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Published April 30, 2024
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7 minutes

Guaranteed Investment Certificate: What a GIC Is and How It Works

A GIC is a low-risk investment product that guarantees your initial deposit while earning a fixed or variable rate of return, which is typically paid at the end of the term.

Guaranteed investment certificates (GICs) could be a good fit for anyone who’s looking to invest but doesn’t want to take on much risk. GICs typically provide guaranteed returns on fixed-rate investments and security on your principal funds. 

If you’re planning to invest in a GIC, knowing how they work is crucial to understanding how they might fit into your overall financial strategy.

What is a GIC?

GICs are a type of investment product. In exchange for depositing your money into a financial institution for a fixed period of time, GICs earn a guaranteed rate of interest. 

GICs are often referred to as term deposits because your money is tied up for a certain period, ranging from 30-days, as with short-term GICs — to 10 years, with long-term GICs.

Though GIC returns typically aren’t enough to make it your primary investment vehicle, GICs can seem extra attractive when interest rates and economic instability are both increasing.

Because most GIC products assure moderate to high rates of returns, it has been one of the safest and popular investment options among Canadians for decades.

In a rising interest rate environment, a bank or credit union is likely to pay you a higher interest rate if you’re willing to let them keep your money for a longer period. For example, a three-year GIC may offer a higher interest rate than a one-year GIC term.

How does a GIC work?

When you buy a GIC, you’re essentially creating a contract with a financial institution. Along with other conditions, this contract includes: 

  • Investment amount: an amount equal to the minimum deposit determined by the bank or higher based on your preference.
  • Interest rate: a set amount that you will be paid once the term of the contract is over, monthly or annually as per the payment option you choose.
  • Length of the term: an agreed period that can range from a few months to several years during which you’ll typically have no access to your funds. 
    For example, let’s say you deposit $1,000 in a one-year GIC that is available with a 2% interest rate. You’d earn $20 at the end of the year. That means you’d have $1,020 when the term is over.
  • Date of maturity: the point at which interest payments stop and your investment is due. You may choose to reinvest or withdraw your funds by instructing the bank ahead of time. 

Note, if you fail to provide instructions to your bank, even after receiving a reminder, the bank could automatically reinvest your funds at the end date. However, you get 10 business days to cancel the new term.

Unless otherwise stated, GICs are generally non-redeemable. To get the full benefit of a GIC, your money must remain invested for the entire length of the contract. And if you were to withdraw your funds sooner, it would end up costing you a penalty. That said, some GICs are cashable or redeemable, but they typically come with a lower interest rate. 

Besides redeemability, you can choose from other kinds of GIC options to support your periodic savings goals.

Best GIC & Term Deposit Rates in Canada

Compare all different GIC rates side-by-side and find out the best rate that will meet your need

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Types of 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 did for much of 2023, but it works against you if rates drop.

The variable rate of interest paid on these GICs is determined by the issuing financial institution’s prime rate, and can change at any time based on the market performance.

Though, your principal is still guaranteed, so you can’t actually lose money.

Market-linked GICs

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, your returns sink, but your principal is still 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’ll have to be mindful of any age or contribution limits.

Non-Registered GICs

A non-registered GIC is a GIC that isn’t held in a registered account. Since they’re not regulated by the government, they don’t come with any tax breaks or incentives. However, you won’t have to worry about age or contribution limits when investing in a non-registered GIC.

Foreign Exchange GICs

Foreign exchange GICs, such as U.S. dollar GICs, allow you to earn interest on foreign currency.

Are GICs insured?

GICs purchased through member banks of the Canadian Deposit Insurance Corporation (CDIC) are insured up to $100,000.

Term deposits purchased from a credit union or caisse populaire, are covered 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 Financial Services Regulatory Authority (FSRA) of Ontario’s Deposit Insurance Reserve Fund (DIRF).

GIC pros and cons

GICs can be an ideal product for someone with a short investment timeline and a low risk tolerance. But you should consider the main benefits and drawbacks that may impact your individual goals before investing.

Advantages of GICs

  • The principal investment is secure and can be cashed in full at the end of the GIC term.
  • Calculating return on fixed-rate GICs is relatively straightforward as it’s based on the length of the term and the amount deposited.
  • You often receive a higher rate of return on GICs when interest rates are on the rise.
  • You’re not taxed on the interest earned within a registered GIC.

Disadvantages of GICs

  • There’s usually a minimum amount required to invest in a GIC. For example, $500 or $1,000.
  • You’ll need to lock 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.

How to buy a GIC

If you already have an account with a bank or credit union that offers online banking, you can usually purchase a GIC with just a few clicks. 

If you want to buy a GIC from a financial institution you don’t bank with, you’ll first have to call an advisor or visit a branch to open a new account. When opening any new bank account, you may need to provide: 

  • Your personal information, including email and home address.
  • Two pieces of valid government-issued IDs, such as your passport and driver’s licence.
  • Your Social Insurance Number (SIN).

Before you add funds to your GIC, you’ll need to decide the type of account you want to hold your GIC in, such as:

When you purchase GICs in a tax-friendly account, 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 — but the portfolio still benefits from the added security of fixed-income investments

If you’re a prospective international student, learn more about the qualifying requirements for the Student Direct Stream (SDS) program before buying a GIC.

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Registered vs. Non-Registered GICs

Registered vs. Non-Registered GICs

The main difference between registered and non-registered GICs is that registered GICs are held in investment accounts that receive special tax privileges.

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