Barry Choi
Clay Jarvis
Beth Buczynski
If you’re looking to invest but don’t want to take on much risk, then Guaranteed Investment Certificates, or GICs, could be a good fit for you.
Because GICs typically provide guaranteed returns, this type of investment product has been popular with Canadians for decades.Those returns typically aren’t enough to make GICs someone’s primary investment vehicle, but when interest rates and economic instability are both increasing, GICs can seem extra attractive.
If you’re planning to invest in a GIC, knowing how GICs work is crucial to understanding how they might fit into your overall financial strategy.
What is a GIC?
GICs are financial products that generally provide a guaranteed return:you agree to lend money to a financial institution for a fixed period of time at a fixed interest rate.
In most cases, the bank or credit union will pay you a higher interest rate if you’re willing to let them keep your money for a longer time. For example, a three-year GIC would offer a higher interest rate than a one-year GIC.
How GICs work
When you buy a GIC, you’re essentially creating a contract with the borrower (the financial institution) that says you will be paid a certain amount of interest once the term is over.
For example, let’s say a one-year GIC is available with a 2% interest rate. If you were to deposit $1,000 into the GIC, you’d earn $20 at the end of the year. That means you’d have $1,020 when the term is over.
With GICs, you need to tie up your money for the entire length of the contract to get the full benefit. That said, some GICs are cashable or redeemable, but they typically come with a lower interest rate. Andf you do need to withdraw your funds, you could end up paying a penalty. Unless otherwise stated, GICs are generally non-redeemable.
Disadvantages of GICs
Even though GICs are safe and give you a guaranteed return, you should be aware of some drawbacks before you start investing.
- There’s usually a minimum amount required to invest in a GIC. For example, $500 or $1,000.
- You’ll need to tie up your money for the entire term if you want to get the full return.
- The interest rate offered on GICs may not beat inflation.
- You’ll be taxed on the interest earned if the GIC is held outside of a registered account.
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Types of GICs
GICs are often referred to as term deposits because your money is tied up for a certain period of time. GIC terms can range from 30-days, as with short-term GICs, to 10 years, with long-term GICs. Understanding how different types of GICs work will help you determine which ones might be the best fit for your portfolio.
Fixed-rate GICs
When people talk about GICs, they’re usually referring to fixed-rate products. These types of GICs are easy to understand since they pay a fixed amount of interest based on the length of the contract and the amount you deposit. For example, if you were to invest $10,000 into a one-year GIC with an interest rate of 3.50%, you’d have $10,350 when the term is up.
Variable-rate GICs
Variable-rate GICs have interest rates that can fluctuate during the term. This can benefit you when interest rates are rising, as they have been for much of 2022, but it works against you if rates drop.
The amount of interest paid on a variable rate GICis determined by the financial institution’s prime rate, and can change at any time. If the markets perform well, you’ll get paid more; if markets drop, you may not get anything at all.
But with any type of GIC, your principal is still guaranteed, so you can’t actually lose money. At the very least, you’ll still get your original deposit back at the end of the term.
Market-linked GICs
Many people avoid investing in the stock market because they’re afraid of potential losses, but you can protect your capital by purchasing market-linked GICs. Instead of having a fixed interest rate, market-linked GICs give you a return based on the performance of the stock market. If markets go up, so does your rate of return. If markets drop, like they have in 2022, your principal is protected.
Registered GICs
A registered GIC is held in an account registered with the Canadian federal government and allows you to grow your savings tax-free, such as a registered retirement savings plan or a tax-free savings account. You won’t pay taxes on any interest you earn on your GIC while it’s in one of these accounts, but you will have to be mindful of any age or contribution limits.
Non-Registered GICs
A non-registered GIC is a GIC that is not held in a registered account. Since they are not regulated by the government, they do not come with any tax breaks or incentives. However, you won’t have to worry about age or contribution limits. You can invest as much as you’d like in a non-registered GIC.
Foreign Exchange GICs
Foreign Exchange GICs, such as U.S. dollar GIC, allow you to earn interest on foreign currency.
Are GICs insured?
Even though GICs are safe financial products, some people still want to ensure that their money is safe in case the financial institution were to fail. If you purchase a GIC through a Canadian Deposit Insurance Corporation (CDIC) member, you’re insured up to $100,000.
If you purchase a term deposit through a credit union or caisse populaire, your insurance coverage is provided by a corporation within your province or territory of residence. For example, residents of Ontario who purchase a GIC via a credit union would be covered up to $250,000 thanks to the Deposit Insurance Corporation of Ontario (DICO).
How and where to purchase a GIC
Purchasing a GIC is easy since just about every financial institution offers them. If you already have an account with a bank or credit union, you can usually purchase a GIC with just a few clicks. You can also purchase GICs from a financial institution you don’t bank with if you call one of its advisors or visit a branch.
What’s nice about GICs is that they can be held in a variety of accounts, such as:
- Tax-Free Savings Accounts (TFSAs)
- Registered Retirement Savings Plans (RRSPs)
- Registered Retirement Income Funds (RRIFs)
- Locked-in Retirement Accounts (LIRAs)
- Non-registered accounts.
In an ideal scenario, you’ll only purchase GICs in a tax-friendly account, so you won’t have to give a portion of your returns to the Canada Revenue Agency. If you hold your GICs in a non-registered, taxable account, all interest earned is fully taxable.
While the rate of return on GICs is most attractive when interest rates are on the rise, they can be an ideal product for someone with a short investment timeline, a low risk tolerance and a portfolio that could benefit from the added security of fixed-income investments.
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