Compound interest Canada is one of the most powerful forces in personal finance: it means your money can grow faster than with simple interest because you earn interest on interest. This guide explains how compound interest works, shows real Canadian examples (savings, GICs, TFSA/RRSP, mortgages and credit cards), and gives step-by-step calculations you can use to estimate compound growth.
What is compound interest?
Definition: Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods.
Why it matters: Over time, compounding accelerates growth — small differences in rate, frequency or time can have large effects.
The basic formula
Compound interest formula: A = P (1 + r/n)^(n*t)
A = future value (amount after t years)
P = principal (initial amount)
r = annual nominal interest rate (decimal)
n = number of compounding periods per year
t = number of years
Example: For $10,000 at 5% compounded annually for 10 years: A = 10,000(1 + 0.05/1)^(1*10) = 10,000(1.05)^10 ≈ $16,288.
Step-by-step: Calculate compound interest
Write down the variables: P, r (as a decimal), n, t.
Compute r/n (period rate).
Compute n*t (total periods).
Raise (1 + r/n) to the n*t power.
Multiply by P to get A.
Subtract P if you want total interest earned: Interest = A − P.
Compounding frequency matters
Annual compounding: n = 1.
Semi-annual: n = 2 (common for some GICs).
Monthly: n = 12 (common for bank savings and mortgages).
Daily: n = 365 (some savings accounts and credit cards effectively compound daily).
Continuous compounding: A = P e^(r*t).
Example: $10,000 at 5% for 10 years:
Annual: ≈ $16,288
Monthly: A = 10,000(1 + 0.05/12)^(120) ≈ $16,470
Continuous: A = 10,000 e^(0.05*10) ≈ $16,487
Small differences in frequency amplify with longer time horizons.
Real Canadian examples
1) GIC (Guaranteed Investment Certificate)
Scenario: $10,000 GIC at 2.5% compounded annually for 5 years.
Calculation: A = 10,000(1 + 0.025)^5 ≈ $11,289.
Notes: GICs are low risk; check compounding frequency and early withdrawal penalties.
2) TFSA vs. non-registered account
Scenario: $5,000 annual contributions for 20 years at 6% compounded annually.
Calculation (future value of annuity): A = contribution * [ (1 + r)^t − 1 ] / r
A = 5,000 [ (1.06)^20 − 1 ] / 0.06 ≈ 5,000 65.297 ≈ $326,485
Tax effect: In a TFSA, growth and withdrawals are tax-free. In a non-registered account, investment income and capital gains are taxable. That tax drag reduces effective compound growth.
3) RRSP contributions
Why RRSPs change compounding: Contributions are tax-deductible, lowering current tax burden. Growth is tax-deferred until withdrawal. This allows compounding on pre-tax dollars, which can accelerate accumulation for retirement.
4) Mortgage interest (how compounding affects what you pay)
Scenario: $300,000 mortgage at 3.5% annual rate, amortized over 25 years, monthly payments.
Key point: Mortgage interest is compounded monthly in the amortization schedule; each payment covers interest on the outstanding balance plus principal. Longer amortizations mean more interest paid overall.
Tip: Use a mortgage amortization calculator from an institution or CMHC resources to compare costs.
5) Credit cards and high-interest debt
Danger: High-rate debt compounds against you. A 20% APR compounded monthly reduces wealth growth dramatically.
Checklist:
Pay more than the minimum.
Move high-rate debt to lower-rate options (consolidation, line of credit).
Avoid interest-bearing balance transfers with long promo periods unless you understand fees.
Rule of 72 — quick estimate
What it does: Estimates years to double an investment.
Formula: Years ≈ 72 / annual rate (as percent).
Example: At 6%, doubling time ≈ 72 / 6 = 12 years.
Compound growth & taxes, fees, and inflation
Taxes: Investment income in non-registered accounts reduces compound growth. Use TFSA/RRSP strategically to shelter growth.
Fees: High management fees (MERs) reduce your effective return and compound loss. Compare ETFs and low-cost index funds.
Inflation: Real compound growth = nominal return − inflation. For long-term planning, consider expected inflation (Bank of Canada resources can help).
Helpful links:
Practical steps to harness compound interest (numbered)
Start early — time is the most important factor.
Contribute regularly — set up automatic contributions to your TFSA or RRSP.
Choose tax-efficient accounts — use TFSA for tax-free growth; RRSP for tax deferral depending on your marginal tax rate.
Minimize fees — prefer low-cost ETFs/index funds or no-fee accounts.
Reinvest earnings — dividends and interest should be reinvested to compound.
Avoid high-interest debt — pay down credit cards and consumer loans first.
Tools & calculators
Use the FCAC and Bank of Canada tools to model savings and compare rates.
Check CRA My Account for contribution room and tax records.
Banks and credit unions provide GIC and mortgage calculators; CMHC has mortgage guidance.
Final takeaways
Compound interest works best with time, consistent contributions, tax-efficient accounts, and low fees.
Small rate or timing changes compound into large dollar differences over decades.
Use Canadian-specific tools (FCAC, CRA, Bank of Canada, CMHC) and consider speaking with a licensed financial advisor for personalised planning.