What Is A GIC? A Guide to Guaranteed Investment Certificates (GICs)

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Have you ever wondered what is a GIC? A Guaranteed Investment Certificates (GIC) is an investment product that is very safe. There’s absolutely no chance that you’ll lose money on your principal (original investment), that’s why they’re attractive to investors.

However, since the returns are guaranteed, the best GIC rates in Canada are typically low. This may not matter to investors who have a short investment timeline or are looking to balance their portfolios, but GICs won’t help you grow your wealth in the long run.

Even though GICs may have limited growth opportunities, they may still have a place in your overall investment strategy. The key is to understand how GICs work and what affects GIC interest rates.

What is a GIC? 

GICs are Canadian deposit investments that are sold by financial institutions. You’re basically lending money to a bank or credit union for a set period of time. In return, they pay you interest. You’re literally lending financial institutions money, and they’ll pay you a guaranteed interest rate for the privilege.

The money banks get from offering GICs is then used to provide loans, such as a line of credit or mortgage, to their regular customers. Banks would obviously charge a higher interest rate than what they’re giving you. Essentially, banks are profiting from the money they’ve borrowed from you. For example, if the bank pays you 3% interest for a GIC, but then they offer mortgages at 5%, they’re making a 2% profit.

GICs are attractive to investors since the principal is guaranteed. There’s no chance that you’ll ever lose the money you put in. However, since you’re getting a guarantee, you need to commit your money for anywhere from 30 days to 10 years. The longer you commit your money, the higher the interest rate you get.

While it is possible to get your money early with some different types of GICs, there may be penalties involved. You also would be offered a lower interest rate since you’re given the option to redeem your GICs early.

What are the best GIC rates in Canada?

The best GIC rates in Canada change frequently. Generally speaking, digital banks such as EQ Bank typically offer the best GICs in Canada. They’re able to offer better rates compared to traditional banks because they have lower overhead costs from not operating physical stores. The money saved is passed onto consumers in the form of better interest rates. This applies to both GICs and high-interest savings accounts.

When looking at GICs in general, the longer you commit your money, the higher the interest rate you’ll get. That’s because you’ll be locking in your money for a longer time. While higher rates can be attractive, you should only invest your money based on your timeline. For example, if you know you’ll need access to your money in two years, it wouldn’t be a good idea to buy a three-year fixed-term GIC.

How much interest will you earn from a GIC?

When asking about what is a GIC? It’s important to know how much interest you’ll earn from a GIC. The amount will depend on which financial institution you’re purchasing your GIC from, the term, and the formula used to calculate your interest rate. Generally, the formula used to calculate GIC interest rates is the most important factor.

Fixed-rate GICs

Fixed-rate GICs are sometimes known as guaranteed-return GICs and are the easiest GICs to understand. You’re getting a guaranteed amount of interest. That means any changes in the markets or economy won’t affect your returns. Not only is your principal guaranteed, but you also have a fixed interest rate.

For example, let’s say you decide to invest $10,000 into a 5-year GIC that pays 5% interest. At the end of your five-year term, you would have earned $500 interest. That’s a total of $10,500 that you’d get back.

Interest Rate-Linked GICs

Interest Rate-Linked GICs offer you a chance to earn a little bit more interest. Since variable rates are tied to your financial institution’s prime rate, you would earn more interest if the prime rate increases. However, if the prime rate decreases, so would your interest payments.

Even if rates do decrease, you can typically cash out your investment. Of course, you may end up losing all the interest earned since you’re cashing out early. Variable-rate GICs and prime-rate GICs operate in the same way as interest rate-linked GICs.

Equity-Linked GICs

Equity-Linked GICs, or market-linked GICS, have become increasingly popular over the years. Your principal is guaranteed and your interest rate has the potential to grow based on underlying stock market indexes. Basically, if the markets perform well, your interest rate increases. If the markets are in a downturn, your principal is still 100% protected.

What makes equity-linked GICs appealing is that there’s usually a minimum rate of return with the potential to earn much more. The problem is that the advertised rates can sometimes be deceiving. For example, the advertised rate might be 6%. However, that might mean you’re getting a maximum of 2% for three years. Saying you’re getting 6% is misleading.

What is a GIC term?

Every guaranteed investment certificate has a term. They typically range from 30 days to 10 years. To get the full interest rate, you would need to wait for your GICs to mature (reach the end of the term). If you’re able to redeem them early, you’d face penalties or get a lower interest rate. GICs can be broken down into two types of terms.

Short-term GICs

Short-term GICs, or term deposits, are any GICs that have a term of less than one year, so 30 to 364 days. Locking up your money for less than a year may seem odd to some people, but the idea is to maximize your interest rate. For example, if you can get a short-term GIC that pays more than a high interest savings account for six months, you might as well purchase the GIC. Admittedly, the difference in interest rate will be quite low, but some people always look to maximize their return.

