Compound or not compound? | GIC discussions | Discussion forum

There will be no compounding with a GIC when one choses to have the interest paid out annually, semi-annually, quarterly, or monthly.

When one choses not to have the interest paid out until maturity, then the interest is usually credited and compounded annually. As SavingsIsGood mentions, Hubert's one-year term is an exception to this.

SavingIsGood said
Do not look at that stupid site and do not believe everything they say.

Hubert 1year GIC is redeemable every 3 months and it IS compound every 3 months.  

Agreed with foolishly relying on third-party websites.

(I realize a bit of irony as I post this on this independent personal finance message board. )

Some GIC issuers do compound the interest but report it annually to CRA via the TFSA, which I prefer. In such cases, the interest is "paid" to the GIC "account" or term on a set date annually but the GIC doesn't actually "pay out" or mature until its maturity date. So the wording can sometimes be confusing. Other issuers don't report compounded interest until maturity, leaving you with a "lumpy" interest earning and taxation schedule or to try and calculate & report the internest manually without a T5 slip and hope the CRA doesn't do an automated adjustment when there's a mismatch from your GIC maturity T5 and what you've reported (because you've already paid it ahead of time). For these reasons, I prefer compounded interest GICs but ones that get reported annually. 🙂

Cheers,
Doug

Top It Up said
From Motive's website

Motive GIC

• It's your choice whether to have your interest paid annually to your Motive Savings Account or have it compounded and paid at maturity.

(though it doesn't state it I'm pretty sure their products reflect Oaken's with respect to annual compound or annual pay)  

From my recollection, that option is only available on NON-registered GIC's. TFSA and RSP GIC interest is compounded and paid at maturity. Thought that was kind of weird. RSP and TF GICs are the ones that I would need to draw on. May want to double check that. I got my info from a CSR over the phone.

re: Hubert one year GIC. It doesn't matter when you buy it. Your quarter begins with purchase date. You are paid at the end of each quarter from there on in and it goes into the GIC.

I believe most FIs pay interest annually, but can't confirm. Whether it is paid into the GIC or paid out to you is usually your choice.

Some years back, CRA only required that interest be reported for tax purposes every 3 years, which gave people some flexibility in arranging their affairs, but it is my understanding that this was changed to annually several years ago and has not been changed again. Perhaps someone else can confirm.

I couldn't advise trying to fiddle with this. Best for most people to take the interest annually and pay the tax on it - especially in ia rising interest environment, as you can deposit it in another GIC, hopefully with as good or better rate.

Accrued interest in a compound GIC needs to be declared annually on tax returns whether paid or not in taxable accounts. Some institutions will provide T5s that do the work for you, while in other cases, you must figure it out yourself. I think it is much better when buying multi-year GICs in taxable accounts to just buy the ones that pay out interest on each annual anniversary and that is the reportable number for CRA. The KISS principle.

From my experience the folks at CRA and their computer just want a match between your T5s and the amount on your return, despite the wording of the Income Tax Act re reporting unpaid accrued interest. Start reporting interest amounts that differ from your T5s totals and their computer is more likely to spit you out to see what's going on. And then you have to try to explain to a CRA agent how you calculated your interest income and why it's not the same as the issued T5s - good luck! But maybe someone else has a different experience.

kevhaw said
Hi, I am new to the forum and have a question.

I am interested in opening up a TFSA account with my credit union. I tried to do this online and via an escalator 3 year GIC, with an average yield of 3%. However, I had to choose between "Renew in same term" or "renew in new term".

Can anyone tell me what the difference is? I want to keep the money in for the full 3 years as in year 3, you get the 4% rate.

Thanks for any help provided!  

They are probably asking what instructions you want to provide now regarding automatically renewing the Escalator GIC at maturity after the three year term ends. Do you want to renew into another 3 year escalator GIC or into a different term? My suggestion is to advise them not to renew automatically and you will advise them before the maturity date if you want to redeem or renew, and, if renew, for what term, based on interest rates then.

I assume you are referring to Meridian's 3 year Escalator GIC paying 2%, 3% and then 4% p.a, for an average of 3% if held for 3 years. If you want a 3 year term, higher GIC rates than 3% are available for 1 or 2 or 3 years, if you really don't want the option to redeem early. As you probably know, Meridian's 1 year rate is 3.25% p.a. As rates are continuing their upward trend, do you really want or need a 3 year term now?

Loonie said
I agree with GR.
In addition, if you really want a 3 year Escalator, WealthOne Bank has one that averages 3.3% https://www.wealthonebankofcanada.com/Personal/Rates/EscalatorGIC/  

Thanks GR and Loonie! Well, Meridian has a "gotcha" clause. Before you can get their high rate promotional GIC's, you have to use "new money."

Most of my money is in a now poorly performing balanced mutual fund and I was thinking of slowly transitioning into GIC's. As I deposit my pay with Meridian, then transfer PACs into the mutual fund, it's debatable if I transfer money back into Meridian, if it is truly "new money" for the simple reason the money traveled in a circle!

I agree it's not wise to put too much money into a GIC as the rates are rising. I was thinking of something along the lines of $500 per month into 3 year GICs. This way I "dollar cost average" in and can get any rate increases as they come along.

Just an idea. My mutual fund earned me 7.5% last year. But, this fiscal year's profits are now gone after yesterday's market blood bath 🙂

Truth be told, I've now lost a little of the profit I made last year 🙁

Loonie said
I am not a stock market investor, but the worst time to sell is normally when your investments are doing badly and you get spooked. That is, by far, the most common reason that people lose money in the market. So, be careful. On the other hand, we're due for a "correction", as they euphemistically call it.

Talk to your Meridian branch manager and see if they will let you in on the GIC deal. It never hurts to ask. Only a manager can make this decision.

It sounds like what you really need is an overall plan for your money. I'm not qualified to offer that, but neither are most people who give advice - especiall, but not limited to, free advice!

But I can say that it's not good to be adjusting your plan responsively. You need to have a plan in place so that you know what to do in such circumstances without agonizing all over again about it.

In any event, I think that, for most people, it makes sense to have at least some of their money in GICs.

You might want to look at laddering them - Meridian website has an explanation of this. Whie we are in a rising rate environment, there is no guarantee what will happen next. Remember how long we waited for them to start going up? - much longer than pretty well anyone expected. The rates over the various terms are relatively flat right now (not a lot of difference between one and five year rates), which suggests that they may not rise as much as we'd like. Wait to see what happens with the Bank of Canada rate later this month - Oct 24. It seems likely the bank rate will go up. This may bring some better rates for you, but Meridian is ahead of the pack on their one year rate and you likely won't do any better soon if that's what you want.  

Hi, yes my overall plan is not set. I just started investing about 18 months ago and just went the balanced mutual fund route, as it covered all the bases. Bonds, equities, ect.

Yes, I won't make the mistake of selling out. I will sit tight and transition part of my money into safer GICs. I will follow your advice and wait to see what happens on October 24th.

Thanks!