HOW TO INCREASE YOUR RETURNS WITH GICs - YouTube

Hi everyone and welcome back to The Independent Dollar, where we make

informative and unbiased personal finance videos in a way that is

straightforward and easy to understand. In today's video we're going to be

taking a closer look at GICs : how to build a ladder GIC portfolio, some common

misconceptions with GICs, and how interest on guaranteed investment

certificates is paid and then taxed. Now for the purpose of today's video, we are

going to assume that you're already familiar with what a GIC is. However, if

you're new to guaranteed investment certificates start by checking out our

intro video on GICs to learn the basics first. While we often spend most of our

time scouring the internet to find the best possible interest rates, we often

forget that the rate of return is only part of the whole picture. To be

effective we suggest building a GIC portfolio with a specific strategy in mind.

The most common way to do this successfully, is to ladder your GICs.

But what does laddering mean? Laddering your GICs means purchasing GICs

strategically to allow a portion of your portfolio to mature on an annual basis.

This will allow you the flexibility of having access to funds on an annual

basis for convenience, but also takes advantage of rising interest .

On top of that, it protects your portfolio from a decreasing rate environment by

keeping a portion of your GICs invested in more favorable rates, while renewing

only a percentage of your portfolio at a time. Let's take a look at an example:

Let's assume you have $50,000 to invest. Now typically you would start by

shopping around for the best rates and then investing your money into one GIC.

However, investing the full $50,000 into one certificate

leaves you open to the following risks: first of all should you require a

portion of the money for an unexpected emergency or critical purchase, you would

be forced to cash in the entire GIC early and that'll likely result in a

forfeit of all interest earned up until that point.

Second, if interest rates were to rise you're unable to take advantage of these

rising rates until your entire GIC matures. And finally, if rates were to

fall by the time your GIC matures, the entire portfolio will be renewing at

the lower interest rate. Instead, you could consider structuring your

$50,000 investment the following way: instead of purchasing one GIC you'll

purchase five GICs instead with the following laddered maturities. As each GIC

matures, you'll renew them into a new five-year term. Now I know this might

seem intimidating locking into a five-year GIC. But keep in mind, each year

20% of your portfolio is going to be coming due. After one year, your portfolio

will look as follows: as you can see we've now reinvested the GIC that

matured in 2021 and as each GIC comes due, you will continue to reinvest into a

five-year term. This is going to give you the benefit of a higher average rate of

return on your entire portfolio since longer GICs typically offer higher rates

of return. On top of that, it's going to give you the flexibility that

purchasing a one-year GIC typically offers: the ability to access money from

your investments on an annual basis. Five years has now passed after initial

investment and your portfolio has completed the entire phasing process.

So your GIC portfolio is now operating as follows: five equally weighted GICs

each in five-year terms, with one coming due on an annual basis. If you watched

our video on Market Linked GICs, we showed you the pros and cons of what those GICs

have to offer. This would be an excellent strategy to implement with those types

of GICs as well, as it'll offer you the same flexibility to access your portfolio on

an annual basis while also reducing market risk by eliminating your entire

portfolio from maturing on the exact same day. Aside from building a strategic

GIC portfolio, here are the most common misconceptions when it comes to GICs

that we think you should be aware of: if your GIC auto renews, there is nothing

that you can - do you're locked in until it matures again. This is actually not

correct, just because at GIC Auto renews it doesn't mean that you're forced into

keeping that GIC. There are guidelines in place to protect you from these

situations. According to the Financial Consumer Agency of Canada, if you're GIC

automatically renews you actually have the ability to cancel the renewal within

10 days of the new GIC being issued. The second misconception is joint accounts:

if your GIC is joint then you can decide who pays the tax.

Unfortunately this is not correct, with joint accounts the interest cannot be

split between the two account holders unless they both contributed their own

funds into the investment. Otherwise, the income must be taxed in the hands of the

person that it originated from. If you watched our video this year on our tax tips,

you would remember us mentioning ATTRIBUTION RULES. In this example, you

can't split the income or decide which spouse will claim. It it must be claimed

by the person where the money originated from. The next misconception is that if

you pass away, all interest on your GICs is lost. Typically, if you were to pass

away the GIC is cashed out and interest is paid up until the date of death.

However, not all GICs are alike. With market linked GICs for example, interest is

only paid when the GIC reaches maturity and that's because the rate of return is

based on the value of underlying securities on a specific date. In that

case, should the owner one of these GICs pass, it is unlikely that any

interest would be paid. Now with joint accounts, typically should one owner pass

away the survivor can maintain the GIC either until maturity or is sometimes

provided with the option of cashing it out early without penalty. So make sure

you speak to your investment provider prior to purchasing, so you understand

what all of your options would actually be. They are required to provide you with

this information and they should be able to do so in writing. And finally, the most

common misconception is that you didn't receive a tax lip, so you don't need to

pay tax. When you're just starting out your investment journey, your nest egg

will be small as you start to grow your savings. But if you don't earn $50 or

more in interest, it is unlikely that a tax slip will be generated. But in that

case, you are still required to declare that income on your tax return even

without a tax slip. Now let's take a look at the different ways that interest is

paid on GICs and how it is taxed. One way that you can receive interest from your

GICs is to get paid monthly, quarterly, or annually. In these cases, the interest is

paid out each year and not reinvested at the end of the year. You'll receive a tax

slip in the form of a T5. Any amount of interest reported on the

T5 slip, will be added to your taxable income for that year.

Another way to be paid interest, is for it to be reinvested, allowing any

interest to compound within the GIC until it finally matures. So as an

example, you had purchased a five-year GIC and at the end of each year any

interest earned would be reinvested and then paid to you at the end of the

five-year term. This allows you to earn even more money, by earning interest on

your interest. Here's an example of how that would look on the same $50,000 GIC:

As you can see here, any interest is reinvested back into the GIC every year.

However, one common misconception is that with compounding interest, you don't pay

tax until the GIC matures, which in this example would be after the five year period.

Unfortunately, this is not correct. With GICs, any interest earned within the

year, even if it's not paid out to you and is instead reinvested, will be added

to your taxable income for that year. Just like the previous example, you will

receive a T5 slip listing the amount of interest your GIC earned and it will be

added to your income. As you can see here, the full amount that is reinvested into

the GIC is added to your taxable income annually, even though you won't be able

to access it until the five-year term is up. This wraps up our video on the basics

of GICs and how to properly structure a successful investment portfolio. If you

have any questions comment below to let us know and if you like the video, give

it a thumbs up so we can create more content just like it. Thank you so much

for watching and we'll see you back here on Thursday.