Long-term GICs

When it comes to long-term GICs, you’re looking at anything that has a term of more than one year. The best GIC interest rates typically come with long-term GICs. Even though you would get a higher interest rate with a longer-term, locking up your money for that long usually isn’t worth it. A better idea would be to set up a GIC ladder, which I’ll get to below.

Long-term GICs are ideal for people who know they’ll need money in the near future but are willing to tie up their money to earn more interest. For example, someone who is saving up to buy a car in two years might consider a one or two-year GIC for their current savings.

Can GICs be redeemed early?

Even though GICs have defined terms, it is possible to redeem GICs early. That said, getting your cash out early doesn’t apply to every type of GIC. The ability to redeem your GIC depends on what type of GIC you purchased.

  • Non-redeemable GICs – You’re unable to access your money early if you purchase a non-redeemable GIC. Since they’re non-redeemable, you typically get a higher interest rate for locking in your cash.
  • Cashable GICs – There’s typically a locked-in window of 30 to 90 days for cashable GICs. Once you exceed that minimum threshold, you can access your funds. However, early redemptions mean you get less interest. You’d only be paid interest up to the day you withdraw the funds.
  • Redeemable GICs – For those looking for maximum flexibility, redeemable GICs are the way to go since you can cash out at any time. The catch is, that if you redeem early, you’ll get less interest. In addition, your starting interest rate is already lower compared to non-redeemable GICs since you have the option to withdraw funds early.

How secure is a GIC investment? 

Many people who ask what is a GIC are surprised to learn that GICs are arguably the safest investment product available. Your principal is 100% guaranteed, so that means you’ll never lose your initial investment.

In addition, GICs are considered a deposit. That means if you purchase your GICs through a Canada Deposit Insurance Corporation member, your deposits are insured for up to $100,000. Don’t worry if you’re purchasing your GICs through a credit union, they typically have insurance that covers eligible deposits up to $250,000. With your insurance, you would be reimbursed if your financial institution ever went bankrupt. The odds of that happening are incredibly low, but at least you’ll be protected.

Even though GICs are safe, it’s worth noting that the returns you can rarely outpace inflation. Inflation is when the cost of goods naturally rises. In other words, if you invested in just GICs, you would actually lose money over time since the value of your dollars decreases with inflation.

Younger people may want to focus on equities, such as stocks, ETFs, and mutual funds. Alternatively, they could have a balanced portfolio where GICs are just a small portion. That said, people that are about to retire or are about to retire may favour GICs since it protects their money. The last thing they want to do is invest in riskier products when they need to withdraw money to fund their retirement soon.

What is a GIC account?

Some people that are interested in GICs will naturally ask what is a GIC account? Here’s the thing, there’s no such thing as a GIC account. You purchase GICs within a registered or non-registered account. Every type of investment account has different tax implications, so you need to understand how they work

Purchasing GICs within your RRSP

GICs can be purchased within your Registered Retirement Savings Plan (RRSP). First, you’d have to make a contribution to your RRSP. For every dollar you contribute to your RRSP, your taxable income is reduced by an equal amount. For example, if you contributed $1,000 to your RRSP, your taxable income for the year would go down by $1,000.

Keep in mind that you need to have available RRSP room to make a contribution. RRSP space is based on 18% of the income you’ve earned in the previous year.

Now that you have money in your RRSP, you can purchase GICs. While there are no tax consequences for any GICs that are held within your RRSP, you’ll pay taxes when you eventually withdraw from your Registered Retirement Income Fund (RRIF). For reference, your RRSP eventually needs to be converted to an RRIF.

The money that gets withdrawn would be taxed at your marginal tax rate. The assumption is that when you retire, you’ll be earning less income than during your formal working years. As a result, you would pay fewer taxes.

It is possible to withdraw from your RRSP early, but withholding taxes would apply. The amount you withdraw would be added as income and would be taxed accordingly. You would also permanently lose that RRSP contribution space.

Purchasing GICs within your TFSA

Your Tax-Free Savings Account (TFSA) is another registered account where you can purchase GICs. Although there’s no tax break when you make a contribution, interest earned and withdrawals made are completely tax-free.

Unlike RRSPs, you don’t accumulate contribution room by working. Instead, the government provides qualifying individuals that are the age of majority in the province or territory in which they reside an equal amount every year. 

Purchasing GICs within a non-registered account

The final GIC account you can use is a non-registered account. With this type of account, there are absolutely no tax advantages whatsoever. Interest earned on your GICs is fully taxable. How much tax you’ll pay depends on your marginal tax rate for the year.

If you purchase GICs in a non-registered account, your financial institution will provide you with a tax slip when the tax season rolls around. You would use this slip to report the interest earned.

Are GICs worth it?

Asking if GICs are worth it is a bit subjective. For some investors, GICs definitely belong in their portfolios since they’re low-risk investments. However, there are many people who don’t need to invest in GICs. You need to look at your personal situation before looking into the best GIC rates in Canada. One way to decide if GICs are worth it is to look at the pros and cons.

