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

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