With a savings account, you earn interest on the money that you hold in the account. The purpose of a savings account is to be a place where you can store money that you won’t need to access often. That’s why banks often have limits on the number of transactions that you can make with a savings account every month. They may also charge transaction fees if you use your savings account for certain types of transactions. A chequing account would be used for your everyday purchases, while a savings account is used as a place to keep your money.
Some banks only allow free transfers between a savings account and a chequing account held at the same bank. For example, TD’s Every Day Savings Account only allows one free transaction every month. However, TD allows unlimited free transfers between this savings account and your linked TD chequing accounts. This means that you can deposit and withdraw as often as you want with your linked TD bank accounts, but you are only allowed to make one free transaction per month directly with the savings account. Additional transactions cost $3 each with TD’s Every Day Savings Account.
A common benefit of online-only banks is that they often allow free unlimited transactions with their savings accounts. For example, EQ Bank's Savings Plus Account allows unlimited free transactions, including electronic funds transfers (EFTs) between EQ Bank accounts and other banks, and no charge for Interac e-Transfers and bill payments.
Inactivity Fees for Savings Accounts
Some banks may charge an inactivity fee or a dormancy fee if there hasn’t been any activity on your savings account for a certain period of time. A transaction, such as making a deposit or transferring between bank accounts, can keep your savings account active and avoid inactivity fees. Your account can be considered dormant if you have made no transactions for a period of time, even if you have a balance earning interest in your account.
Dormancy fees can be hefty, which means that you still need to monitor your savings account periodically and make transactions, even if it’s only being used to park your money. For example, Scotiabank charges an inactivity fee of $20 per year starting from two years. This increases to $30 per year starting from five years of inactivity, followed by your account being transferred to the Bank of Canada after nine years of inactivity. Coast Capital charges a significant dormancy fee of $50 per year after an account has been inactive for two years or more.
What is a High-Interest Savings Account?
A high-interest savings account (HISA) is just like a standard savings account in which you are paid interest on the money that you have deposited. What makes it different is that a HISA pays a higher interest rate. There is no standard that sets a high-interest savings account apart from a savings account. Instead, it’s often used to simply differentiate between account offerings. It’s common for banks to offer different types of savings accounts, with one of them being a high-interest savings account.
High-interest savings accounts aren’t the same between banks. For example, RBC’s High Interest eSavings account offers an interest rate of 0.10%. Meanwhile, Hubert Financial’s Happy High-Interest Savings Account offers an interest rate of 1.40%. While these are both high-interest savings accounts, the HISA from Hubert Financial offers a much higher rate compared to RBC. That’s why you should compare interest rates between savings accounts to find the best rates, rather than just looking at the name of the account.
How to Calculate Interest in a Savings Account
Canada's Disclosure of Interest (Banks) Regulations under the Bank Act requires banks to provide a written statement that shows how interest is calculated, how often interest will be paid, and the annual rate of interest of a savings account. This will tell you how interest is calculated for your specific savings account.
The most common way that interest is calculated for a savings account is to use the daily closing balance of the savings account. This means that interest would be calculated daily. However, interest would only be paid monthly. Interest is usually paid either on the last business day of the month, or on the first business day of the month. In other words, you earn interest every day, but you are only paid the interest that you have earned once a month. This means that interest in a savings account is compounded monthly. You'd be hard pressed to find a savings account that compounds daily in Canada.
Let’s take a look at the CIBC eAdvantage Savings Account, and consider an interest rate of 0.20% and a balance of $1,000. How much interest will you earn per month?
Step 1: Find the daily interest rate
This savings account’s rate is quoted as an annual rate. Since interest is calculated daily, we’ll first need to find the daily interest rate. This can be done by dividing the quoted savings interest rate by 365, which is the number of days in a year.
