Guaranteed Investment Certificates (GICs) are a type of investment that allows you to invest your funds with a financial institution over a set period, the term. In exchange, you’ll receive a guaranteed amount at the maturity, representing the principal invested and an interest based on the rate agreed.
Because of this, GICs are one of the safest investments available to Canadians.
Features Of Guaranteed Investment Certificates
Here are some key features of a Guaranteed Investment Certificate (GIC):
- There is a minimum amount required to investment. This varies but generally starts at $500.
- You can invest for different terms, depending on your savings goals. Terms could be as short as 30 days or as high as 10 years
- The longer the term, the higher the interest rate you can expect to earn
- There are no fees on GIC investments
- GICs are protected by Canada Deposit Insurance Corporation (CDIC). CDIC coverage was not available for Foreign currency GICs and GICs with terms over 5 years but this changed effective April 30, 2020.
- Interest payment can be received at different set intervals or at maturity. You may also be able to automatically reinvest the interest till maturity.
Types Of GICs
There are different types and variants of GICs. and they can be grouped according to some of the key features:
By Interest Rate
Fixed Rate GICs
Most GICs have a fixed rate of interest. With this type of GIC, you know exactly how much you will receive as interest through out the term of the investment or at maturity.
This is an attractive option if you require predictable returns, for example at retirement.
Variable Rate GICs
As the name suggest, you get variable returns with this type of GICs. The actual interest paid depends on a benchmark interest rate, e.g. the prime rate. So, the interest you receive will increase if the benchmark goes up or decrease otherwise.
This could be a smart way to invest if you have a strong opinion about the direction of the interest rate over the term of your investment.
Market-linked or Index-linked GICs:
Market-linked GICs are similar to variable rate GICs. In this case, the GIC pays an interest that depends on the performance of a specified stock market index.
It provides a downside protection since your initial principal is guaranteed, but you can still take part in the growth of the benchmark stock index.
Usually, there’s a cap on the interest rate but there’s the potential to outperform a traditional fixed rate GICs. There’s also the risk of not receiving any interest if the index performs poorly.
You won’t know how much interest you’ll receive in advance since the stock index performance is not known from the start. Interest, if any, will be calculated and paid at maturity.
There are also some variants that have both fixed and index-linked interest rates. For example, there could be a fixed rate of 0.5% and another 5% depending on the performance on the index.
By Account Type
Registered GICs
These are GICs bought inside any of the registered plans like RRSP, TFSA, RESP etc. The interest received on the GICs will be tax-sheltered.
Non-Registered GICs
If you invest in a GIC outside of a registered account, it called is a non-registered GIC. Unlike registered GICs, the interest is not tax-sheltered and will be taxed at 100% of your marginal tax rate when you file your income
By the option to redeem before maturity
Non-redeemable GICs:
They are the most common type of GICs.
With non-redeemable GICs, your investment is meant to be held till maturity. If you ever need to redeem the investment, you may have to show you’re undergoing some financial difficulty, but it is still at the discretion of the GIC issuer to allow the redemption.
There will be some penalty for early withdrawal. And you may have to forfeit all or a substantial portion of the interest.
Because of these restrictions, it offers a higher interest rate than the redeemable or cashable GICs.
Redeemable GICs:
This type of GICs offers you the flexibility to cash out early but you receive a lower interest rate in return.
Cashable GICs:
This is a hybrid of the first two, with a term of 1-year: You can cash out early but only after a set period, typically 30 to 90 days.
They are more liquid and ideal for people that value having access to their money over receiving a higher interest. Also, if you expect interest rates to rise, a cashable GIC gives you the flexibility to cash out of your current contract and buy a new one at a higher rate.
Not surprisingly, they have lower rates than non-redeemable GICs.
By Currency
Canadian Dollar GICs
GICs denominated in Canadian dollars. Most GICs are in CAD.
Foreign Currency GICs:
These are GICs denominated in other foreign currencies. You can purchase foreign currency GICs from some financial institutions, especially U.S. dollars.
This could be an option if you have future expenses in the currency, for example a planned vacation to the country, or you simply want some exposure to the currency. If you expect the U.S. dollars to strengthen against the Canadian dollars in a year for instance, you could buy a 1-year term U.S. denominated GIC today. If you’re correct, you’ll get more Canadian dollars after exchanging the funds.
A drawback is that the interest rates offered are generally very low. Also, they are usually not available in registered accounts.
Why Choose GICs
The biggest draw to GICs is the guaranty that you’ll never lose the original principal invested. And in most cases, you know exactly how much you’ll receive and when.
So GICs are for people that prioritize the safety of their investment over returns, but could also be used to add predictable, low volatility income to any portfolio.
Factors To Consider In Choosing A GIC?
- Term of the GIC
The longer the term of the GIC, the higher the rate of return. However, you should not choose a GIC simply because it has a higher interest rate.
The right term should be decided based on your investment horizon, that is when you expect to need the money. Foe example, if you’re saving for retirement that is still 10 years away, then a 5-year GIC may be ideal.
However, if you’re savings for a shorter-term goal like car purchase or house down-payment, then a 6-month to 1-year GIC will be more appropriate
Also, where your investment horizon is not clear, for example you’re holding the cash while looking for a house to buy, you should be choosing a GIC with a shorter term.
- Fixed or Variable Rate
This will also depend on your financial goals, need for predictable income and outlook of the interest rate or an equity index.
If you’re retired and will need the periodic interest from your GIC investment, a fixed rate GIC may be more attractive and safer than a variable or market linked GIC.
