Compound interest is interest earned on interest: each period’s interest joins the principal, and the next period’s interest is calculated on the larger amount. Every textbook then reaches for a hypothetical 5%. We track real rates for a living, so this explainer runs entirely on what Canadian deposits actually pay right now.
Two rates do most of the work below, both from the observation set behind our boards as it stood on August 26: the best 1-year GIC rate on our boards is 4.00% (Brunswick Credit Union) and the best 5-year is 4.30% (Wealth One Bank of Canada). Every figure that follows is arithmetic on those numbers, deposit size shown.
The five-year math at 4.30%, year by year
Put $10,000 into that 5-year GIC at 4.30%, compounded annually, and this is exactly what happens:
| Year | Opening balance | Interest at 4.30% | Closing balance |
|---|---|---|---|
| 1 | $10,000.00 | $430.00 | $10,430.00 |
| 2 | $10,430.00 | $448.49 | $10,878.49 |
| 3 | $10,878.49 | $467.78 | $11,346.27 |
| 4 | $11,346.27 | $487.88 | $11,834.15 |
| 5 | $11,834.15 | $508.87 | $12,343.02 |
Year five’s interest is $508.87 against year one’s $430.00, and nothing changed except the balance it was calculated on. That’s the entire mechanism. Total interest over the five years: $2,343.02.
Now the comparison that makes the definition stick. Simple interest, where the $430 is paid out each year and never rejoins the principal, pays $430 × 5 = $2,150.00 on the same deposit at the same rate. Compounding adds $193.02, roughly 9% more interest, for doing nothing except leaving the interest where it sits. The wedge widens with bigger deposits and longer horizons, which is why it matters how a GIC credits interest: some compound it, some pay it out annually, and the choice at purchase is exactly the difference between these two figures.
Doubling time: the Rule of 72 at today’s rates
Divide 72 by an interest rate and you get a serviceable estimate of how many years money takes to double at that rate. The weakness in the rule as usually taught is the invented rate that gets plugged in. Run it instead on observed rates from our boards:
| Rate | Where it comes from | Doubling time (72 ÷ rate) |
|---|---|---|
| 4.30% | Best 5-year GIC on our boards (Wealth One Bank of Canada) | about 16.7 years |
| 4.00% | Best 1-year GIC on our boards (Brunswick Credit Union) | 18 years |
| 3.35% | Big-bank 5-year posted average, from the same boards | about 21.5 years |
| 2.93% | Big-bank 1-year posted average, from the same boards | about 24.6 years |
| 2.75% | Top of our HISA board (Lighthouse Credit Union) | about 26.2 years |
The rule is an approximation; the exact answer at 4.30% is 16.5 years, close enough for planning. Now set the best 5-year rate beside the big-bank average for the identical term. The product is the same and so is the five-year commitment, yet the doubling time stretches by almost five years. Rate gaps compound just like interest does.
Frequency, product, tax lane: what else moves the total
Compounding frequency (annual, semi-annual, monthly) changes the outcome less than most explainers imply; one worked example shows why. Take the same $10,000 at the same 4.30% over the same five years:
- Compounded annually: $12,343.02
- Compounded monthly (4.30% ÷ 12 credited each month): $12,393.86
Difference: $50.84 over five years. Meanwhile, dropping from 4.30% to the 3.35% big-bank average, both compounded annually, finishes at $11,791.05 instead: a gap of $551.97 on the same deposit over the same period. The frequency question is worth about $51 here; the rate question is worth about $552. Read the compounding terms, then spend your attention on the rate. In principle, how a specific GIC credits interest (compounded annually, paid out annually, paid at maturity) is set by each product’s terms and varies by institution, so two GICs with the same posted rate can finish a few dollars apart. Check before you assume; the arithmetic above is the ceiling on how much it matters at these rates.
Product choice moves the total too. A saver who prefers rolling 1-year terms would reach $12,166.53 after five years if the 4.00% board-leading rate held every renewal, trailing the five-year lock by $176.49. The “if” is the point: renewal rates are never promised, and the boards moved on the very day of our snapshot, with Wealth One raising eight term rates while Equitable Bank cut twenty. Rolling short terms is a bet on future boards; locking long is a bet on this one. A middle route, GIC laddering, spreads one deposit across several terms. The current per-term leaders are on the GIC boards either way.
Interest on a high-interest savings account compounds the same way in principle, with one difference that matters: the rate floats. The top of our HISA board pays 2.75% (Lighthouse Credit Union), and coverage on that board is thinner than for GICs. A floating rate means the doubling-time table above is written in pencil for savings accounts; the 26-year figure holds only while the rate does. Compare the HISA board against a 1-year GIC before leaving long-horizon money at a floating rate.
Then the lane decides whether compounding is left alone. In a non-registered account, interest is taxable in the year it’s earned, even when it compounds inside the GIC rather than being paid out. Inside a TFSA, RRSP or FHSA, interest is not taxed while it remains in the account. How interest income is taxed in each lane is its own guide. The tables above are pre-tax arithmetic in a non-registered account and as-written inside the registered lanes, which run their own leaderboards; the TFSA boards won’t always match the rates used here.
Run your own numbers
The only wrong rate to put into a compounding calculation is an invented one. Pull the live leader for your term from the GIC boards, run the arithmetic above on your own deposit, and set a rate alert so you hear when the number worth compounding changes. Our job is the tracking; the decision is yours.
Frequently asked questions
How does compound interest work on a GIC?
A compounding GIC adds each year’s interest to the principal, so the next year’s interest is calculated on a larger balance. At the best 5-year rate on our boards, 4.30%, a $10,000 deposit earns $430.00 in year one and $508.87 in year five. A GIC sold with interest paid out annually earns simple interest instead, and at that rate the difference is $193.02 over five years.
What is the Rule of 72?
Divide 72 by an annual interest rate to estimate the years needed for money to double. At the 4.30% board-leading 5-year rate that’s about 16.7 years; at the 2.93% big-bank 1-year average it’s about 24.6 years. It approximates the exact logarithm math and is accurate enough at deposit-rate levels.
Does compounding frequency matter on a savings account?
Less than the rate does. On $10,000 over five years at 4.30%, monthly compounding beats annual by $50.84, while a rate 0.95 points lower costs $551.97 over the same stretch. Read the frequency in the product terms; shop the rate.
Is compound interest taxed in Canada?
Where the money sits decides. In a non-registered account, interest is generally taxable in the year it is earned even if it compounds instead of being paid out. Inside a TFSA, RRSP or FHSA, interest is not taxed while it remains in the account.
What rate should I use in a compound interest calculator?
A live one, for the product and term you actually intend to hold. The per-term leaders on our GIC boards and the top of our HISA board are observed rates, and on our boards the ceiling is 4.30% for a five-year lock. A hypothetical 5% will flatter every projection you run.
Rates referenced in this article were checked against Ratehunter's data on the publication date shown above and may have changed since — the rate boards always carry the current numbers. See our editorial standards andadvertiser disclosure.