Guaranteed Investment Certificate

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As you approach retirement age or wish to save on a long term basis,you might want to choose a risk-free investment with a nice interest rate. That's what a guaranteed investment certificate (GIC) offers in a nutshell. If you keep your money in these low-risk investments for a certain period, you'll get a significant return that would be surely enough to meet your financial obligations.

Guaranteed Investment Certificate might be a difficult concept to grasp for novice investors. However, it is important to know how it works and how it can help you achieve your financial goals. Which is why, we've put together this well-curated guide to GICs to make things easier for you, so let's get started.

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What Is a Canadian Guaranteed Investment Certificate?

A guaranteed investment certificate or GIC is a deposit investment offered by banks and trust organisations in Canada. They're popular among retirees because they offer low-risk returns at fixed rates. The best part about GICs is they are partially insured by the Canadian government, which adds a degree of safety to these long term investment options. These are sold in Canada in the same way that Certificates of Deposit are sold in the United States. Insurance firms are responsible to establish and promote GICs in the United States, and the target clients are slightly different. 

Furthermore, the GIC functions similarly to a certificate of deposit in the United States. GICs are savings accounts in which you deposit money and earn interest on it. The catch is that the funds must be placed for a set period of time, with interest rates varying depending on the time frame of the commitment. When a GIC is purchased, you lend money to the bank and receive interest in return.

Because the financial organisations that sell GICs are legally bound to return the principle along with the interest to investors, they are said to be safe investments. In case the bank fails to return the amount, investors are covered by the Canadian Deposit Insurance Corporation for an amount of up to $100,000 to cope with the incurred loss. 

Why is GIC Compulsory for Canada?

Yes, GIC is a requirement for Canadian citizens. The main goal in retaining it as a compulsion is to:

  1. It is a mark of assurance or guarantee to the Canadian government that you have enough money to cover living expenses for at least a year in Canada.

  2. It ensures that the Canadian visa or study permit application is processed quickly. Candidates must provide evidence of their bank statements. A GIC in the amount of $10,000 CAD serves as proof of funds from the authorised Canadian bank.

Type of Guaranteed Investment Certificates

Fortunately, GICs exist in a variety of terms, rates of interest and withdrawal conditions, making it easy for most investors to pick the ideal one. Here’s the list of the most frequent GICs you'll come across when you search the market.

Non-Redeemable GICs 

A non-redeemable GIC is a conventional GIC in which you agree to put your money in a guaranteed investment certificate for a set amount of time and the principal amount will grow at a high rate as long as you decide to withdraw the accumulated amount. If you wish to take money out of your GIC prior to the completion of GIC’s said term, you will be liable to pay a penalty, which the GIC provider will stipulate in your contract.

Cashable GICs

Guaranteed investment certificates that come with the option of accessing funds during the term are known as cashable guaranteed investment certificates (CGICs). CGICs typically have one-year periods and always have a 30- to 90-day lock-in period. In this time frame, you won't be able to access your investment. However, once the locked-in terms have ended, you can withdraw funds without penalty. 

CGICs often have lower interest rates than non-cashable GICs, and while you can cash out your cashable GIC after the lock-in period, numerous financial institutions ask to maintain a minimum balance in your GIC account. In simple words, as soon as you hit the specified minimum balance, you won't be able to withdraw funds.

Redeemable GICs 

Redeemable GICs are somewhat similar to cashable GICs. You get the option to withdraw funds from your account without bearing any sort of penalty. 

However, there is a significant difference amongst the two. Redeemable GICs come with the exemption of the lock-in period. In other words, you don't have to wait for a specified time to start withdrawing the accumulated funds. You can withdraw the amount from the very next day you sign the contract. But you can't neglect the fact that flexibility comes with caveats. Redeemable guaranteed investment certificates usually have an early rate of redemption. The interest rate is significantly lower than the one offered in other GICs.  

