GICs versus stocks in a non-registered account
If you purchase guaranteed investment certificates (GICs), Joe, you will avoid capital gains tax upon your death. However, you might find yourself paying more taxes overall. GICs don’t increase in value the way in which a stock can increase in value over time, so there is no such thing as a capital gain taxable upon your death.
However, GICs are less tax efficient on an annual basis in comparison with other investments. GICs are taxed annually based on the interest income earned, while capital gains are only 50% taxable – and only whenever you sell the investments. Dividends from Canadian stocks also profit from a lower tax rate if the investments are held in a non-registered account.
GICs are inclined to have lower annual returns than stocks over the long run. For example, your GICs could generate an annual return of three% over the long run, with taxes payable annually on that income. By comparison, your stocks could return 6% over the long run, with 2% taxable annually from dividends and 4% taxable in the longer term from deferred capital gains.
You’ll probably be higher off earning a tax-efficient, somewhat tax-deferred return of 6% than a tax-inefficient return of three% that is taxed annually, Joe, regardless that there will likely be more taxes to pay whenever you die. The tax efficient approach means you might be more likely to have a better estate value and a better after-tax value.
Beneficiary designations
You can name a beneficiary for registered accounts, including RRSPs, RRIFs, and TFSAs. If you permit these accounts to a spouse, you may name them because the successor beneficiary to your RRIF or successor owner to 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 could possibly be purchasing a guaranteed interest annuity (GIA). You can name a beneficiary of a GIA since it is an insurance product.
Naming a beneficiary doesn’t change the tax implications of death. GIC or GIA interest is taxable annually, and there is no such thing as a capital gains tax upon death (as these investments don’t appreciate in value).
By naming a beneficiary, probate can at best be avoided.
