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. GICs are most commonly issued by Canadian banks or Trust companies. In most circumstances[1] 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.

Certificates of greater than 5 year term are offered by some banks, trusts and insurance companies, but are not CDIC-insured. The certificates issued by insurance companies are referred to as Guaranteed Investment Annuities (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+3" 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

Market linked GICs (also known as index-linked GICs) are a hybrid product that combine the security of principle of a GIC with some participation in specified equity market returns. The participation factor -- what percentage of the stock index return you will actually get -- is discretionary and set by the financial institution at the time of GIC purchase. You should be careful to fully understand the terms and conditions of the GIC. For exemple, dividends are often excluded from the index returns.[2]

Investors should be aware these products tend to be complex, lack transparency and you cannot control when you sell your investment. Because of this, one financial institution, ATB Financial (formerly the Alberta Treasury Branch), has stopped selling these products.[3]

The return is not normally taxable until maturity when the exact return is known and paid, at which point it is fully taxable as income. Some market linked GICs have a minimum interest guarantee which requires investors holding them in non-registered accounts to report and pay tax on the minimum interest guarantee each year.[4]

Index-linked GICs are higher-risk investments than interest-bearing GICs, which are low risk.[5]

Keep in mind that financial institutions have designed these products and have deemed them attractive enough to want to sell a lot of them. In other words, they will tend to offer products when they are confident that the odds will be tilted in their favour – which may be at odds with what’s best for end investors.

— Dan Hallett, Investors should take a pass on this market-linked GIC, the Globe and Mail, August 7, 2014

US dollar

A number of Canadian institutions offer GICs that are purchased in US dollars and pay interest in US dollars. However, these are not covered by deposit insurance from the CDIC.[6]

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 and Fiscal Agents for publication in your local newspaper. 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, RBC or TD. 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 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 but may be covered by a provincial deposit insurance program.

Taxation

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. GICs and Other Term Deposits, viewed on 05-Dec-2013
  2. Ellen Roseman, Avoid GICs linked to stock markets: Roseman, Toronto Star, February 2, 2014, viewed December 20, 2015
  3. ATB Financial, What are market-linked GICs—and why does ATB no longer sell them?, viewed December 20, 2015.
  4. CIBC Investor's Edge - GICs - Taxation, viewed December 18, 2013.
  5. InvestRight, a program of the BC Securities Commission, GICs (index-linked), viewed February 3, 2014.
  6. How Does CDIC Calculate Insurance?, viewed on 05-Dec-2013

Further reading

External links