GICs versus stocks in a non-registered account
If you buy guaranteed investment certificates (GICs), Joe, you will avoid capital gains tax on your death. But you may pay more overall tax. GICs don’t grow in value the way a stock can appreciate over time, so there’s no capital gain taxable 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 income earned, whereas capital gains are only 50% taxable—and only when you sell the investments. Dividends from Canadian stocks also benefit from a lower tax rate if the investments are held in a non-registered account.
GICs tend to have lower annualized returns than stocks over the long run. For example, your GICs might earn a 3% annualized return over the long run, with tax payable on that income annually. By comparison, your stocks might earn a 6% long-term return, with 2% taxable annually from dividends and 4% taxable in the future from deferred capital gains.
You will probably be better off earning a tax-efficient, somewhat tax-deferred 6% return than a tax-inefficient 3% return taxed annually, Joe, even though more tax will be payable on your death. The tax-efficient approach means you will likely have a larger estate value and a larger after-tax estate value.
Beneficiary designations
You can name a beneficiary for registered accounts, including RRSPs, RRIFs and TFSAs. If you are leaving these accounts to a spouse, you can name them as successor annuitant for your RRIF or successor holder for your TFSA. This allows them to take over the account directly.
You cannot name a beneficiary for a GIC in a non-registered account. An exception might be if you buy a guaranteed interest annuity (GIA). You can name a beneficiary of a GIA, because it’s considered an insurance product.
A beneficiary designation does not change the tax implications of dying. GIC or GIA interest is taxable annually, with no capital gains tax on death (because these investments do not appreciate in value).
At most, a beneficiary designation can avoid probate.
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