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Motus GIC's - Not paid out monthly?
August 1, 2019
7:05 am
MapleOne
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I've owned a number of GIC's and in all cases I see the interest deposited into my accounts monthly.

I have the following GIC's at Motus

TSFA GIC
RRSP GIC
Savings GIC

I have interest paid in my other accounts but the GIC accounts did not have interest paid on them so I assume I will get a lump sum on majurity.

I guess it's a the same in the end but I always prefer to see the monthly deposits. I'm not sure I agree with how Motus is doing it here and it may cost them some business in the end.

August 1, 2019
7:14 am
Doug
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As far as I'm aware, MapleOne, that seems right as I recall not seeing a monthly, semi-annual, or other payment frequency on Motus Bank GICs, but you could always ask them and see. Usually, there's a 0.25-0.50% reduction for monthly paid interest, owing, in part, to the compounding benefit of the paid interest each month.

I suspect what Motus will compound the interest annually, by crediting the interest "paid" amount to the GIC "account" each year. At maturity, the principal plus interest will be paid to the account specified on the applicable GIC, unless it's in a registered account, they may call you if you don't have a registered savings account open to see what you want to do.

Personally, I prefer compounded interest, so long as the interest compounded amount is added annually to the GIC via a credit line, so the interest is reported annually on my T5. I don't like it when interest accumulates annually but is only shown as one lump sum interest payment at maturity.

Cheers,
Doug

August 1, 2019
11:10 pm
Loonie
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I too have had quite a number of GICs over the years, with many FIs, large and small, online and bricks, banks and CUs, various provinces.

I've NEVER had the interest paid monthly. I've never asked for it to be paid that way. It is always paid or compounded annually. I have always asked for compounding.
My experience is that the default position is normally annual compounding but they usually ask if you want annual pay instead. I've never been asked if I wanted monthly pay.

I believe current legislation requires them to send you an annual T5, whether interest is compounded or not.

August 2, 2019
6:07 am
davidgeorge
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MapleOne said
I've owned a number of GIC's and in all cases I see the interest deposited into my accounts monthly.  

Can you let us know which FIs pay GIC interests monthly? Thanks.

August 2, 2019
8:31 am
Doug
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Loonie said
I too have had quite a number of GICs over the years, with many FIs, large and small, online and bricks, banks and CUs, various provinces.

I've NEVER had the interest paid monthly. I've never asked for it to be paid that way. It is always paid or compounded annually. I have always asked for compounding.
My experience is that the default position is normally annual compounding but they usually ask if you want annual pay instead. I've never been asked if I wanted monthly pay.

I believe current legislation requires them to send you an annual T5, whether interest is compounded or not.  

Thanks, Loonie. Agree with you on all of that. I'm not sure whether legislation or regulations require them to send an annual T5 if interest is compounded or not, but that would make sense why they create a GIC "account" and show an annual credit to your GIC "account" so they can easily report that portion of the GIC term interest that is compounded annually. I find the Income Tax Act very daunting, but perhaps if he is so inclined, Norman can fill us in whether there's a statutory requirement for annual reporting of compounded interest (for both provincially- and federally-regulated institutions). sf-cool

Cheers,
Doug

August 2, 2019
12:48 pm
2of3aintbad
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Why would you want monthly interest in an RRSP? Firstly the rate is lower than annual pay or compounding, and secondly, how do you invest the monthly amount paid?

If you absolutely want interest deposited every month, you are better off to stagger 12 annual pay GICs.

August 2, 2019
6:50 pm
Norman1
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Doug said

… I find the Income Tax Act very daunting, but perhaps if he is so inclined, Norman can fill us in whether there's a statutory requirement for annual reporting of compounded interest (for both provincially- and federally-regulated institutions). sf-cool

If the interest is actually paid or reinvested, annually or more frequently, then one needs to report the paid/reinvested interest in that taxation year. Naturally, the financial institution is required to issue a T5 slip for the interest paid, even when the interest is reinvested.

In contrast, if the interest is paid or reinvested less frequently than annually, or only paid on maturity, then the investment is likely an "investment contract" under Income Tax Act subsection 12(11).

Under subsection 12(4), one needs to report the interest accrued to each anniversary day of the "investment contract". According to Chapter 8 of the T5 Guide – Return of Investment Income, the financial institution is required to prepare T5 slips to report the interest accrued to each anniversary date:

What is an investment contract?

