Guaranteed Investment Certificate

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A Guaranteed Investment Certificate (GIC) is a term deposit that offers a guaranteed rate of return over a fixed time period.[1][2][3] GICs are most commonly issued by Canadian banks or Trust companies. In most circumstances[4] they are covered by deposit insurance from the Canada Deposit Insurance Corporation (CDIC) or a provincial deposit insurance program. GICs are similar to the Certificate of Deposit in the United States.

GICs with a term of less than 1 year are considered cash equivalents and are alternatives to money market funds or high-interest savings accounts (HISA). GICs with terms of 1-5 years are alternatives to conventional bonds. The CDIC insurance now extends to terms longer than 5 years.[5]

The certificates issued by insurance companies are referred to as Guaranteed Interest Annuities or Guaranteed Interest Accounts (GIAs) and are considered insurance products. They are guaranteed by Assuris, without a limitation to the maximum term.

GICs are purchased for "T+0" or "T+1" settlement, depending upon the institution. Investors who sell stocks or bonds with "T+2" settlement should generally wait until the funds are in their account before purchasing GICs to avoid incurring interest charges.

Types

Cashable

Cashable GICs give you the right to redeem the GIC without penalty before the original maturity date, subject to the terms and conditions of the GIC.

Non-cashable

Non-cashable GICs cannot normally be redeemed before the original maturity date without penalty. Generally non-cashable GICs have a higher interest rate than an equivalent cashable GIC because of this limitation.

Some institutions may be willing to crystallize the maturity of all or a portion of a GIC before its term in special circumstances, e.g. for estate settlement purposes, or division of assets in a marital breakdown, or to meet minimum Registered Retirement Income Fund (RRIF) withdrawal requirements. If one of these situations might be an important part of the investment decision, it may be worthwhile to ask the institution what their policy is with respect to such situations.

Market-linked

Main article: Market-linked GIC

Market-linked GICs (also known as index-linked GICs) are a type structured product that combines the security of principle of a GIC with some participation in specified equity market returns. Index-linked GICs are higher-risk investments than normal interest-bearing GICs, which are low risk. The rest of this article is only concerned with normal interest-bearing GICs.

US dollar

A number of Canadian institutions offer GICs that are purchased in US dollars and pay interest in US dollars. These are now insured by CDIC.[5]

Interest Rates

Typically the longer the term of the GIC, the higher the interest rate will be, although some exceptions may be found due to institutions offering bonus rates on specific products.

While the majority of GICs will have a fixed interest rate for the entire term, there are GICs offered by various institutions where the interest rate will rise each year to rates that will be determined at the time you purchase the GIC.

Payment frequency

The terms of the GIC will specify how often interest is paid. Typical terms are monthly, quarterly, semi-annually and annually. Some GICs only pay the earned interest upon maturity, and are only suitable for a registered account (Tax-Free Savings Account, Registered Retirement Savings Plan, Registered Retirement Income Fund or Registered Education Savings Plan) due to the tax treatment of accrued interest.

Getting the best rate

Banks

Many GIC issuers (such as your neighbourhood bank) may not give their best rate on first enquiry. Often they will first quote the official rate that they post in the branch and report to CANNEX. If you have a good relationship with the institution, e.g., a bank account, Registered Retirement Savings Plan (RRSP), mortgage, credit cards, etc., and/or you want to purchase a relatively large GIC, at least $5,000 or $10,000, then you should be able to get a bonus rate of interest. Ask to speak with a bank officer, point out the length and value of your relationship and ask for a better rate.

Sometimes the brokerage divisions of the "Big-5" banks offer higher GIC rates than you can easily get at one of their retail banking branches. Some make their rates available online, for example BMO. Print copies of their and/or their competitors' rates and ask the bank officer to match. Bank branches can't always do that but the more ammunition you have, the better are your chances to get significant increases over their official rates.

When you compare the best rate you can get from your own bank with the highest rate you can get from a competitor, it's useful to calculate the size of the difference in absolute dollars. For example a 0.25% higher interest rate on a $5,000 is only $12.50 per year. It may not be worth your time and effort to open an account and transfer money for such a small increase. On the other hand, 1% more on $10,000 is $100 a year.

Online banks

Online banks can offer attractive GIC rates when looking to increase their deposits. See the list of online banks listed in the HISA article for examples, and this comparison chart. See also the Financial Wisdom Forum topics below in the Further reading section.

Discount brokers

GICs can be purchased in discount brokerage accounts, including registered accounts. Discount brokers typically offer a wide selection of GICs, including CDIC-insured GICs from online banks or trusts, which typically have higher rates than the "Big-5" offerings. Brokerage accounts are therefore a good place to build a GIC ladder.

Deposit brokers

Alternatively, look for Deposit Brokers who can offer you higher rates. A word of caution, deposit brokers routinely advertise credit union GICs. Credit unions offer some of the highest rates, but their GICs are not covered by CDIC although they may be covered by a provincial deposit insurance program.

Rolling GIC ladder

Main article: Fixed income ladder

A typical way to invest in GICs in a retirement portfolio is a rolling five year ladder in a discount brokerage account. For example, to set it up, you could divide a hypothetical $50k into five $10k rungs and purchase non-cashable GICs with maturities of one, two, three, four, and five years. When each of these initial GICs mature, you purchase a new non-cashable 5 year GIC, with the original $10k, the interest, and any newly available funds, at the best rate you can find, remembering to take into account CDIC coverage.

In accumulation mode, for registered accounts, compounding GICs would typically be used in the ladder to avoid receiving regular interest payments, which would accumulate as cash in the account and would require reinvestment. With a compounding GIC, all interest is received at maturity, and can be simply reinvested in a new GIC along with the capital. For non-registered accounts, taxation will be simpler for non-compounding GICs. Those would be also used during retirement to provide cash flow.

Declining GIC ladder

Main article: Declining GIC ladder

A declining GIC ladder provides cash flow over a predetermined period of up to 5 years. The cash flow consists of both interest payments and the principal from maturing GICs: these combine to provide the targeted amounts, which are spent. So by design, there is nothing left in a declining ladder at the end. Applications include:

  • financing education and living costs during a university or other degree;
  • providing extra retirement income while waiting for government benefits (OAS) or pensions (CPP/QPP) to start at the regular age, or at voluntarily delayed ages, i.e. bridging an income gap.

If the aim is provide a specific amount every year, a few calculations are required to figure out each rung, as explained in the main article.

Taxation

Main article: Tax-efficient investing

Interest income is taxed at the highest marginal tax rate in Canada so the general guideline is to hold GICs in a registered account if possible.

See also

References

  1. ^ Autorité des marchés financiers (Quebec), Debt Securities - Guaranteed investment certificates (GICs), viewed November 14, 2021.
  2. ^ Financial Consumer Agency of Canada, Your Financial Toolkit, Term deposits and guaranteed investment certificates, viewed November 14, 2021.
  3. ^ Moneysense, Compare the Best GIC Rates in Canada 2021, viewed November 14, 2021.
  4. ^ CDIC, What's covered, viewed October 19, 2021.
  5. ^ a b CDIC press release, Changes to modernize and strengthen CDIC deposit protection now in effect, April 30, 2020, viewed October 19, 2021.

Further reading

External links

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