Guaranteed Investment Certificates (GIC) in Canada

If you have a reasonable amount of spare cash kicking around and want a safe way to invest it without losing money, a GIC might be a suitable option for you. This type of investment guarantees a consistent return on interest (provided you have a fixed rate) and you can rest easy knowing that any money you put into your account will be given back at the end of your term.

What is a GIC and why should I consider one?

A Guaranteed Investment Certificate (or GIC for short) is an investment made over a fixed term that offers either a fixed or variable return on interest, along with a guaranteed return of your principal. So what does this mean exactly?

Let’s say you invest $1,000 over a term of 3 years with a fixed interest rate of 3%. If you manage to keep the money in the GIC for the whole term, you’ll get a return of approximately $93 at the end of three years (or around 3% of $1,000). An investment of $10,000 with the same term and interest rate will net you a return of $930 over three years. A variable rate, on the other hand, can be harder to predict because it’s tied to the stock market.

The main draw of a GIC is that you earn a decent interest rate but you never lose the principal you invest so there’s very little risk involved. For this reason, GICs can be a safe haven for more conservative investors who don’t want to be exposed to the possibility of losing cash due to market fluctuations.

What are the downsides of a GIC?

The downside of a GIC is that you can’t usually access your money while it’s in the account. If you do need to withdraw cash unexpectedly, you’ll typically be charged a fee or penalty, unless you have a cashable GIC with no conditions for withdrawal.

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 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.
• 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.
• 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.

How to compare GICs

When you’re deciding which GIC to choose, you should check the length of the term, the return on interest rates, the minimum deposit and the conditions you’ll have to fulfill to cash in on your investment.

• 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 in that they typically offer higher interest rates.
• Interest rates. GICs offer interest rates between 1-4%, 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.
• Minimum deposit. Most lenders require a minimum deposit of at least $500 while some want 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. If you’re only looking to invest a small amount of money, make sure you meet the minimum requirements with the lender you decide to go with.
• Withdrawal conditions. Each GIC has different rules for when you’ll be able to get the money you invested back. Some lenders insist that the investment can only be cashed in after the full term is up, while others might return your money earlier if you forfeit any interest you made on the GIC. You could also face fees or penalties for withdrawing before the expiry date, so make sure you read the fine print before you sign on the dotted line.

How is my money protected?

In the case of a bank failure, 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 five-year term. The good news is that you don’t have to apply or pay for this insurance, and you’ll get an automatic pay out from the insurance agency if the bank closes or goes out of business.

Hackers pose another threat to your money – though it doesn’t happen very often, bank account hacks result in the theft of both personal data and money and can have devastating consequences for the victims. In the event of a hack, banks often cover their customers’ losses, but even so, you can still take steps to prevent unauthorized access to your funds. Read this article to find out how to keep your funds safe and how to respond if someone has broken into your account.

How can I buy a GIC?

It’s easy to buy a GIC through your bank or another financial institution, both in person and online. Just 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 may be suitable for you if you’re a cautious investor who wants to get a decent return on the money you put in. If you’re looking to explore GICs, get started by learning more about the different types available. Alternatively, you might be interested in putting your funds into a high-interest savings account to grow your money while still keeping your risk level low. To learn more, read our guide to comparing high-interest savings accounts.

Frequently asked questions

• How often is interest added to my GIC?

  You can typically choose how often you want your interest compounded when you purchase your GIC. For example, if your interest is compounded bi-annually, it will be added to your initial investment twice per year.

• Will I always get a fixed interest rate?

  Equity or market-linked GICs don’t pay a fixed interest rate, so there is some investment risk. While you still can’t lose your original investment, it’s possible that the return on your money will be lower than expected or even zero.

• What happens when the term for my GIC ends?

  Once your term is over, the money you invested will become available for you to transfer to your bank account. Alternatively, you may be able to roll your money over into a new GIC to continue earning interest.

• Do I have to pay tax on my GIC?

  It depends. If your GIC is held in a registered account like a TFSA, RRSP or RESP then you won’t have to pay tax on any interest earned from your GIC. If it’s held in a non-registered account, such as a savings account, then you may have you pay tax on the interest earned and will have to declare the interest when you file your taxes.

• I'm not a Canadian resident, can I still open a GIC?

  No. Most banks require you to live in Canada and supply a Canadian address in order to open a GIC.