Before you rush out and move all your savings into that one bank with the highest interest rate, you need to think about how the CDIC coverage works and how it affects your deposits.
Why? Because the CDIC coverage is limited to $100,000 per depositor in each insured category at a member institution.
In this post, we’ll cover some strategies you can use to maximize your CDIC protection in Canada.
The strategies presented post are for deposits held at a CDIC member institution. Similar strategies can be used for the banks or credit unions insured by a provincial deposit insurer, with slight modifications.
The key to maximizing your CDIC protection is understanding how CDIC deposit insurance works. This means knowing which deposits are eligible for coverage, called “eligible deposits”, and the insured categories.
What Are Eligible Deposits?
These are the types of deposits that are covered by CDIC insurance.
They include:
- Savings Accounts (Regular, High-interest Savings Accounts and Tax-Free First Home Savings Account (FHSA)
- Chequing Accounts
- Guaranteed Investment Certificates (GICs) and other term deposits (irrespective of the term*)
- Foreign Currency Deposits*
- Bank drafts or money orders
- Cheques
These eligible deposits can be held in unregistered accounts or in registered plans like Tax-Free Savings Accounts (TFSAs), Registered-Retirement Savings Plans (RRSPs) etc.
*Before April 30, 2020, foreign currency deposits and GICs or term deposits with terms above 5 years were not covered.
What Is Not Covered?
Not every deposits or investments held at financial institutions are covered. In general, investment accounts or products are not covered by CDIC.
These include:
- Mutual Funds
- Exchange-Traded Funds (ETFs)
- Cryptocurrencies
- Bonds and Treasury Bills
And of course, all deposits even if eligible, that are held with non-members of CDIC are not covered. For example, credit unions not regulated federally are not covered by CDIC but they are covered by their respective provincial deposit insurer.
What Are The Insured Categories?
The 7 insured categories are:
- Deposits held in one name
- Deposits held in more than one name: This refers to joint accounts, for example a joint savings account with your spouse. The limit in this category is per set of joint owners. So, you can have the $100,000 coverage limit on your joint savings account with a child, and another $100,000 on your joint accounts with your spouse.
- Deposits held in an RRSP (Also includes Locked-In Retirement Account (LIRA) and Spousal RRSP)
- Deposits held in a TFSA
- Deposits held in an RRIF
- Deposits held in Trust
- Deposits held for paying tax payments on mortgaged properties (that is, deposits held in a separate account to pay property taxes)
If a CDIC member fails, your deposits will be grouped into one of the 7 categories above, and the $100,000 limit applied.
Note that Deposits held in more than one name (that is, Joint accounts) and Deposits held in trust are per set of joint owners or beneficiaries, so the total can potentially be higher than $100,000 in these 2 categories.
Strategies To Maximize CDIC Protection
Now that you understand how the CDIC coverage works, let’s look at the strategies you can use to maximize the protection.
For illustration purposes, we will use the CDIC Coverage Calculator.
1. Spread Your Savings Across Financial Institutions
This is perhaps the simplest and easiest strategy to implement, especially if you have accounts at other institutions with comparable features (like interest rate) to your main savings account.
Illustration:
John just received an inheritance of $125,000 and he is considering putting it in a High-Interest Savings Account (HISA) at ABC Bank.
Let’s consider what will happen to John’s savings if ABC Bank fails.
CDIC will promptly reimburse him, but up to the limit of $100,000. So, he loses $25,000 plus any interest accrued.
What could he have done differently?
To prevent this loss, he could have moved $30,000 to another CDIC member institution (or provincially insured bank), even if he’ll be getting a slightly lower interest on his money.
We could move just the $25,000 over the CDIC limit but we want to account for any interest that may accrue on his savings at ABC Bank over time.
With the new setup, there are 4 possible scenarios:
- No failure: The preferred option so no insurance payment.
- ABC Bank fails: CDIC will reimburse $95,000, plus interest, to John up to the limit of $100,000 and he still has the balance in the second bank.
- The second bank fails: No loss since none of the balances are above $100,000
- Both Banks fail: John will be reimbursed the full amount of $125,000 in both banks since the balances in both banks are below the CDIC limit.
So here’s the new CDIC coverage.
So, even in the very unlikely event that both banks fail, the entire amount of $125,000 will still be covered by CDIC coverage.
2. Consider Joint Accounts
This is ideal for couples. You can move some of your savings into a joint account shared with a spouse or common-law partner.
“Deposits held in more than one name” is a separate insured category under CDIC protection, so it will be treated as distinct from those in your name alone.
For the deposits to be eligible for separate coverage, CDIC requires that the information below must be on the records of the financial institution:
- A statement that the deposit is owned jointly
- The name and address of each of the joint owners
Each set of joint owners are treated separately, so you can have separate joint accounts with a spouse, children, parents and so on, and still qualify for $100,000 each.
Using John as an example, he may choose to open a joint savings account with his partner to extend his coverage without the need to transfer to another financial institution.
Let’s assume he moves $30,000 to his joint account with his spouse at the same bank. His CDIC coverage will now look like this.
3. Spread Your Money Across The CDIC Insured Categories
With this strategy, you want to move some of your funds into one or more of the other insured categories.
For example, CDIC has separate insured categories for some registered plans such as RRSP, RRIF and TFSA, with plans to add RESP and RDSP in 2022.
This means, any eligible deposits held in any of these plans will be covered separately from the deposits in your other non-registered accounts.
This may be an option if you have available contribution room in your registered plans but think twice before using your tax-sheltered contributions on low-earning deposits. You should only be using this strategy as part of a larger well thought out investment plan.
Using the same example as before, John could move $30,000 to his TFSA or higher if he has the room. This is his updated coverage summary from the CDIC Coverage Calculator.
Summary
If you have eligible deposits above the $100,000 limit in a single financial institution, one or more of the strategies discussed above may be ideal, depending on your individual circumstances.
At the minimum, you can easily move some of the funds to another bank or open one within a few days, even if you don’t have a spouse or contribution room in your registered accounts.
The risk of a bank failure may be remote, but it is possible, so act accordingly and take action to protect your hard-earned money today.
Fortunately, many of the strategies presented in this post are simple with little stress.
Related Post: CDIC : Understanding How Deposit Insurance Works In Canada
