Guaranteed Investment Certificates (GIC)

Your Guide to GICs in Canada

Even though it is tempting for today’s investors to trade in equities, you are putting yourself at the mercy of the market. Today, with zero-commission online brokers like Robinhood or eToro, they entice you even more to invest your hard-earned money within a few clicks on your phone.

Suppose you feel too intimidated and overwhelmed to trust stocks and cryptocurrencies. In that case, Canadian GIC offers a better way to invest and reach your long term savings goal.

What is a GIC?

GIC, or Guaranteed Investment Certificate, is a uniquely Canadian financial construct that aims to lower the risk for investments in either mutual funds, stocks, or bonds. In other nations, something like GIC would be called a timed or term deposit. GICs are issued by either banks or trust management funds.

How does a GIC Work?

To secure your principal investment — hence the term “guaranteed” — you need to make your money available for the financial institutions for a certain period. Therefore, banks receive a fresh influx of cash to invest in other projects, and you get peace of mind that your principal investment will earn a fixed rate of return and will not be lost no matter the market conditions. Of course, almost all GICs pay interest rates higher than you would get from usual savings accounts, even high-interest savings accounts.

In short, once the agreed-upon period expires, the financial institution will fully return the deposited money, plus interest. The minimum principal investment varies from bank to bank, but it is usually $500. The interest rate depends on the amount of time and the region in which you live.

And with Guaranteed-Return GICs, you enjoy a guaranteed rate of return, so you don’t need to be concerned about changes in the markets or the economy

How Does Interest on a GIC Work?

Like a savings account, when you deposit money into a GIC, your money will earn interest. The longer the specific term, the more interest you earn. And, at the end of the term, you get the entire amount you deposited plus the interest. How much? Short answer—it depends on how the GIC is structured and its payment options. You could earn simple interest, or compound. With simple interest, the bank only pays you interest based on the initial principal. With compound interest, on the other hand, every time you’re paid out interest, it’s added to your principal. That means, the next time you earn interest, it will pay you on the new principal. That’s the beauty of compounding interest.

Main Benefits of Opening a GIC

Besides guaranteed interest and principal, there are other enticing benefits to opening a GIC account.

If—for some reason—the institution you invested your money in fails, both your principal and interest are safeguarded by a guarantee from the Canada Deposit Insurance Corporation (CDIC). This guarantee is extended up to $100,000.

For an even greater guarantee, up to $300,000, you would have to have three types of separate GIC accounts: non-registered, RRSP, and TFSA. 3x 100,000 = 300,000.

As CDIC-insured, GIC safeguards against market volatility and black swan events, such as coronavirus pandemic or military conflicts.

For instance, if you were to invest $1000 in stocks, and those stocks drop by 40%, your entire investment portfolio would drop accordingly. On the other hand, if you were to invest $500 in stocks and $500 in GIC, only half of your portfolio would drop by 40%.

GICs offer flexibility. You can lock in your money for a few months or up to a decade. Expanding this flexibility further, you can get a GIC for several plans: RRSP, TFSA, RESP, LIRA, or RRIF, for both registered or non-registered accounts.

Even some GICs offer the best of both worlds — stock market ups but not the downs. However, these market-linked GICs provide lower interest rates than regular GIC accounts.

How to Choose the Right GIC

Only you can answer for how long and how much money you want to lock in a GIC. As previously mentioned, the period of time can range from a few months to ten years. Once you have assessed how much money you are willing to part with, take a look at up-to-date sites that collate financial institutions according to their fixed and variable rates in a given period.

Frequent Asked Questions About GICs

What is a non-redeemable GIC?

Non-redeemable GICs offer an opportunity for even higher interest rates. However, there is a catch. You would not be able to withdraw your money until the allotted time expires. There is an exception to this rule; you would have to prove in no uncertain terms that you have fallen on hard times and need the money desperately.

Who has the best GIC rates in Canada?

Lucky for you, there is stiff competition between various financial institutions licensed to offer GICs. At the current date, the winner, for periods between one and five years, seems to be Oaken Financial, at a 2.3% interest rate for a 5-years term. However, this can change, so make sure to shop around.

Tangerine, EQ Bank, CIBC, and People’s trust are also highly competitive, depending on what type of account you want and how long.

Is a GIC a security?

Yes, although not usually referred to as such. Nonetheless, a security holds a range of assets that represent monetary value. A stockholder owns that value in the relationship between the creditor and the governmental institution, making certain guarantees.

In other words, GIC is a senior security, unlike a corporate bond.

Can a GIC be cashed in early?

You can do so only with a cashable or redeemable GIC without paying the penalty. With standard GICs, you will have to pay the penalty in addition to not earning interest. The whole point of GIC, as a low-risk financial instrument, is to provide banks with the security that your cash will not be withdrawn. Likewise, when you further increase that security, via non-redeemable GIC, you get an even higher rate of return.

How much interest will I earn on a GIC?

If you invest $30,000 for one year, and the interest rate is 2%, you will receive $600. Plus, the deposited principal. You can then reconfigure your GIC for two years, five years, and so on. This process is called reinvesting, and you could also reinvest it into another type of GIC.

Make sure to take advantage of many online GIC interest calculators to find the best GIC rates in Canada. Remember, a maximum interest is only available to non-redeemable GICs.

Are all GICs covered by CDIC insurance?

Unfortunately, no. If you were to purchase a USD GIC or those GICs locked for more than five years, CDIC insurance coverage will not be present. Likewise, GICs bought from non-CDIC members will also not be CDIC-insured. The only exceptions are deposits made at credit unions under the auspice of non-government insurers.