For example, you cash out an amount of $5,000 from your one year redeemable GIC.The offered interest rate was .50%. After a few months of purchasing a GIC, due to medical emergencies you need access to instant funds. You decide to withdraw the required amount from your GIC. In this case, the GIC provider will credit the returns with redemption rate and not the said rate. The redemption rate can go down to .05%. 

Market GICs or Equity-Linked GICs 

GICs that are tied to the market work a little differently as compared to other GICs. The GIC provider guarantees your initial deposit, but despite specifying a set rate of interest, the principal amount is linked to the equity market performance.

In general, your original deposit will rise when the correlated market performs well. At the very least, you'll receive your money back if the market performance degrades significantly. A market-linked GIC's potential returns could be significantly higher than traditional GIC interest rates. Of course, there's no assurance that you'll make any money with equity-linked GICs. In addition, certain market-linked GICs have a set participation rate along with the maximum returns, so check the fine print before signing an agreement.

Registered GICs 

A registered GIC allows you to secure savings through a registered retirement account including a Tax-Free Savings Account (TFSA) as well as a Registered Retirement Savings Plan (RRSP). Usually, the GIC earnings are subject to taxation, but with a registered GIC you can accumulate tax-free funds.

Escalator GICs

Escalator guaranteed investment certificate comes with a fixed rate of interest that grows annually. For example, you could obtain a two percent interest rate on your GIC in the first year, a three percent interest in the second year, and a four percent interest rate during the third year. In general, the longer the term of an escalator GIC, the higher the interest rate you'll get.

How does a GIC Work?

A GIC operates by safeguarding the deposited amount and providing interest for a certain time period. GICs typically have a defined duration and a fixed rate of interest, which allows you to determine exactly what amount you will access in terms of investment returns. For example, if you put $2,000 in a GIC for two years with an interest rate of 2%, you'll get $2,080 when the maturity period ends.

GICs exist as a cashable GIC or a  non-cashable GIC. You get the option to withdraw the accumulated funds before the end of specified tenure if you invest in a cashable GIC. At the same time, in case you chose a non-cashable guaranteed investment certificate, you will be required to wait till the completion of the term to withdraw any amount from your GIC. 

The bank may impose a penalty if you decide to redeem/cash in a non-cashable GIC prior to the expiration of the specified term. It works identical to the penalty charged on early withdrawals in the United States if you take money out of a CD before it matures.

When it comes to GIC rates, it entirely revolves around the financial institution that is supplying them. Options for GICs include:

  • Investment certificates with a set rate of return
  • Certificates with a variable rate
  • Certificates linked to market (usually works as per stock market indices)
  • Foreign exchange certificates (allow buyers to profit from the sale of foreign currency)

You can either count on a registered account or a non-registered account to hold a guaranteed investment certificate. As per the Canadian tax law, registered accounts are tax-deferred. Moreover, if you keep a guaranteed investment certificate in a registered account, your earnings will be taxed when you withdraw the money.

Whereas, if you decide to hold your earnings in a non-registered GIC account, you will be taxed for the same in a similar manner as taxed for any other sort of income on an annual basis.

What are the Benefits of a GIC?

A GIC may be the appropriate investment for you if you are looking forward to a safe, low-risk investment that also pays you interest.Given below are some of the most significant advantages of doing so.

The Principal Investment is Protected

When you decide to count on a GIC for the purpose of savings, the opted GIC is safeguarded through the CDIC or Canadian Deposit Insurance Corporation. In other words, if the chosen bank fails to repay the said amount, you will still have the guarantee from the CDIC for receiving $100,000 at a minimum. However, this guarantee is applicable only for the initial five years of the investment. 

