GICs vs. stocks in non-registered accounts
Joe, if you purchase a Guaranteed Investment Certificate (GIC) you will avoid capital gains tax upon your death. But you may pay more overall taxes. GICs do not appreciate in value over time like stocks, so no capital gains tax is due upon your death.
However, GICs are less tax efficient on an annual basis than other investments. GICs are taxed annually on the interest income earned, while capital gains are taxed at just 50% – and only when you sell the investment. Dividends from Canadian stocks may also be taxed at a lower rate if the investment is held in a non-registered account.
Over the long term, GICs tend to have lower annualized returns than stocks. For example, your GIC might earn an annualized return of 3% over the long term and be taxed on that income each year. By comparison, your stock might earn a long-term return of 6%, with 2% tax on dividends due each year, and 4% deferred capital gains tax going forward.
Joe, although you will have to pay more taxes when you die, you will probably get a more tax-efficient, slightly deferred 6% tax return than the inefficient 3% tax return you pay each year. A tax-efficient approach means you are likely to have greater estate value and greater after-tax estate value.
Beneficiary designation
You can designate beneficiaries for registered accounts, including RRSPs, RRIFs, and TFSAs. If you leave these accounts to your spouse, you can designate him or her as the successor annuitant to a RRIF or the successor holder of a TFSA. This allows them to take over the account directly.
You cannot designate a beneficiary for a GIC on a non-registered account. The exception may be if you purchase a guaranteed interest annuity (GIA). You can name a beneficiary for a GIA because it is considered an insurance product.
Designating a beneficiary does not change the tax consequences of death. GIC or GIA interest is taxable annually, and no capital gains tax is due upon death (because these investments do not appreciate in value).
At best, naming a beneficiary can avoid probate.