Step 2: Calculate the daily closing balance of the savings account
The daily closing balance is the amount of money in an account at the end of each day. For example, if you started a day with $1,000, deposited $300, and then later withdrew $100, your closing balance for that day would be $1,200. In our example, let’s say that you made no additional transactions.
Step 3: Calculate the daily interest earned
Apply the daily interest rate to the daily closing balance to calculate the daily interest earned.
For a specific day, the interest calculation would be:
You would be earning $0.005479452, or less than one cent, on that specific day.
Using the average daily balance is another method to calculate the interest earned in a given month.
Step 4: Sum the daily interest earned in a month
In this example, the balance in the savings account remains at $1,000 throughout the month. Since interest is paid monthly, the $0.005 daily interest earned is not added to the savings account’s balance every day. Instead, you will add up the daily interest earned to calculate the monthly interest payment.
Let’s say that this month has 30 days. At $0.005479452 per day for 30 days, the monthly interest earned would be:
You would earn a little over $0.16 in this savings account after one month. Since interest will be paid at the end of the month, this means that you will start the next month with $1,000.16 in your savings account. You are now earning interest on the $0.16 interest earned from the previous month. This is known as compounding, as you are earning interest on previously accumulated interest.
Historical Savings Account Interest Rates
Interest rates on savings accounts generally follow the Bank of Canada's policy rate, which in turn impacts prime rates. If the Bank of Canada increases rates, then the cost of borrowing will increase. The amount that savers earn will generally increase as well.
The graph below shows the historical savings account interest rate offered by Tangerine since its inception in 1997 as ING, and ICICI Bank when it entered the Canadian market in 2004 with its HiSAVE Savings Account. It then compares these rates with the Bank of Canada’s policy rate.
Some banks have tiered interest rates. The larger your balance, the higher the interest rate for your savings account. This rewards you with a higher rate in exchange for holding a larger balance. In some instances, the opposite might be true. This would be the case for special promotional rates that offer a high interest rate for a certain savings balance, with any additional amount over only earning a standard non-promotional rate.
The way that interest is calculated for a tiered savings account is different from a regular savings account. It can also differ depending on your bank and the specific account. One way is for the tiered interest rate to apply for the entire balance. If your balance is in a certain tier, then the entire balance of your tiered savings account earns that tier’s interest rate. The other way is a partial balance method. With this calculation method, only the portion of the balance in each tier would earn that tier’s rate.
Whole Balance Example
HSBC's High Rate Savings accounts have a tiered interest rate system, but pays interest on the entire account balance of the highest earning tier. For example, let's say that this HSBC savings account has an interest rate of 0.05% if the daily closing balance is up to $24,999.99, and 0.20% if the daily closing balance is $25,000 and over.
Example of HSBC’s High Rate Savings
Daily Closing Balance
Up to $24,999.99
$25,000 and over
If your daily closing balance is $25,001, then you would earn an interest rate of 0.20% on the balance of $25,001. If your daily closing balance is $24,999, then you would earn an interest rate of only 0.05% on the balance of $24,999.
In this example, having a daily closing balance of $25,001 would earn you $4.11 in one month at an annual rate of 0.20%. On the other hand, a balance of $24,999 would earn you $1.03 in one month at an annual rate of 0.05%. Being left out of one tier can significantly affect your interest earnings!
Partial Balance Example
Progressive tiers, where interest is calculated based on a tiered balance, is the industry standard for business savings accounts. Some banks may also use progressive tiers for personal savings accounts.
Laurentian Bank's digital arm, LBC Digital, offers a HISA with a tiered interest rate. However, LBC Digital uses a partial balance system. To see how this works, we’ll take a look at a LBC Digital High Interest Savings Account that has a 1.15% interest rate on balances up to $500,000, and an interest rate of 0.30% on balances over $500,000.
Example of LBC Digital’s HISA Rates
Daily Closing Balance
$500,000 or less
$500,000.01 and over
If you have a daily closing balance of $500,000, then you would earn a rate of 1.15% on the entire balance. This would earn you $472.61 in one month at an annual rate of 1.15%.
