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Foreign currency GIC guide
Take advantage of top exchange rates and earn a guaranteed return on your foreign currency investment.
A foreign currency GIC (or Guaranteed Investment Certificate) is a low-risk investment that is guaranteed to protect the majority of your principal, subject to exchange rates. Most of these GICs come in US dollars and earn interest in the same denomination. They are often used to maximize favourable exchange rates and can also come in handy if you earn a foreign income and don’t want to lose money by converting your funds to Canadian dollars.
Find out more about how these GICs work and compare their features to make sure you get the best deal.
How does a foreign currency GIC work?
A foreign currency GIC is a Canadian investment product that allows you to earn interest in a foreign currency (often US dollars). The main benefit of this type of investment is that you’ll earn a guaranteed return on interest and may be able to make money on exchange rates. The downside is that you’ll typically get lower interest rates than on domestic GICs, and your investment won’t be covered by insurance.
You can purchase a foreign currency GIC with Canadian dollars or with the currency you’re investing in. If you purchase with Canadian dollars, the bank will exchange your currency at the current market rate (plus an added markup). If you purchase with foreign currency, you won’t lose any money on the exchange rate.
While your money is invested, you’ll earn either a fixed or fluctuating interest rate in the denomination of the foreign currency. You also stand to earn money on exchange rates if the Canadian dollar falls against the foreign currency. But if the Canadian dollar rises, you risk losing money on your principal investment because your Canadian dollar buying power will be lower.
Why invest in foreign currency GICs?
Foreign currency GICs can be beneficial because they give you the potential to earn money on interest and exchange rates. With these GICs, you risk losing some of your principal investment if the Canadian dollar performs well during your term, but you also have the potential to get a higher return on the principal (plus interest) if the Canadian dollar performs poorly. For Canadians, a US dollar GIC is the most common foreign currency GIC purchase.
These investments can also be handy if you want to “buy” foreign currency when exchange rates are good so that you don’t have to exchange money at lower rates when you travel. They can also be a suitable option if you have a foreign income that you would rather invest directly without converting into Canadian dollars.
As a rule of thumb, you should only invest in these GICs if you’re confident that the Canadian dollar is on a long-term downward trend to avoid losing money on your principal investment.
How to maximize your foreign currency GIC?
To make money on these types of GICs, you should aim to purchase your foreign currency when the value of the Canadian dollar is high. For example, let’s say that CAD$1 is worth US$0.75 at the time that you purchase your US dollar GIC. If you invest CAD$1,000, you can purchase US$750 and begin to earn interest on this amount in US dollars.
Now let’s say the value of the Canadian dollar drops to US$0.65 after 5 years, which is the length of your term. When you sell your stock (worth US$750) and exchange it back into CAD, you could end up with an extra US$100 on top of your original investment due to the drop in the Canadian dollar. This is in addition to the guaranteed rate of interest you’ll earn over the course of your term.
How to compare foreign currency GICs
You can compare foreign currency GICs based on the following factors.
- Interest rates. Interest rates can be fixed or variable and are typically lower than what you would earn with domestic GICs.
- Length of term. Terms usually range from 3 months to 10 years, with longer terms typically earning more interest.
- Minimum investment. You may be able to start a foreign currency GIC with as little as $100, but most require at least a $500 investment.
- Redemption type. Cashable GICs let you access your money at any time while non-redeemable GICs come with a penalty for early withdrawal.
- Payment frequency. You can choose to be paid monthly, yearly or when the GIC matures.
Drawbacks of foreign currency GICs
There are a couple of factors to consider before you invest in a foreign currency GIC.
- Lower interest. The interest you make will typically be lower than what you might earn on a domestic GIC.
- Lower return on principal. If the Canadian dollar performs extremely well, you could lose money on your principal investment when you exchange it back to Canadian dollars.
- Less flexibility. You won’t be able to make changes or withdraw your funds if the Canadian dollar starts doing really well.
- Conversion costs. If you use Canadian dollars to buy a foreign GIC, or a US dollar GIC, you’ll lose money when your bank exchanges your funds into your foreign currency.
- Interest subject to taxation. Any interest you earn on your GIC is subject to taxation if the GIC is held outside of your TFSA, RRSP or RESP.
- No insurance. Unlike domestic GICs, foreign exchange GICs ( aren’t protected by the Canada Deposit Insurance Corporation (CDIC).
Foreign currency GICs are a suitable option if you want to take advantage of favourable exchange rates and are looking to invest with minimal loss to your principal. Find out more about how these products work and learn how to compare providers to find the best deal.
Frequently asked questions about foreign currency GICS
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