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Guaranteed Investment Certificates (GIC) in Canada

How do GICs work and what are the different types of GICs available in Canada?

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Claire Horwood
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If you have a reasonable amount of spare cash kicking around and want a safe way to invest it without losing money, a GIC could be just the ticket. This type of investment guarantees a consistent return on interest and you won’t lose money on your original deposit.

What is a GIC?

A guaranteed investment certificate (or GIC for short) is an investment vehicle that lets you earn a high interest rate on your savings. In return, you usually have to lock your funds in over a fixed term that can last anywhere between 30 days and 5 years. When your term expires, you’ll get the interest you earned on your account plus the amount you originally deposited. This is usually paid out as a lump sum of cash that you can re-invest or put into savings.

There are many different types of GICs, and the best one for you will depend on your unique set of financial needs and savings goals. The main benefit of all GICs is that they are a relatively safe investment because you can’t lose the principal amount you invest. The main downside is that you won’t usually be able to access any money you put into your account until your term ends (unless you sign up for a cashable or redeemable GIC).

How do GICs work?

GICs are relatively low-risk investments that let you earn a higher interest rate than you might be able to with a normal savings account. Interest rates can be either fixed or variable, depending on your preferences. A fixed rate GIC will offer a consistent rate of interest for the duration of your investment. Variable rate GICs offer interest rates that fluctuate in line with market conditions.

For example, you might earn around $30 per year on a $1,000 investment with a fixed rate of 3%. As the amount you invest increases, this dollar figure will go up. With a variable interest rate GIC, your return will be more of a mixed bag. This is because you could earn a 4% return in one month and a 1% return in the next month, depending on what the market is doing.

Are GICs taxable?

GICs are only taxable if they are held in non-registered accounts. For example, if you hold your GIC in a regular savings account, you’ll have to pay taxes on any interest you earn. GICs are not taxable if they are held in a registered account such as a TFSA, RESP, RRSP or RRIF. This means you won’t need to claim the interest you earn on your taxes as income. Learn more about registered vs non-registered GICs.

Types of GICs

Depending on the financial institution, there are several types of GICs with different terms and interest rates.

  • Fixed vs variable (or market-linked) rate. A fixed rate GIC gives you a set rate for the duration of your term, while a variable rate GIC will fluctuate according to how well the stock market is doing. There’s more risk involved with a variable rate since you can’t predict how much interest (if any!) you’ll get back.
  • Registered vs non-registered. Registered GICs can be held in RRSPs, RESPs and TFSAs, which means the interest you make on them is tax deductible. The interest earned on non-registered GICs, on the other hand, has to be claimed as taxable income when filing your taxes. Read up on RRSP GICs, RESP GICs and TFSA GICs.
  • Short vs long-term. Short-term GICs typically last less than a year and usually come with lower interest rates. Long-term GICs usually come with a higher interest rate and can last up to 10 years.
  • Local vs foreign currency. You may be able to invest in a GIC that accumulates interest in a foreign currency like the US dollar, British pound or euro. This might sound like a no-brainer given currency conversion rates but there are some downsides. Unlike local investments, foreign currency GICs aren’t insured and they often come with lower interest rates than their Canadian counterparts.
  • Cashable vs non-redeemable. Cashable GICs let you take your money out before your term without incurring a fee or penalty. Non-redeemable GICs are more set in stone and can cost you a lot of money if you take your investment out before it matures.

      How to compare GICs

      You’ll want to consider the following features when comparing GICs:

      • Term. The length of time that your money will be tied up in a GIC varies, with terms ranging from 30 days to 10 years. Longer terms are beneficial because they typically offer higher interest rates.
      • Interest rates. GICs offer interest rates between 1% and 4%, with most paying out interest on an annual basis or when the investment matures. These interest payments can be added to the balance so that they compound every year or they may be funneled into a different account to become a passive form of income. Find out the best GICs rates in Canada.
      • Minimum deposit. Most lenders require a minimum deposit of at least $500 while some require you to invest as much as $10,000. Keep in mind that you might need to consider other options if you don’t have that kind of cash floating around.
      • Withdrawal conditions. You’ll need to wait until the end of your term to take your money out unless you have a cashable or redeemable GIC. If you need to make an early withdrawal, you could end up paying a penalty or forfeiting the interest you earned on your investment.
      • Suitable duration. If you know you might need quick access to your money at some point, then you should aim for a short-term cashable GIC. If you don’t have any issues with cash flow, you can probably take out a longer-term non-redeemable GIC with a higher interest rate.
      • Easy tracking. Some GICs offer mobile banking apps so that you can check the balance of your account easily. Others offer regular statements and online platforms to help you monitor your savings. Look for a lender that keeps you up-to-date on your account.

        Benefits of GICs

        GICs come with a number of features that make them a worthwhile investment to pursue:

        • High interest rates. Enjoy higher interest rates with GICs than you’ll get with most savings accounts.
        • Low-risk investment. Earn guaranteed interest rates and get a guaranteed return on your principal when it’s time to cash out your investment.
        • Portfolio diversification. Use your GICs to balance out your portfolio so that you can continue to build up your savings without taking on additional risk.
        • Tax-free interest on registered accounts. Hold your GICs in a registered account such as a TFSA or RRSP to earn tax-free interest on your savings.
        • Deposit insurance. Relax knowing that your money is protected up to $100,000 by the Canada Deposit Insurance Corporation (CDIC) if your provider is a CDIC member.

        What to watch out for

        GICs also include a handful of drawbacks you should be aware of before investing:

        • Lower return than higher-risk investments. You could end up with a lower return on interest than you might get with more risky investments such as equities.
        • Can’t keep up with inflation. GICs with longer terms are usually unable to keep pace with inflation – meaning you could lose money on them over time.
        • Locked-in funds. You’ll have to lock in your money with most GICs, and you could incur significant penalties if you redeem them before your term is up.
        • Minimum balance. You may need to invest a minimum of $500 or more to sign up for a GIC, which makes this type of investment less accessible for low-income earners.
        • Taxable interest. You’ll pay tax on any interest you earn unless you hold your GIC in a registered account.

        Are GICs safe?

        GICs are a very safe investment vehicle and can even be used to help you lower the risk in your investment portfolio. Aside from giving you a guaranteed return on your original investment, GICs are automatically insured with either Canadian Deposit Insurance Corporation (CDIC) insurance or provincial insurance.

        Both types of insurance limit coverage to a set term and amount. For example, CDIC insurance covers up to $100,000 over a 5-year term. The good news is that you don’t have to apply for or pay premiums to get this insurance, and you’ll get an automatic payout from the insurance agency if the bank closes or goes out of business.

        How can I buy a GIC?

        You can buy a GIC through your bank or another financial institution, both in person or online. Keep in mind that most GICs require a minimum investment of $500 while others go as high as a $10,000 minimum.

        Bottom line

        GICs are designed for the cautious investor who wants to get a decent return on the money they put in. If you’re interested in a GIC, just be aware that any money you put in will be locked in for the duration of your term unless you sign up for a cashable or redeemable GIC.

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