Understanding the real rate of return of a GIC

GIC’s (Guaranteed Investment Certificates) offers investors attractive features, such as a guarantee on your original investment along with a fixed interest rate. Although a highly stable investment choice, the interest a GIC pays is not the net income you might receive. There are factors that will lessen that payment, namely taxes and inflation.

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GIC's pay interest income, which is the highest taxable form of investment income, compared to dividends and capital gains. It’s fully taxable at an investor’s marginal tax rate.

A less tangible impact to investment income is inflation. It erodes the value of your money over time; a year from now, $1 will not be able to purchase as much as it would today.

When you deduct taxes and inflation, the net income generated by a GIC can look very different, here is an example:

GIC interest rate: 2.5%
Marginal tax rate: 40%
Inflation rate: 2.51%*

The expected rate of return versus the real rate of return can end up being vastly different. Once taxes and inflation are taken into consideration, what was originally a guaranteed positive income stream has now become negative.

*Source:  Bank of Canada, as of February 28, 2022

Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Past performance does not guarantee future results. Seek advice on your specific circumstances from an IG Wealth Management Consultant. Insurance products and services distributed through I.G. Insurance Services Inc. (in Québec, a Financial Services Firm). Insurance license sponsored by The Canada Life Assurance Company (outside of Québec). Trademarks, including IG Wealth Management and IG Private Wealth Management, are owned by IGM Financial Inc. and licensed to subsidiary corporations.

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