- Option for early withdrawal
Do you want the option to cash out early if something comes up? You should consider this before deciding on a redeemable or non-redeemable GIC.
To make the decision, consider your goals and other available sources of funds you can quickly and easily draw on without a steep penalty.
- Need for regular income
Your need for regular income will determine when you want interest to be paid.
If you need regular income, you can buy a GIC with your preferred term but choose to receive the interest on a more regular basis. For example, you can buy a 3-year GIC but choose to receive the interest quarterly.
Another strategy to consider is what is called GIC Laddering.
With this approach, instead of buying a single 3-year GIC of say $30,000, you can buy 3 different GICs maturing in one-year intervals. That is, 1-year, 2-year and 3-year GICs for $10,000 each.
At each maturity, you can use the money to fund your needs or reinvest if necessary.
GIC Insurance
Most GICs are covered and protected by the Canadian Deposit Insurance Corporation (CDIC). The protection, just like bank deposits, is automatic and you don’t have to do anything from your end to activate it.
If a financial institution fails, you’ll be notified by CDIC within days and both the principal and interest paid to you.
But note that CDIC protection is limited to $100,000 per category at each financial institution. If you have more than $100,000 in GICs at a single issuer, consider moving some of the investment to other financial institutions, putting some in your spouse’s account or opening a joint account with them. That way, you can maximize the protection available to you.
CDIC members include banks and federally regulated credit unions. Check here for a list of members.
Deposits at provincial credit unions are not protected by CDIC, but rather the provincial deposit insurer. All the 10 provinces and territories have their own provincial insurer and the amounts covered may vary. For example, Financial Services Regulatory Authority of Ontario covers up to $250,000 and provides unlimited coverage for qualifying deposits in registered accounts.
Links to the various provincial deposit insurers can be found here.
Related Post: How To Maximize CDIC Coverage On Your Savings
Other GIC Risks To Consider
Inflation
The Bank of Canada’s inflation target range has a mid-point of 2%. Considering how low the interest rate on GICs are, even for longer term maturity, you’re barely beating inflation and may even be losing money in real terms.
For example, if you invested $100,000 in a 5-year GIC paying 2.5% per annum and the inflation rate averaged 2% for those 5 years, you’ll receive a total of $113,141. But because of the inflation, the payout is only worth $102,475 in today’s dollar.
To see how inflation affects your investment growth, check the Investment Calculator on Bank of Canada’s website.
Returns on with Market-linked or index-linked GICS
Market and index-linked GICs have variable returns since the interest-rate is not fixed. Since the rate is linked to a stock market index, you may potentially receive a higher rate than that of a fixed-rate GIC. On the other hand, you may receive less or nothing in some cases if the stock market tanks.
If you require predictable and stable returns, then this is an important risk to consider.
Penalty for early withdrawals
If you invest in a non-redeemable GIC and you need to cash in the investment before maturity, you may have to pay a penalty and lose some or all the interest. You can avoid this risk by only investing in a redeemable GIC but then you’ll have to pay for the flexibility by accepting a lower interest rate.
How Is GIC Interest Taxed?
Interest earned on GICs held in a registered account, like RRSP, TFSA or RESP, are tax-sheltered. But if you hold a GIC in a non-registered account, the interest earned will be taxed.
While all returns (capital gains, interest, dividends etc.) earned in non-registered accounts are taxed, the tax treatment varies. In general, you’ll pay less tax on capital gains and dividends than you would on interest income.
The tax rate on GIC interest will vary depending on your total taxable income for the year and even your province. You should consider this as part of a holistic tax planning strategy.
Other GICs Alternatives
Here are some other low risk alternatives to GICs
1. Savings Account:
- Low risk with usually no fee or minimum balance to open
- pays slightly higher interest than chequing accounts.
- Usually, you can withdraw your money at any time with no restriction
2. High Interest-rate Savings Account (HISA)
- Also low risk but may require a minimum balance to open
- Pays a higher interest rate than savings accounts. The interest-rate on some of the HISAs may even be higher than those of longer term GICs.
Both options generally offer more flexibility than a GIC.
Check here for the best high interest savings accounts rates.
3. Bonds
Bonds are another alternative to GICs. Here’s a short video comparing GICs to Bonds:
How To Buy GICs
Before you buy a GIC, you will need to decide on the following:
- The amount you want to invest and how much: Remember there’s usually a minimum amount required to invest – generally $500 but as high as $5,000 for some financial institution.
- Decide on the type of rate you want: Fixed, variable or index-linked
- Compare the available rates across the different financial institutions for the type of GIC you want (redeemable or non-redeemable)
Should you pick the one with the highest rate? The answer will be Yes in most instances. The offerings are similar. So, as long as you’re comparing the same GIC type (that meets your investment goals) across the different issuers, the one with the highest interest rate is usually the best option.
The quickest way to buy a GIC is by going on the website of the financial institution. Most of them have the rates for the available terms and types of GICs available on their site. Alternatively, you can walk into any of their branches to buy the GIC.
If you don’t have an existing account with the issuer you choose, you should be able to open one immediately at the branch or within a few days if done online.
Conclusion
GICs are a safe and low risk investments that you can use for different savings goals. Whether you’re saving for longer term goals like retirement or short-term goals, GICs could play an important role in a portfolio.
But assess your investment goals to determine if it’s a good fit. If it is, then shop around to get the best GIC rates for on your non-registered investments. For registered accounts, please check the 2 posts below:
And if you’re looking for other investment options, check this post for the best investments in Canada.
Further Reading: Learn more about how to start investing in Canada.
