Guaranteed Investment Certificate

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 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.

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.

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.

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.

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.

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

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.

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.

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.

GIC 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, 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.

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.