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- Title
The Erosion of GIC Returns by Income Taxes and Inflation.
- Authors
Mawani, Amin; Milevsky, Moshe; Landzberg, Josh
- Abstract
Canadian investors currently hold approximately $247 billion in guaranteed investment certificates (GICs), and a little over two-thirds of personal GICs are held outside tax-deferral accounts. A widely held perception exists that the real (after-inflation) rate of return on GICs has been consistently positive over a two-decade period, and therefore GICs provide investors with more assurance of future purchasing power than investment products subject to the uncertainties of the stock market. However, common wisdom fails to take into account the annual taxation of accrued interest income on GICs held outside registered accounts. This study computes the real (after-inflation) after-tax returns (RATs) on one-year, three-year, and five-year GICs during the period 1974-2003. In our analysis, we assume that on maturity these GICs were rolled over into new GICs with an identical term and an interest rate based on the (historical) average market rate quoted by the major banks and trust companies in the year of the rollover. We show that annualized RATs have been negative for Ontario investors in the top marginal personal tax bracket for most of the study period. For example, any investor whose marginal personal tax rate exceeded 35.5 percent earned, on average, a negative annual RAT from one-year GICs rolled over continuously from 1974-2003. For three-year and five-year GICs, the breakeven tax rate was slightly higher at 42.06 percent. Even when positive, RATs rarely exceeded I percent. From the viewpoint of individual investors, these results demonstrate the importance of looking beyond the quoted rates for GICs to determine the reward in future consumable dollars for the investor's current consumption sacrifice.
- Subjects
CANADA; GUARANTEED investment contracts; TAX returns; INVESTORS; TAXATION; INVESTMENTS
- Publication
Canadian Tax Journal / Revue Fiscale Canadienne, 2004, Vol 52, Issue 4, p1057
- ISSN
0008-5111
- Publication type
Article