What To Expect From GICs In 2024 (2024)

While no one can say for sure how interest rates will change in the future, there has been speculation that in 2024, interest rates in Canada mayfall—by how much is up for debate. What we do know is that the Bank of Canada (BoC) has signaled a pause in rate hikes, maintaining the policy interest rate at 5.0% as of January 24, 2024.

The BoC’s decision to hold its key interest rate hardly comes as a shock. There’s now enough evidence of slowing demand and an increased likelihood of a recession, driven by slower consumption growth and a decline in housing activity. In addition, Canada’s annual rate of inflation rose 2.9% on a year over year basis in January, rather than the 3.4% rise in prices seen in December 2023.

Market analysts and senior economists largely anticipate that there will not be further rate hikes, with the first rate drop expected mid-2024. The economy is projected to continue cooling down and bring inflation back to the BoC’s 2.0% target by early 2025.

The adjustments in the policy rate will directly influence the interest rates available to GIC investors. Given the direct correlation between Canada’s central bank’s policy interest rate and GIC rates, you may want to lock in rates now before the anticipated decreases.

With the first rate drop expected as soon as the second quarter of 2024, GIC rates are likely to remain stable in the short term, but may start to decrease following the Bank of Canada’s adjustments. This is because GIC issuers typically adjust their rates based on the central bank’s policy rate to maintain their margins. As the policy rate decreases, so too will GIC rates.

If you’re an investor with maturing GICs or someone who relies on fixed-income investments like GICs for retirement or other financial goals, you might need to reinvest sooner rather than later to take advantage of the current higher rates before they potentially decline following the Bank of Canada’s rate cuts.

The tax implications for GICs in 2024 depend on whether they are held in accounts:

• Registered accounts. With registered accounts like registered retirement savings plans (RRSPs) or tax-free savings accounts (TFSAs), interest income from GICs is tax-free, although RRSP withdrawals will eventually be taxable. In other words, your money is shielded from taxes if it stays in your RRSP—once you make a withdrawal, though, it’s treated as taxable income.
• Non-registered accounts. Interest income earned in non-registered accounts is subject to taxation. As a result, the interest you earn on non-registered GICs is considered regular income and is taxed at both the federal and provincial levels—just like any other income.

For example, an Ontario investor with $100,000 of income would pay a marginal tax rate of about 31% on interest income from a GIC, effectively reducing a 6.0% GIC yield to approximately 4.1% after tax. This highlights the importance of choosing between a registered or non-registered account when considering GIC investments, since income taxes can significantly impact your GIC returns.

With the anticipation of interest rate cuts in 2024, investors might consider diversifying their portfolios beyond GICs.

Bonds can be a worthwhile alternative, especially if interest rates fall. Bond prices usually move in the opposite direction of interest rates—a decrease in rates could mean a rise in bond value. The FTSE Canada Universe Bond Index, for example, with a yield to maturity of about 4.6% and a duration of 7.1 years, could potentially provide double-digit returns through price appreciation and yield, if rates decline.

For GIC investors seeking to lock in favourable long-term rates, including some bond exposure, falling interest rates could offer diversification benefits and potentially higher returns. Nevertheless, it’s essential to consider the risk-return profile of bonds versus GICs. Although bonds may offer more significant potential returns, they come with increased risk compared to typically safer GIC investments.

Investing in a GIC in 2024 depends on many factors, including your financial goals, risk tolerance and the economic environment.

From a risk tolerance perspective, GICs are low-risk, fixed-income investments with guaranteed returns, making them an attractive option for conservative investors. There’s no risk of losing your investment because it’s guaranteed. Much like putting money into a savings account, a GIC allows you to deposit funds and earn interest over time.

From an economic standpoint, interest rates are now high compared to historical averages, allowing GICs to offer higher rates than term deposits. Currently, the best one-year GIC rates in Canada are as high as 5.50%. However, it’s important to note that these rates might change due to inflation and the Bank of Canada’s policy decisions, which cannot be predicted with certainty.

Given Canada’s current high-rate environment and the expectation of rate cuts in mid-2024, GICs could be a solid investment for anybody looking to preserve capital and earn a stable return. If you’re seeking higher returns, GICs are not the way to go.

If you are seriously considering a GIC, it’s crucial to assess your financial situation, consider the potential for interest rates to change and understand the tax implications if you plan to invest in a GIC outside of a tax-sheltered account.

To minimize the tax impact on your earnings, investing in a GIC via a registered account is the more prudent choice. At the same time, determine if the GIC rate is fixed or variable (market-linked) to maximize your returns based on the prevailing interest rate environment.

Additionally, figure out how long you are willing to lock up your money in a GIC for a long period of time. If you expect to need access to your money, opting for a shorter term or a redeemable and cashable GIC might be more suitable for you. On the flip side, though, the longer your investment period in a GIC, the higher the potential return.