- The advertised rate is not what you earn — the effective yield is, and it depends entirely on how often interest is credited.
- Interest in a regular savings account is taxed as ordinary income, at your full marginal rate, in the year it is earned.
- Money deposited early earns for longer, so the timing of contributions matters more than small differences in rate.
- A TFSA holding the same savings account earns the same interest and keeps all of it — the tax line is often larger than the rate difference between banks.
How savings interest works
A savings account pays interest on whatever balance it holds, credited on a schedule the bank sets — daily, monthly, quarterly or annually. Each time interest is credited it joins the balance, so the next credit is calculated on a slightly larger number. That is the whole mechanism, and over a long enough period it is the difference between an account that keeps up with inflation and one that does not.
The rate on the poster is the nominal annual rate. What you actually earn over a year is the effective annual yield, and it is higher than the nominal rate whenever interest is credited more often than once a year. The gap is small on one year and not small on twenty, which is why the calculator shows both.
Deposits change the shape of the result more than the rate does at ordinary balances. A regular monthly transfer earns interest for every month it has been in the account, so money added early does most of the work — the same total contributed over ten years earns meaningfully less if it all arrives in year nine.
The math
The effective annual yield comes from the standard conversion: APY = (1 + r/n)^n − 1, where r is the quoted annual rate as a decimal and n is the number of times a year interest is credited. At n = 1 the two are identical; at n = 365 a 5% quoted rate becomes about 5.127%.
The projection applies your deposit or withdrawal every month and grows the balance by the compounding periods that fall in that month, then rolls the twelve months into the year row shown below. Applying deposits monthly regardless of the compounding schedule is deliberate: a payroll transfer does not wait for the bank's quarterly compounding date, and modelling it as though it did would understate the result.
Tax is applied to each year's interest at the marginal rate you set and reported separately rather than taken out of the balance. Interest in a non-registered account is taxable as ordinary income in the year it is earned — there is no capital-gains treatment and no dividend credit — so the marginal rate is the right rate. In a TFSA there is no tax at all, which is what the 0% default represents.
Worked example
Put $10,000 into an account paying 4% compounded monthly and add $300 a month. After ten years the balance is about $58,000: roughly $46,000 of your own money and roughly $12,000 of interest. The effective yield is 4.074%, not 4% — three quarters of a percentage point of extra earnings over the decade, purely from the compounding schedule.
Now apply a 40% marginal rate to that interest. The account still holds $58,000, but about $4,800 of the interest is owed to the CRA, leaving roughly $7,200 kept. That is the number worth comparing against a TFSA, where the same account keeps all $12,000 — and it is the comparison most savings calculators do not show you at all.
Key terms
- Nominal rate (APR)
- The annual rate a bank advertises, before accounting for how often it credits interest. Two accounts quoting the same nominal rate can pay different amounts.
- Effective yield (APY)
- What a nominal rate actually pays over a full year once compounding is included. The only rate on which two accounts are directly comparable.
- Compounding frequency
- How often the bank credits interest to the balance — daily, monthly, quarterly or annually. More often means a higher effective yield at the same nominal rate.
- Marginal tax rate
- The rate charged on your next dollar of income, which is the rate that applies to savings interest. Not your average rate, which is lower.