I'm 68 and by the time the
last one matures in 2019)..I'll be 5 years older...no time left to recover from any losses that may occur in other investment vehicles..(No RRSP), so I decided to lock in my funds for
up to 5 years, (in a way I'm betting with the bank that I will still be around in 5 years to collect the last GIC) and that way I have $10k a year + interest to look after my personal needs.

You can't really win with these bank offerings...but just try to keep up with the rate of inflation. I won't be re-investing after each one matures though.


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## AltaRed (Jun 8, 2009)

While you are saying you won't be re-investing after each GIC matures, you are likely to have spare cash sitting around. You may want to investigate the pros and cons of going to one of the online banks next year with any surplus funds left over after the first GIC matures. http://www.highinterestsavings.ca/ provides a good summary of the various alternatives for HISA accounts.


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## carverman (Nov 8, 2010)

AltaRed said:


> While you are saying you won't be re-investing after each GIC matures, you are likely to have spare cash sitting around. You may want to investigate the pros and cons of going to one of the online banks next year with any surplus funds left over after the first GIC matures. http://www.highinterestsavings.ca/ provides a good summary of the various alternatives for HISA accounts.


 Thanks. I've saved the link. I won't be as naive the next time around. I'll look for a GIC that will allow me to access the money (if need be) without locking it up.


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## Eclectic12 (Oct 20, 2010)

carverman said:


> So the fatcat bankers make money off ...
> Winners .. banks, CRA...Losers: seniors that are trying to keep above inflation.


No ... the institution including the Gov't of Canada offers the investment and the investor decides if it's worth it. Canada Savings Bonds operate the same way (or bonds in general).

The winner is CRA who gets the tax revenue and if the investor doesn't realise there's tax due, it's one year's worth instead of the full duration.


Cheers

*PS*

It's the tax laws that are determining this, not the offering institution. 

Or would you argue that Bell, Enbridge or Rogers are "being philanthropic" because the tax laws dictate the share price capital gains are not due until sold? Or that eligible dividends benefit from the dividend tax credit?


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## fatcat (Nov 11, 2009)

carverman said:


> So the fatcat bankers make money off your measily GIC that you have to wait 1->5 years to realize any growth, and you pay taxes on interest money that you haven't received yet out of your own pocket.
> Winners .. banks, CRA...Losers: seniors that are trying to keep above inflation.


don't be silly carverman, the banks always win that's why, when you buy a GIC, you always buy bank stock to go along with it :love-struck:


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