GICs versus stocks in a non-registered account
If you buy guaranteed investment certificates (GICs), Joe, you’ll avoid capital gains taxes when you die. But you may pay more tax. GICs don’t grow in value the way stocks can over time, so there’s no taxable capital gain on your death.
However, GICs are less tax efficient on an annual basis compared to other investments. GICs are taxed annually based on the interest earned, while capital gains are only taxed at 50%—and only if you sell the investment. Dividends from Canadian stocks also benefit from a lower tax rate if the investment is held in a non-registered account.
GICs tend to have lower annual returns than stocks over time. For example, your GICs may earn a 3% annual return over time, with tax paid on that income each year. By comparison, your stocks may earn a 6% long-term return, while 2% will be taxed annually from gains and 4% will be taxed in the future from deferred gains.
You’ll probably be better off getting a tax-free, tax-deferred return of 6% than a paltry 3% annual taxable return, Joe, even though more tax will be paid on your death. A tax-efficient approach means you will likely have a larger estate value and a larger after-tax estate value.
Beneficiary positions
You can name the beneficiaries of registered accounts, including RRSPs, RRIFs and TFSAs. If you leave these accounts to your spouse, you can name them as the beneficiary of your RRIF or successor trustee of your TFSA. This allows them to take over the account directly.
You cannot claim a GIC beneficiary in an unregistered account. An exception may be if you buy a guaranteed interest annuity (GIA). You can name the beneficiary of GIA, because it is considered an insurance product.
The designation of a beneficiary does not change the tax implications of the death. GIC or GIA interest is taxed annually, with no capital gains tax on death (because these investments do not appreciate).
Generally, beneficiary designation can avoid probate.
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