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.

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.

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.

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.

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.

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.

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.

In November 2023 the CRA denied the taxpayer’s request. The CRA’s explanatory letter stated that the arrears interest it charged was correctly applied because the balance due on the taxpayer’s return was not paid on time as the taxpayer failed to make the instalment payments required by the instalment reminders issued to him by the CRA.

The taxpayer subsequently requested a second-level review of the CRA’s decision to deny interest relief. In March 2025, the CRA once again denied the requested relief and rejected the taxpayer’s argument that he should not have to pay instalment interest on T5 investment income that he had not yet received.

Having been denied relief twice by the CRA, the taxpayer turned to the federal court, asking a judge to determine whether the agency’s decision to deny him interest relief was “reasonable.” A federal court judge heard the case in late January 2026, and released his decision last week.

Under the Income Tax Act, the CRA has the discretion to waive or cancel any penalty or interest payable where there are extenuating circumstances beyond the control of the person seeking relief, including actions of the CRA, or an inability to pay or financial hardship. They are outlined in the CRA’s Income Tax Information Circular, No. IC07-1R1,

Taxpayer Relief Provisions

.

The taxpayer felt that the CRA officer’s decision to deny interest relief was unreasonable in that the CRA officer failed to accept, or to “adequately engage with,” his main argument that the income giving rise to his instalment obligations included notional interest on GICs that had not yet been paid to him, for which he should not be expected to pay taxes by instalment. His position was that interest should be taxable only when it is actually paid to a taxpayer.

But the judge found that the CRA officer was, indeed, aware of the taxpayer’s notional income argument, as it was in the CRA officer’s notes. The notes also set out the officer’s reasoning that, although the taxpayer believed he should not have to pay instalment interest, taxpayers are required to make tax instalment payments if their net tax owing is more than $3,000 in the current year, and more than $3,000 in either of the two previous tax years. The taxpayer was sent reminders as to his potential instalment obligations and that, if he was uncertain of his obligations, he could have called the CRA upon receipt of those reminders to make further inquiries. The officer observed that, although the taxpayer believed otherwise, by ignoring his instalment reminders, he didn’t pay his taxes on time, and thus was properly charged instalment interest.

The judge commended the taxpayer’s preparedness for trial, referring to him as “an organized and capable advocate on his own behalf.” But the judge added that “despite his able advocacy, he has not demonstrated a reviewable error in the (CRA’s) decision.”

As a result, the judge dismissed the taxpayer’s application for judicial review, and the CRA officer’s decision to deny relief was therefore upheld.

  • Avoid these TFSA and RRSP mistakes to keep the CRA off your back
  • CRA denies hard of hearing taxpayer disability credit

Jamie Golombek,
FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto.
Jamie.Golombek@cibc.com

.

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