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If you invest in a guaranteed investment certificate (GIC) outside of a registered plan such as a registered retirement savings plan (RRSP) or tax-free savings account (TFSA), many financial institutions will allow you to choose how often you receive your interest payments. For GICs with terms of one year or more, you can often elect to receive simple interest paid either monthly, semi-annually or annually. Alternatively, many GICs allow you to choose the compound interest option, which, while calculated annually, is only paid upon maturity.

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Either way, you’re generally required to pay tax annually on the interest income you earn, even if you don’t receive the cash each year. Your financial institution will provide you with a T5 slip each February reporting any interest income you received in the prior year as well as any interest accrued (if not actually paid), if you invested in a GIC that only pays interest at maturity, once you have held the GIC for a year. Accrued compound interest on GICs is reported based on the anniversary date of the GIC’s issue.

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For example, let’s assume you bought a compound-interest GIC on Feb. 15, 2025, which matures on Feb. 15, 2030, at which time the interest is paid to you. No T5 slip will be issued for 2025 since the first anniversary date of the GIC only falls in 2026. For 2026 through 2029, you will receive a T5 slip each year reporting the interest that accrues, respectively, to Feb. 15, 2026, Feb. 15, 2027, Feb. 15, 2028, and Feb. 15, 2029. You will receive one final T5 slip for 2030 showing the interest paid in the final year less what was previously reported on in previous years as accrued interest.

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A lack of understanding of the tax reporting of GIC income accrued, but not paid, got a taxpayer into hot water with the Canada Revenue Agency (CRA) for the 2022 taxation year. The taxpayer’s troubles began when he ignored a February 2022 CRA instalment reminder, informing him that if his tax owing for the 2022 taxation year was going to be more than $3,000, he may be required to pay income tax by instalments. The CRA provided him with his various options for instalment payments.

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In August 2022, the CRA issued another instalment reminder, informing the taxpayer that he would not be required to pay further instalments in 2022 if he had paid all the amounts identified in earlier reminders. However, the taxpayer did not make any instalment payments in 2022.

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When the CRA assessed the taxpayer’s 2022 tax return on May 23, 2023, he had a balance owing of $9,127, which included both arrears interest and instalment interest resulting from his failure to make instalment payments. The taxpayer subsequently paid the amount owing.

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In June 2023, the taxpayer wrote to the CRA requesting relief for the interest charged for the 2022 taxation year. He explained that he had checked with his bank which had informed him that his T5 that contributed to the income giving rise to the instalment obligations included what the taxpayer referred to as “notional interest” on GICs that was attributed to the taxpayer in the 2022 taxation year but not yet paid to him. He argued that he should not be expected to pay taxes by instalment on “notional income” that he had not yet received. He therefore requested interest relief from the CRA.