An investment contract is any debt obligation other than those excluded by the definition of investment contract in subsection 12(11) of the Act. For example, a debt obligation that provides for the payment of interest at least annually is not an investment contract because it is excluded by paragraph (i) of the investment contract definition.

A common type of investment contract would be a written agreement with a financial institution where a sum of money is invested for more than one year and the accrued interest on the funds invested is only paid at maturity (when the term of the contract expires).

On the T5 slip, enter the total of all interest accrued to each anniversary day. Do not include any interest you previously reported.

The anniversary day is:

  • the day that is one year minus a day after the day the contract was issued (and every successive one-year interval after that day)
  • the day the contract was disposed of

We consider an investment contract to be disposed of when it is converted, cancelled, sold, or redeemed.

August 3, 2019
3:38 am
Loonie
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I would imagine that the market-linked funds might provide an exception. Technically, they are GICs, but it is not possible to establish any earnings until maturity, so that all the earnings would have to be declared in the year of maturity, right? (another reason not to buy them as it creates lumps and bumps in your income) If your fund did really well and you earned, say, 20% over five years, you'd be stuck declaring all of it in one year, which would very possibly reduce its net value to you more substantially than an annual rate.sf-frown

August 3, 2019
9:51 am
Norman1
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Loonie said
I would imagine that the market-linked funds might provide an exception. Technically, they are GICs, but it is not possible to establish any earnings until maturity, so that all the earnings would have to be declared in the year of maturity, right? (another reason not to buy them as it creates lumps and bumps in your income) If your fund did really well and you earned, say, 20% over five years, you'd be stuck declaring all of it in one year, which would very possibly reduce its net value to you more substantially than an annual rate.sf-frown

For market-linked GIC's, I think the minimum guaranteed return portion is deemed to accrue annually and needs to be reported annually. I think any remaining portion, above the minimum guaranteed return, is not deemed to accrue annually and is reported when actually credited or paid out.

This is a fairly complex area of tax law because of some of the things taxpayers and investment sellers used to do to defer the taxes on investment gains for years after the gains were achieved.

One of the ways tried was to contractually make the interest not payable until maturity. This interesting note in the T1 General instructions for Line 121 - Bank accounts, term deposits, guaranteed investment certificates (GICs), and other similar investments suggests there are provisions in place for the government to deem interest to be accrued, regardless of the legal terms of the investment:

Note
If your investment agreement specified a different interest rate each year, report the amount on your T5 slips, even if it is different from what the agreement specifies or what you received. The issuer of your investment can tell you how this amount was calculated.

A bond stripped of its coupons and the individual coupons, each bought separately, come to mind.

August 3, 2019
5:31 pm
gicjunkie
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davidgeorge said

Can you let us know which FIs pay GIC interests monthly? Thanks.  

Oaken Financial has an option to receive monthly GIC interest. You lose 10 points from the annual rate.

August 3, 2019
9:14 pm
Loonie
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With the market-linked GICs, very few, if any, have an annual guaranteed return (or any guaranteed return for that matter), so I think it would be very rare for them to be able to assume accrued annual interest. I think it's going to all come in the year of maturity in almost all cases.

The rule you cite, Norman, appears to apply to Escalator GICs. It sounds as if you might get dinged for the "average" rate rather than the specified annual escalator rates. I don't have any problem with the theory. However, many of those Escalator GICs allow for annual redemptions on anniversary. If you had a five year Escalator and cashed it after 2 years, you could have been dinged as if you'd received the five year average whereas in fact you received a (lower) two-year average. Would be hard to untangle. FI would have to issue revised T slip after the fact, and you might even have to file some sort of claim with CRA. Surely they haven't made it that complicated? I mean, they're going to get their share, one way or another.

I've never bought an Escalator or an index-linked GIC. Anyone have any hands-on experience with the associated taxation?

August 4, 2019
8:21 am
Norman1
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The 5 year RBC U.S. MarketSmart GIC has a guaranteed minimum. The current terms are as follows:

  • Payout at maturity in 5 years.
  • 100% participation in S&P 500 Index (not including any dividends).
  • Minimum 3.25% per term (not per annum).
  • Maximum 11.00% per term.

According to last page of its Fact Sheet, the minimum return is reported annually over the five years, even though the minimum won't actually be paid until maturity:

For each year you hold your RBC U.S. MarketSmart GIC, you will receive a T5 slip (Relevé 3 in Quebec) based on the minimum return at the time of purchase. In the final calendar year that includes the Maturity Date of your RBC U.S. MarketSmart GIC, you will receive a tax slip reflecting the return paid for the term, minus the interest income reported in previous years.

