GIC_ INTEREST RATES FALLING
Tax tarnishes term deposit savings

THE TROUBLE with term deposits is the tax. And the so popular if income tax were
trouble with the tax is that you pay it separately.

Now that intcrest rates on term
deposits and GICs are falling
almost daily, the trouble is getting
worse. On July 1, the interest on
‘Canada Savings Bonds, for exam-
ple, drops back to 9.5 per cent
from the current 10.5 per cent
(Happy Canada Day!).

While falling interest rates are
great news for borrowers, they just
compound the trouble for savers.
Let me explain.

You might put money into a
term deposit or GIC (guaranteed
investment certificate) which will
earn 10 per cent interest over the
next year. So if you invest $10,000
now, next summer you will receive
an interest cheque for $1,000.

(To keep the example simple,
we'll assume the interest is paid
annually. GICs can also pay inter-
est monthly, but the underlying
principle/problem is the same.)

“Great,’” you tend to think.
“Inflation is running around five
per cent, so this guaranteed,
worry-free, simple investment has
earned mea respectable five per
cent on my money.”

Even if you realize this interest is
fully taxable, the fact is not driven
home because no tax is withheld
and you get the total amount of
your interest.

Only the following spring, when
you file your tax return, will your
TS slips arrive. Then you will add
all the interest to your income for

fresh

the year — and jose up to almost
half of it to Revenue Canada.

On the $1,000 interest, you earn-
ed, you might typically pay more
than $400 in tax, leaving you less
than $600. After five per cent in-
flation, the real growth of your
$10,000 investment is less than one
per cent.

Or you can look at the bad news
another way. If you spend your in-
terest rathe: than adding it to the
capital, your $10,000 investment
one year from now will have lost
$500 in purchasing power, thanks
to that five per cent inflation.

This continual double-whammy
of income tax and inflation flat-
tens all term deposits,. GICs,
Canada Savings Bonds and similar
investments which pay interest but
cannot appreciate in value.

These instruments would not be

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withheld from the interest payment
and if our currency were regularly
adjusted for inflation.

How would you feel if, in our
example above, you saw that only
about $100 (after tax and inflation)
— not $1,000 — had been added
to your original $10,000 invest.
ment, or if you spent the interest,
your capital were cut to $9,500 (to
reflect its new purchasing power)?

dollars

and sense
Mike Grenby

Yet that is what happens to the
money you invest in interest-only
instruments. And when (a) interest
rates fall, (b) your tax rate rises
and/or (c) inflation increases, you
and your money suffer still more.

Even when higher rates accom-
pany higher inflation, income tax
still cripples your income and in-
flation then realiy cuts down your
capital.

How should you deal with this
“trouble with term deposits’’?

© Decide what percentage of

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your savings/investments should
be in interest-only investments.
Don't automatically put all your
money into them.

© Realize the price you pay for
safety and simplicity. These in-
vestments are fine as long as you
feel comfortable with ~- and can
afford to pay — that price.

eReview the alternatives:
mutual furds or direct stock mar-
ket investments, real estate, a
business. Decide how much
money, in your situation, would be
appropriate for one or more of
these alternatives. You must take
more risks, spend more time, de-
velop more expertise and invest for
a longer term. But your reward
wiil be a chance to keep ahead of
income tax and inflation.

Shelter interest from tax
(though not inflation) by keeping
as much as possible of ycur GIC
etc. money in your RRSP or RRIF
(registered retirement savings
plan/income fund).

© Make sure all your interest-
bearing investments earn the
highest rate possible. For example,
if you have money in a savings ac-
count earning eight per cent or less
and your taxable income (before
the interest) this year will exceed
$27,803, your savings are costing
— not earning — money.

gan
Based locally, Mike Grenby

writes a money column which ap-
pears in newspapers across

Weston’s ®

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North Vancouver
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ay, June 14; 1989" Noth Sadr News

Canada. Although he also works
as an independent financial ad-
viser, Mike will respond to readers’
questions and story ideas through
the paper.

Write to Mike Grenby, Money
Columnist, North Shore News,
1139 Lonsdale, North Vancouver
V7M 2H4. Mike cannot reply in-
dividually but will answer as many
of your letters as possible in his

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