Short term cash returns

When saving towards a short term objective, such as a car or house purchase, Canadians often look for higher rates of interest than what is available in a savings or chequing account at a bank or credit union. There are a variety of ways for investors to earn higher rates of interest on money they may need to draw on in the short term. They include Guaranteed Investment Certificates (GICs), Guaranteed Interest Accounts (GIAs) offered by life insurance companies and high-interest savings accounts. Other options include money market mutual funds, treasury bills and other money market debt instruments.

For short term uses, equities are not a good choice, due to their volatility.

GICs and GIAs
A Guaranteed Investment Certificate (GIC) is a term deposit that offers a guaranteed rate of return over a fixed time period, typically 1-5 years, but there are shorter and longer terms available. GICs are most commonly issued by Canadian banks or Trust companies. The equivalent product is called Guaranteed Interest Account (GIA) when issued by an insurance company. Make you your GICs are covered by the Canada Deposit Insurance Corporation (CDIC) or another acceptable form of deposit insurance.

If you are uncertain when you will need the money, a cashable GIC or cashable GIA might be preferable. The marketplace for these products is very competitive, so it is recommended that you spend some time and effort to ensure that you are getting the best GIC rate.

High-interest savings accounts
HISAs are bank accounts offering a rate higher interest than traditional daily savings accounts. In Canada, there are two types of HISA, a savings account offered by financial institutions such as banks (including virtual banks) and credit unions and fund-based savings accounts offered by discount brokerages. Current rates for for the former type are available from Cannex or Canadian high interest savings account: Comparison chart. The latter indicates which accounts are available in Quebec and which institutions are credit unions. It is important to check which type of deposit insurance applies to your HISA.

Money market funds (MMFs)
Money market funds (MMFs) are mutual funds that can be used like a savings account. Money market funds, as their name indicates, buy money market instruments. These are debt securities such as federal and provincial government treasury bills (described below) and other financial instruments with less than a year to maturity.

Unlike Guaranteed Investment Certificates (GICs) and Guaranteed Interest Accounts (GIAs), MMFs are not guaranteed deposits. For current rates, you can check current yields courtesy of The Fund Library. For many investors, they have been supplanted by HISAs.

Treasury bills
Treasury bills, usually called "T-Bills", are debt instruments issued by the Government of Canada (or provinces) with maturities of up to 360 days. They are sold at a discount to face value (i.e., at less than 100 cents to the dollar) and pay full face value on maturity. The difference between the face value and the purchase price represents the interest payment and is fully taxable. Since T-Bills are government-issued, no CDIC guarantee is necessary. They are suitable for parking large amounts of cash for a short time, with full government guarantees. T-Bills are purchased on the secondary market via a brokerage account.

Current rates can be found at Selected treasury bill yields - Bank of Canada

Banker's acceptance
A short-term debt instrument issued by a firm that is guaranteed by a commercial bank. Banker's acceptances are issued by firms as part of a commercial transaction, such as imports, exports and other merchandise transactions. These instruments are similar to T-Bills and are frequently used in money market funds. Banker's acceptances are purchased on the secondary market via a brokerage account.

Commercial paper
An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial paper rarely range any longer than 270 days. The returns of commercial paper are higher than on T-bills because of the risk of default, and commercial paper is usually issued in denominations of $100k or more, so individual investors typically access it through money market mutual funds.

Canadians are probably most aware of asset-back commercial paper (ABCP) when the market for about $32-billion worth of this debt froze completely in August 2007. Commercial paper is purchased on the secondary market via a brokerage account.

Converting US and Canadian dollars
Banks charge retail customers substantial fees, typically 1% or more, to exchange Canadian dollars to or from foreign currencies. However, in the common case of Canadian to US dollars (or vice versa), those with a discount brokerage account can convert funds inexpensively via Norbert's Gambit.

Registered account or not?
For tax efficiency reasons, a Tax-Free Savings Account is a good choice for placement of short term funds. On the other hand, in a low interest rate environment, some investors preper to use their TFSA space for equities (for long-term investing), and keep their short term cash reserves unregistered.