If you have a daily closing balance of $1,000,000, then you would earn 1.15% on the first $500,000 balance, and 0.30% on the amount over $500,000. In one month, you would earn $595.90 on the balance of $1,000,000. Even though your balance is double that of the previous example, the interest that you earn is not double. That’s because you’re earning a lower interest rate on a portion of your account’s balance based on this tiered system.
Some of these savings options can be combined. For example, you can hold a GIC in a TFSA so that your interest income is tax-free. Many banks also offer High-Interest TFSAs, which mixes the high rate of a HISA with the tax-savings of a TFSA.
Frequently Asked Questions
What is CDIC Deposit Insurance?
Deposits at certain banks, which includes money in savings and chequing accounts, GICs, and foreign currency deposits, are insured by the Canada Deposit Insurance Corporation (CDIC) up to a certain limit. Since the limit is based on Canadian Dollars, the value of any foreign currency deposits will need to be converted to CAD when determining the amount eligible to be insured. You can use a currency converter to find this amount. This deposit insurance protects your money by reimbursing you should your bank fail. CDIC insurance covers deposits up to $100,000 per insured category. These categories are:
Deposits in your name
Deposits in a joint account
Deposits in a TFSA
Deposits in a RRSP
Deposits in a RRIF
Deposits held in trust
Deposits for property taxes
This means that the maximum coverage that you are eligible for is $700,000 per bank, if you have $100,000 in deposits in each of these categories. CDIC deposit insurance is free, so you won’t be charged any insurance premiums for your deposits to be covered.
Deposits in your name include chequing accounts, savings accounts, term deposits, money orders, certified cheques, and bank drafts. The $100,000 limit is a combined coverage limit between all of your term deposits, chequing, and savings accounts at a certain bank.
For example, if you have $100,000 in your savings account and $50,000 in your chequing account at one bank, you are only covered for up to $100,000. The CDIC’s coverage limit also includes both the principal balance and interest. If you have $98,000 in savings and $3,000 interest, you are only covered for $100,000. The remaining $1,000 interest will not be covered by the CDIC.
Other accounts that are not in an insured category will not be covered by the CDIC. This includes stocks, bonds, and mutual funds held in an investment account or brokerage account with a bank. However, you may be protected through coverage offered by the Canadian Investor Protection Fund (CIPF).
Do Credit Unions Have Deposit Insurance?
Since credit unions are provincially regulated in Canada, they are not covered by the federal CDIC, unless they are a federally regulated credit union. Coast Capital is a federal credit union, and so deposits at Coast Capital are covered by the CDIC. However, most credit unions will have deposit insurance provided by their home province.
For example, credit unions in Ontario have deposit insurance offered by the Financial Services Regulatory Authority of Ontario (FSRA) through the Deposit Insurance Reserve Fund (DIRF). This provides coverage for up to $250,000 for unregistered accounts, such as checking and savings accounts, while registered accounts have unlimited coverage. Accounts with no insurance limit include RRSPs, TFSAs, and RRIFs.
Note: Coverage limit is per insured category, per financial institution.
Are Savings Accounts Taxed in Canada?
Interest income from savings accounts are taxed in Canada. You will need to report interest that you have earned from your savings accounts as income when filing your income taxes. An exception to this is interest earned in a registered account, such as a TFSA or RRSP. Interest income in a TFSA is not taxed, while interest income in a RRSP will only be taxed when it is withdrawn from the account.
Your bank or credit union will send you a T5 slip if you have earned more than $50 of interest income in a given year. This slip, called a return of investment income slip (T5), is only required to be sent to you if you have earned more than $50. However, you are still required to report interest income even if it is less than $50 and you are not given a T5 slip by your financial institution. For example, if you earned $1 from interest in your savings account, you will need to report this as income when filing your tax return. You will report this income on line 12100 - interest and other investment income.
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