How High-Interest Savings Accounts Work in Canada

What makes a savings account high-interest

There is no legal definition of high-interest. It is a marketing label for a savings account that pays a rate noticeably above the standard savings or chequing rate at the big banks. Many of the best rates come from online banks and the online divisions of larger institutions, which have lower costs, but traditional banks and credit unions offer them too.

A HISA is a deposit account, not an investment. Your balance never goes down because of markets, you can usually withdraw any time, and your rate can change. That last point surprises people: HISA rates are variable. The institution can raise or lower the rate whenever it chooses, and rates generally drift with the Bank of Canada's policy rate.

The trade-off compared with chequing is convenience. The Financial Consumer Agency of Canada notes that most savings accounts offer a limited number of transactions and may not give you the same services as a chequing account. A HISA is a place to park money, not to pay bills from.

How interest is calculated

Advertised rates are annual. Most HISAs calculate interest daily on your closing balance and pay it into the account monthly. Daily calculation means every day your money sits there counts, even if you withdraw before month-end.

Here is the math with a round, hypothetical rate. Say you have $10,000 in an account paying 2% a year, calculated daily. Each day you earn about $10,000 x 0.02 / 365, or roughly 55 cents. Over a 30-day month that's about $16.44, which is deposited into your account. Next month you earn interest on $10,016.44, and so on. That is compound interest at work; our guide to compound interest shows how it builds over years.

How often interest compounds makes a small difference. The FCAC notes that accounts that compound daily earn interest faster than accounts that compound monthly. Ask your institution how often it calculates and pays interest, because two accounts with the same advertised rate can pay slightly different amounts.

Interest is usually credited at the end of the month or on the first business day of the next one. If you close the account or move your whole balance mid-month, ask whether the interest earned so far is paid out on closing, or forfeited until the next payment date. Most institutions pay it, but it's worth confirming before you switch in the middle of a cycle.

Tiered rates and minimum balances

Not every account pays one rate on your whole balance. Some use tiers, where different portions of your balance earn different rates. The FCAC gives an example of one bank paying 1% on the first $1,000 and 2% on amounts above that, while another pays 2% on the entire balance as long as you keep at least $1,000.

Tiers can work in either direction. Some accounts pay more as your balance grows; others pay their best rate only on a small first slice and much less above it. Others require a minimum balance before they pay any interest, or charge fees if you fall below a threshold.

Some accounts also tie the top rate to conditions, such as setting up a recurring payroll deposit or holding another product with the institution. If you won't meet the conditions, compare the base rate you'd actually get.

Promotional rates and when they expire

Promotional rates are the biggest source of confusion. Institutions often advertise a high introductory rate to attract new deposits, and the FCAC warns that once the promotional period ends, the rate may be much lower. The headline number may last only a few months.

Read the promotion's terms for these details:

• How long the promo lasts, and whether it starts when you open the account or when you deposit.
• Whether it applies to your whole balance or only to new money deposited during a window.
• Whether there is a maximum balance the promo rate applies to.
• Whether the extra interest is paid monthly or as a lump sum after the period ends, sometimes only if you keep the money there.
• What the regular rate will be afterward.

Chasing promotions can pay off if you're organized, but it means moving money every few months. For many people, an account with a consistently competitive regular rate is worth more over time than a short burst of promo interest followed by a low rate.

Transfers, holds and transaction limits

Moving money into a HISA at a different institution from your chequing account is usually done by linking the accounts for electronic transfers, or by Interac e-Transfer if the account supports it. Linked transfers are usually free but can take a few business days, and some institutions place a hold on incoming funds before you can withdraw them again.

Check these limits before you rely on an account:

• Daily or per-transaction limits on transfers out, which matter if you need a large amount quickly.
• How many free withdrawals you get per month and what extra ones cost. The FCAC notes savings accounts usually have no monthly fee but may charge for transactions like withdrawals or transfers.
• Whether you can withdraw cash or only transfer to a linked account.

Plan for timing. If your HISA holds your emergency fund, keep a small buffer in chequing for anything that can't wait two or three days.

How HISA interest is taxed

Interest earned in a regular HISA is taxable income at your full marginal rate. The CRA requires you to report interest paid or credited to you in the year even if you don't receive a slip; you may not get a T5 if your total investment income is under $50, but it is still taxable.

You can avoid that tax by holding the savings inside a registered account. Many institutions offer a HISA within a TFSA, where interest is tax-free and withdrawals don't count as income. If you plan to dip into it often, remember that TFSA withdrawals are only added back to your contribution room on January 1 of the following year, so re-depositing in the same year can cause an over-contribution.

Savings set aside for a first home can sit in a HISA inside an FHSA, and RRSP HISAs exist too, though RRSP withdrawals are taxed.

CDIC coverage and what isn't covered

HISAs at CDIC member institutions are eligible deposits. CDIC insures eligible deposits up to $100,000, principal and interest combined, in each insurance category at each member institution. Categories include deposits in one name, joint deposits, deposits in trust and each type of registered plan, so a TFSA HISA and a regular HISA at the same bank are insured separately. Our CDIC guide covers the categories.

Make sure the institution is actually a CDIC member, or for a credit union, which provincial deposit insurer covers it. Some fintech apps hold your money at a partner bank; ask whose deposit it is and how coverage applies.

Some brokerage products look similar but are not deposits. CDIC does not cover mutual funds or ETFs, including so-called high-interest savings ETFs and savings funds sold through brokerages, even though they invest in bank deposits. If you are using a brokerage for cash, our guide to cash management accounts explains how those differ.

How to choose and switch

When you compare accounts, look past the headline rate:

• The regular rate, not just the promotional one.
• How interest is calculated, compounded and paid.
• Tiers, minimum balances and conditions on the top rate.
• Transaction fees, transfer limits and how fast you can reach your money.
• Deposit insurance and whether the account can be held in a TFSA.

The FCAC's account comparison tool can help you line up options. Once you pick one, open the account, link it to your chequing account, make a small test transfer and then move the rest. Set a reminder to check the rate every few months; HISA rates change, and loyalty is not always rewarded. For a broader look at the options, see where to keep your savings.

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