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What is a GIC?
Guaranteed investment certificates (GICs) are financial products that allow Canadians to invest their money and earn some guaranteed interest. With a GIC, you invest your money with a financial institution (the “issuer”) for a specific period of time (the “term”), and they'll guarantee you a return of the principal (the initial amount you invested) and interest at a rate specified in your contract.
GICs are a popular method of investing among Canadians for their guaranteed interest. When you purchase a GIC, your funds are insured with CDIC or a provincial insurance organization depending on the financial institution you purchased the GIC from. For example, if you are buying a GIC from one of the big banks, your deposit will be insured up to $100,000 by the CDIC. GICs purchased through credit unions, on the other hand, are provincially insured and the total deposit amount insured will differ depending on the insurance organization.
How do GICs work?
A GIC works opposite to the typical lending relationship between financial institutions and their clients. Instead of issuing the customer a loan, the customer grants the loan to the financial institution. The financial institution then returns the investment after the term is complete, with the interest that was earned. Generally, you would be locked into the GIC term (the duration to maturity of your GIC, or the time duration you agree the financial institution will be able to hold your money), but you can also choose a redeemable GIC, which will allow you to pull your funds out before its maturity. Redeemable GICs in general offer lower interest rates compared to non-redeemable, but they are not entirely locked in, and allow investors who are interested in short-term deposits to beat out interest rates.
GIC terms start in periods as short as thirty days and can go as long as ten years. Due to their low-risk nature, GICs provide higher returns the longer the term is. It is important to note that sometimes financial institutions offer promotional GIC rates which are usually higher than their standard rates, which is why it is important to compare all GIC rates offered to Canadians prior to deciding to invest. CDIC insurance covers investments up to $100,000 in terms of up to five years long. Provincial insurance differs depending on the province. Generally, on non-redeemable GICs (the most popular non-registered GIC type) investors are not permitted to withdraw their deposit until the GIC term is complete without paying an early-withdrawal penalty. You can learn all about GIC basics, GIC terms, and GIC insurance, by visiting our Education Centre.
Is a GIC the right investment for you?
- As mentioned above, investing in a GIC poses little-to-no risk and offers guaranteed returns, making them an excellent option for Canadians with low-risk tolerance or short investment horizons. For instance, if you're nearing retirement in a few years or are saving a downpayment for an upcoming home purchase, a GIC is the perfect investment vehicle as it'll earn you guaranteed returns over a shorter time-frame and help you combat inflation while keeping you isolated from the volatility of high-risk investments. Since rates are guaranteed for the length of their term, GICs also have an advantage over savings accounts, which can see their rates spontaneously dip due to market conditions (such as changes of the Bank of Canada's Prime Rate).
- However, since GICs are locked in for a set term, they might not be the best option if you want flexibility and to access your money before the term is complete. For instance, if you need access to your money, you won’t have access to your investments if they’re locked up in a 5-year GIC. If you are looking to invest your money and have access to it at any time, a high-interest savings account (HISA) or tax-free savings account (TFSA) might be a better option for you, especially if you are putting money aside for an emergency fund. On the other hand, if you are comfortable with a little risk, want a higher return, and have access to your money, a robo-advisor could be an investing route you might want to consider taking.
Choosing the right GIC type:
There are a few different types of GICs that banks and credit unions offer their customers. GIC rates, terms, and conditions can differ from one financial institution to the next. Term deposit lengths vary depending on the institution.
- Short-term GICs, usually ranging from 30-days to 1 year, typically offer lower rates.
- For long-term GICs, Canada currently has term deposits ranging from 2 to 10 years in length.
- You can put your Registered Education Savings Plan (RESP), Registered Retirement Savings Plan (RRSP), or TFSA savings in Registered GICs. Canada permits GIC wealth to grow tax-free, if the investments are registered.
- Non-registered GICs do not have limits and are taxable at the end of each year. There are also other GIC options, such as Market Linked GICs and US and Foreign Currency GICs.
- Canada also offers its citizens Market Linked GICs available, which are economy-linked investments made into various stocks and bonds.
- Rates are not fixed and can change with the market. Buying US and Foreign Currency GICs in Canada allows investors to earn interest on foreign currency.
- It is an excellent option for investors who want to reap the benefits of the best GIC interest rates before using foreign money.
How are GIC investments insured?
One of the best things about GICs is that they're guaranteed. No matter what the market does, your money will be returned to you (along with the prescribed interest) after your term is up. But how is this possible? Who ensures that you'll get your investment back?
Insurance on GICs is a bit layered. First off, your investment will be protected by the financial institution you purchased the GIC from. They're required by law to return the full amount plus interest after the term expires. But what if the worst happens, and your bank dissolves? Who will pay you then?
At this point, a second level of protection comes into effect. Most GICs are protected by the Canada Deposit Insurance Corporation (CDIC), which covers deposits of up to $100,000 on terms less than five years (but does not cover foreign currency GICs). Others carry insurance through provincial organizations.
In these cases, the level of coverage you'll receive depends on your province. Let's review the coverage of each below:
British Columbia, Alberta, Saskatchewan, Manitoba:
- all deposits accepted by the institution with no maximum
- savings up to $250,000
- registered accounts (RRSPs, TFSAs, etc.) fully covered
- savings and GICs up to $100,000
- registered accounts (RRSPs, TFSAs, etc.) up to $100,000
New Brunswick, Nova Scotia, Newfoundland and Labrador:
- savings, GICs, RRSPs up to $250,000
Prince Edward Island:
- savings and GICs up to $125,000
- unlimited RRSPs
Can you negotiate GIC rates?
While you may feel intimidated to discuss rates with your financial provider (or unaware that you're able to at all), it only takes a phone call or in-person appointment to negotiate for something better. Particularly if you're a long-running customer with accounts in good standing, you may be surprised at how far banks are willing to go to keep you and your money. While nothing is guaranteed and there is always the possibility of a hard "no", it never hurts to try. Plus, if you're dissatisfied with your current rate and wish to take your investment elsewhere, there are plenty of other providers in the market eager to offer you something better.
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