Additionally, if you decide to purchase a GIC from a credit union or some provincial financial institution, the provider will be bound to guarantee the principal amount. However, the guaranteed amount may vary from one Canadian province to another. Here’s what you need to know about the guarantees offered in every Canadian province:   

  • All deposits including GICs are guaranteed with no maximum limit in Alberta, British Columbia, Manitoba, as well as Saskatchewan.
  • Deposits of up to Dollar 100,000 are insured in Quebec.
  • Deposits up to Dollar 250,000 are guaranteed in the Canadian province of Ontario. Your entire GIC deposit is insured if you hold GIC through a registered retirement account.
  • Deposits of up to Dollar 250,000 are insured if you purchase GIC in New Brunswick, Nova Scotia, Newfoundland, as well as Labrador.
  • Deposits of up to Dollar 125,000 are insured if you have purchased GIC in Prince Edward Island, through unrestricted RRSP contributions.

If your bank doesn’t fall in the listed categories, your GIC provider will be legally obligated to return at least the principal amount regardless of the fluctuated market trends or loss. The GIC provider is bound to pay back at least the initial deposit amount to you. 

Option for a Fixed Interest Rate

One of the most significant benefits of GICs is that you get the option to lock in favourable rate interest for the entire time frame. Let's say during the GIC period the interest rates surge, you get the option to withdraw the amount at that interest rate before the trend changes. Additionally, you can lock in the interest at that time, which will remain fixed for the entire guaranteed investment certificate period. You can’t avail this opportunity even through a savings account with a high-interest rate. 

GICs Come with Lower Charges or Zero Charges

In general, you can purchase a GIC without paying any associated costs. As long as you maintain the specified minimum deposit and carefully go through the signed terms and conditions, you will not have to pay anything to pile up savings through GIC. 

Disadvantages of a Guaranteed Investment Certificate

After going through the benefits that you can secure with a GIC, you cannot neglect a few disadvantages you will encounter as soon as you turn around the table. You may find a guaranteed investment return at a fixed interest rate fascinating in one go, but later you will understand the associated caveats. 

Before you move further to pile up wad cash through a guaranteed investment certificate, have a look at the mentioned risks.  

Possibilities are GICs Fail to Pace Inflation

Numerous GICs are offered at low-interest rates, at least in contrast to other available GICs. If you secure a GIC that is barely keeping pace with inflation i.e. somewhere around two percent, you won’t be able to earn significant returns at the end of GIC tenure. In simple terms, with such low-interest rates, the principal amount in addition to the earnings will be almost equal to the amount you have deposited initially. 

You May Have to Pay Applicable Taxes

Yes, you read it right! Possibilities are you may have to pay the taxes on the incurred returns. If you hold a GIC through a tax-sheltered account for retirements such as RIFF or TFSA, you will be liable to pay taxes on the GICs earrings. You will be either charged with annual taxes or one-time tax when you withdraw your GIC amount. This will entirely depend upon the type of GIC you have opted for. 

Cashing it Out Won’t Be an Easy Task

If you count in non-redeemable GICs, you may have a hard time liquidating your investments especially prior to the end of said term. In case you need to withdraw your money before the term is up, you will have to convince the GIC provider that you are in dire need of the amount. However, considering or rejecting your request of cashing out the amount entirely depends upon the bank. 

In case your GIC provider agrees on cashing out the amount, you will have to bear the associated penalty or may have to forfeit the earned interest.

How Banks Profit From Guaranteed Investment Certificates

The profit earned by the banks can be simply defined as the difference between the interest rate paid on GICs and offered lending rates. Let's say the mortgage rate clocks at eight percent and GICs are offered at five percent interest rates. The margin of three percent amongst these two is the bank’s profit. 

GICs provide slightly higher returns than the ones incurred through the Treasury bills or T-bills. This makes them the foremost opportunity for diversifying liquid streams with lower risks in a portfolio. GICs can be purchased from Canadian banks or trust companies. However, there’s a difference between the two. The one secured from the trust company doesn't require any sort of asset to pledge on. It usually works by binding you through a legal contract. 

