Taxation in GICs
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Taxation in GICs
The Canada Revenue Agency does not treat every investment in the same way. It is, therefore, necessary to understand the tax system on the GIC before putting in your money. This can also help you to make a comparison on the net returns you will obtain after the tax has been removed.
GICs Taxation System
Every interest earned through GIC is taxed at a marginal rate; this has to do with your tax bracket on your annual income before tax is removed. The tax can be paid to either the state or federal government; you can check up the provincial and the national rates on the CRA’s website.
The income earned from the GICs interest is distinguished from the capital gains income and dividend income, and hence it is handled just like regular income, thus greater charges are involved. GICs opened on a registered investment accounts like TFSA or RRSP are tax-free.
Taxation of multi-year GICs
Tax can be charged on the benefits you have earned but not received in GIC. This is true for GICs that spans more than a year but reinvested automatically. In such cases, the provider would have to pay the tax at the end of the year even though he has not received the money.
This is because CRA considers the interest to have been acquired by the owner as soon as it is accrued and not actually when it has been paid physically. Market-linked GICs are different here. In this case, the GIC returns are not taxed until the exact return can be determined, which can only be done when they mature.
However, GICs with minimum interest rates require the holder to pay tax and report on the minimum guaranteed interest annually. Paying tax on money not received can be extremely burdensome and may be difficult for some people.
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