Pros of GICs

  • Simple to understand. Fixed-rate GICs are one of the simplest investments available.
  • No investment risk. Your principal is protected and your interest rate can give you a guaranteed rate of return.
  • Protected by insurance. GICs fall under Canadian Deposit Insurance Corporation (CDIC) insurance which protects your investment up to $100,000. If you purchased them through a credit union, you’d get coverage of up to $250,000 in insurance thanks to credit union regulatory authorities.
  • Potential for guaranteed insurance. Unlike equities, you’ll know your interest rate in advance with fixed-rate GICs.

Cons of GICS

  • Limited growth opportunities. Even though you can purchase variable and equity-linked GICs, your rate of return is limited compared to equity investments.
  • May not beat inflation. Quite often the interest rates offered by GICs don’t beat inflation. That means you’d be losing money in the long run.
  • Interest is fully taxable. Interest income earned on GICs held in a non-registered account is fully taxed. This is significant considering only 50% capital of your capital gains from stocks is taxed in non-registered accounts.
  • May not be liquid. Unless you’re buying cashable or redeemable GICs, your money is locked in. Of course, if you go the cashable or redeemable route, you’ll have to accept lower interest rates.

How to invest in a GIC?

Now that you know what is a GIC, you’ll want to know how to buy them. Fortunately, purchasing GICs is a straightforward process. Generally speaking, you have three different options when purchasing GICs.

  • Financial institutions. Most banks, trust companies, credit unions and caisses populaires offer GICs to their customers. As mentioned, you’ll want to shop around to see who offers the best GIC interest rates in Canada.
  • Discount brokerages. If you’re a do-it-yourself investor, you can purchase GICs through your discount brokerage. It’s done like a regular trade, so you’ll need the fund code to make the purchase. Note that not all GICs are available on discount brokerages, so you might have to buy direct if there’s a specific one you want to purchase.
  • Independent deposit brokers. Some people are surprised to learn that there are independent deposit brokers that sell GICs. They operate like mortgage brokers, but instead of shopping around for a mortgage for you, they find GICs. Once a broker finds you a GIC you want, they’d purchase it on your behalf directly from the financial institution.

GICs can be purchased in a branch, over the phone, or online. If you’re new to investing, it might make sense to purchase your GICs in a branch or over the phone where an employee can walk you through the steps.

How to open a GIC account?

When purchasing GICs, you don’t need to be a current client of the financial institution. That said, if you want to purchase a GIC, you’d have to open up an account. Remember, you’re not opening a GIC account. You’d open a registered or non-registered account which you could then use to purchase GICs.

Opening a registered or non-registered account for the purpose of buying GICs is a similar process to opening a bank account. Most financial institutions would require you to present two forms of valid ID as well as proof of your address (such as a cellphone bill). You’d also need a valid email address if you want to set up online banking.

You do need to be the age of majority in the province or territory in which you reside to purchase GICs, but you don’t need to be a Canadian citizen.

Keep in mind that some GICs will automatically reinvest your principal and interest once they mature. It’s a good idea to instruct your financial institution to not do this, so your money doesn’t get locked into another term automatically.

What is a GIC ladder?

A GIC ladder is an investment strategy for those looking to maximize their returns while investing in financial products. The idea is to divide a lump sum into five equal parts with different maturity dates of one-year to five-years. For example, if you had $50,000 to invest, you’d split it up into sums of $10,000 and purchase five different GICs with a term of one to five years.

Initial investmentTodayYear 1Year 2Year 3Year 4Year 5
$10,000Buy 1-year GICBuy new 5-year GIC
$10,000Buy 2-year GICBuy new 5-year GIC
$10,000Buy 3-year GICBuy new 5-year GIC
$10,000Buy 4-year GICBuy new 5-year GIC
$10,000Buy 5-year GICBuy new 5-year GIC

Although long-term GICs would give you the highest return, you’d be tying your money up for a few years. By setting up a GIC ladder, you’d have funds that become available every year. Not only will this allow you to cash out some money if you need it, but you could also take advantage of increasing interest rates. If rates happen to go up, you’ll be able to reinvest at a higher rate. However, if interest rates drop, you would have already locked in the higher rates from before.

When each GIC matures, you would simply purchase a new 5-year GIC moving forward. This allows you to take advantage of compound interest and the best GIC rates in Canada. Even though a GIC ladder is a good strategy, it should only be implemented in the following scenarios:

  • You have a short to medium investment timeline
  • You’re a conservative investor
  • Your current goal is to focus on wealth preservation
  • You want a higher interest rate than what a high interest savings account is offering
  • You want regular access to funds while earning some interest

About Barry Choi

Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog Money We Have is one of Canada’s most trusted sources when it comes to money and travel. You can find him on Twitter:@barrychoi

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