In such instances, trust companies play the role of fiduciaries, trustees, or maybe an agent on behalf of an individual or business organisation. As a custodian of your GIC, they are obligated to safeguard GICs and make investment selections to generate good returns. Regardless of which investment alternatives we talk about, i.e. GIC, T-bills, or some other security, the entire range is considered to be safe and beneficial for producing streams of cash. 

GICs and U.S. Treasury Securities

In addition to GICs, another famous alternative for income-producing securities are the U.S. Treasury securities, such as T-bills, T-notes and T-bonds.

T-Bills come with the maturity term of 4, 13, 26, and 52 weeks. When you look for securities with the shortest maturity terms, nothing can beat t-bills. The United States government is responsible for the issuance of the T-Bills at a discounted price. These bills usually mature based on the par value. The difference between purchase price and sale price difference is the interest that is paid on the T-bills.

T-Notes come with a longer maturity time frame on contrary to T-bills. Generally, the maturity term is two, three, five, seven and ten years. T-notes are also provided by the U.S. government. Treasury notes or T-notes are distributed at a par value of $1,000. The T-note maturity price is similar to the offered par value and the interest is paid semiannually i.e. twice every year.

T-Bonds, also known by the name long bonds, are somewhat similar to the T-notes. The key difference amongst the two is the maturity term. T-bonds come with a maturity term of 30 years. Similar to other Treasury securities, T-bonds mature at a par value of $1,000.

Guaranteed investment certificates and U.S. government securities may act as a foundation stone for several portfolio strategies. Both come up as a cornerstone for safe stream investment returns. Additionally, it acts as a base for balancing out the investments revolving around risks including growth stocks as well as derivatives.

Are GICs Worth It?

After going through every aspect of the GIC and what GIC has to offer, the only thing that strikes your mind is are GICs worth it? Should you invest in guaranteed investment certificates? Are they insured? Well, all such questions are worth it as they will help you to decide whether to move further with it or not. 

Purchasing GICs can be the best fit for you if you are an investor with a fixed income and do have a limited time horizon. You'll need to get your hands on that money shortly. Let's say you want to save an amount sufficient enough to make a down payment on a house, you're approaching retirement, planning to start your own business, or you're expecting a child. Guaranteed investment certificates can help cope with all such financial obligations. 

GICs provide reliable income and a safe haven for your money, while the returns are often smaller than those from a stock portfolio with longer terms and may fall behind inflation. This investment will benefit income-oriented investors who prioritise security above possible gains. Even if you fall in the category of a retired investor, be mindful of committing too much of your portfolio to GICs, as there are decades ahead of you.

Finally, the boundary between safe and sorry is subjective, so you must determine what works best for you.

If you're seeking a safe solution with a predictable rate of return, a guaranteed investment certificate (GIC) could help you accomplish your financial obligations. If you can't open a GIC with a Canadian bank, you can still use the same method by opening one or more CD accounts with a US bank.

FAQ’s

Ans: If you are looking for a safe investment that can generate huge savings in the short term, then you must invest in a GIC. The key reason to invest in a GIC is it offers higher rates in the short term.

Ans: Yes, GICs are a good investment option, as they are secured. Even if your bank fails to repay you the said amount or the market falls tremendously, you still get the deposited amount back.

Ans: Yes, based upon the types of GIC you have purchased, you get the option to redeem the amount before they mature. However, you might have to bear the associated costs or penalties for making the premature withdrawal.

Ans: Technically, yes! You sign a contract with the GIC provider that acts as a physical certificate for your GIC purchase.

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Table of Content

  • What Is a Canadian Guaranteed Investment Certificate?
  • Why is GIC Compulsory for Canada?
  • Type of Guaranteed Investment Certificates
  • How does a GIC Work?
  • What are the Benefits of a GIC?
  • Disadvantages of a Guaranteed Investment Certificate
  • How Banks Profit From Guaranteed Investment Certificates
  • GICs and U.S. Treasury Securities
  • Are GICs Worth It?