Compound Interest for Canadian Savers

Summary

Compound interest is interest earned on both your original principal and on previously accumulated interest. For Canadian savers, the key consideration is where you hold your investments: a TFSA shelters all growth from tax, an RRSP defers tax until withdrawal, and an unregistered account is taxed annually. Current high-interest savings account rates in Canada average around 1.50%.

How it works

The formula

FV = P(1 + r/n)^(nt) + PMT x [((1 + r/n)^(nt) - 1) / (r/n)]

Where:

• FV = future value
• P = starting principal (C$)
• r = annual interest rate (decimal)
• n = compounding periods per year (12 for monthly)
• t = time in years
• PMT = contribution per period (C$)

Canadian tax-sheltered accounts

In a TFSA, the full compound growth formula applies with no tax drag. In an unregistered account, interest income is taxed at your marginal rate annually, reducing the effective compounding rate.

The Rule of 72

Divide 72 by your annual rate to estimate doubling time:

• At 1.50% (savings account) = 48 years
• At 5% (balanced portfolio) = 14.4 years
• At 7% (equity portfolio) = 10.3 years

Inflation adjustment

With Canadian inflation at 2.3%, a 1.50% savings rate delivers a real return of -0.8%. For positive real growth, Canadians need to invest in higher-returning assets like equity index funds within their TFSA or RRSP.

Worked example

C$10,000 initial deposit + C$500/month at 5% for 10 years (in a TFSA):

1. Monthly rate: 5% / 12 = 0.4167%
2. Total months: 10 x 12 = 120
3. Lump-sum growth: C$10,000 x (1.004167)^120 = C$16,470
4. Annuity growth: C$500 x [(1.004167^120 - 1) / 0.004167] = C$77,641
5. Total future value: C$16,470 + C$77,641 = C$94,111
6. Total contributions: C$10,000 + (C$500 x 120) = C$70,000
7. Interest earned: C$94,111 - C$70,000 = C$24,111 (tax-free in a TFSA)

Key differences from other markets

• TFSA is unique to Canada. Unlike the UK ISA (which has similar tax-free treatment), the TFSA allows unlimited withdrawals with contribution room restored the following year. The US has no direct equivalent; Roth IRAs are the closest but have income limits and early-withdrawal penalties.
• FHSA combines RRSP and TFSA benefits (tax-deductible contributions AND tax-free withdrawals for a home purchase), a combination not available in other markets.