August 4, 2019
8:39 am
Norman1
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Loonie said

The rule you cite, Norman, appears to apply to Escalator GICs. It sounds as if you might get dinged for the "average" rate rather than the specified annual escalator rates. I don't have any problem with the theory. However, many of those Escalator GICs allow for annual redemptions on anniversary. If you had a five year Escalator and cashed it after 2 years, you could have been dinged as if you'd received the five year average whereas in fact you received a (lower) two-year average. Would be hard to untangle. FI would have to issue revised T slip after the fact, and you might even have to file some sort of claim with CRA. Surely they haven't made it that complicated? I mean, they're going to get their share, one way or another.

If "average" rate reported annually were the tax reporting requirement and one cashed the escalator GIC before maturity, then the taxation could be untangled the same way as an early cashing penalty. No revised T5 slips needed. A subsection 20(21) deduction, discussed previously in Tax treatment of GIC interest penalties, would be made.

I suspect that escalator GIC's that escalate on the anniversary dates and are cashable on the same dates are okay. The higher interest is not actually earned unless one leaves the money in for another year. It would be escalator GIC's that were not cashable on each of the escalation dates that would be an issue.

August 4, 2019
11:16 am
Loonie
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I had forgotten that previous discussion, probably because it isn't something that I would use.
Still, it seems the taxpayer has all the responsibility for getting it sorted out if they cash out early. That doesn't seem reasonable to me as I'm sure many will forget, some won't even know of the issue, and others won't be able to get it right or will lack documentation.
There should be some way to deal with it that kicks in automatically, or else gov't should just accept the fact that tax will be paid after income is received and not mess around with what has not been received.
If your rate for year 1 is 2.0, then you should be taxed on that rate for that year, and so on for the remaining years. Either that or make the FI issue a revised T slip which fits easily into some slots on your T1. Either way would be more fair than having to figure out how to sort it out on your own later if you cash in early.
At one time, CRA didn't concern themselves with these sorts of things and you were only taxed when income was received, like other sources of income. I think the system has become too aggressive in this regard.

Yes, I knew there were a few "per term" guaranteed minimum returns out there, however pitiful (considering the FIs keep all the dividends!). In that case, I think it's reasonable for the person to pay annual tax on prorated amount, because they are "guaranteed" to receive it (unlike redeemable Escalators) and it is comparable to a compounded GIC, where you won't see any of the interest until the end. Even so, people have to plan ahead so that they will have enough money to pay the tax before they have actually received the income. This is a reason why some people ask for annual pay.

In any case, I was just curious. I find all these things gimmicky. Anything that requires this much discussion to figure out how to work it is not likely to be a good idea!

August 4, 2019
7:16 pm
MapleOne
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davidgeorge said

Can you let us know which FIs pay GIC interests monthly? Thanks.  

Simplii Financial for one

August 4, 2019
10:13 pm
GICinvestor
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Oaken

August 7, 2019
4:58 pm
Norman1
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Loonie said

Still, it seems the taxpayer has all the responsibility for getting it sorted out if they cash out early. That doesn't seem reasonable to me as I'm sure many will forget, some won't even know of the issue, and others won't be able to get it right or will lack documentation.

Definitely room for improvement in tax reporting of GIC penalties.

A similar situation occurs when purchasing a marketable bond between the semi-annual interest payments. Buyer pays accrued interest to seller. But, there's no tax slip for the accrued interest paid. Buyer needs to track that to claim a deduction for that accrued interest paid. Otherwise, buyer would be taxed on the entire subsequent semi-annual interest payment.

There should be some way to deal with it that kicks in automatically, or else gov't should just accept the fact that tax will be paid after income is received and not mess around with what has not been received.

If your rate for year 1 is 2.0, then you should be taxed on that rate for that year, and so on for the remaining years. Either that or make the FI issue a revised T slip which fits easily into some slots on your T1. …

One did receive the original interest annually. One may have even received the interest monthly, as in the Simplli Fianancial GIC's MapleOne mentioned that compound monthly. Just that one elected to reinvest the interest payments to effect the compounding. GIC issuer deducted the paid, but reinvested, interest on their tax return. So, the T5 slips originally issued are correct.

The lower early-cashing interest rate is actually the effect of the penalty paid for cashing early. That penalty paid is not backdated and the subsection 20(21) deduction is not carried back to previous tax returns, like a capital loss carryback or an error correction would be.

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