How Does Guaranteed Investment Certificate (GIC) Work in Canada?
A Guaranteed Investment Certificate, or GIC is a type of Canadian investment in which the rate of return is guaranteed over a fixed period of time. This particular type of financial product is a relatively low-risk investment, and thus yields smaller returns than that of stocks, bonds and mutual funds. GIC’s are typically offered by banks or trust companies. These safe and secure Canadian investment vehicles earn interest at a fixed rate, variable rate, or based on a market-based index. Many Canadians view Guaranteed Investment Certificates an excellent choice for a portfolio that requires a measure of safety.
How do Guaranteed Investment Certificates Work?
With these products you will invest an amount of money (determined by you) for a period of time that is determined by the specific type of GIC that you choose. Typically these periods of time vary greatly and can tend to range anywhere from 1 day to 10 years. Investments with longer terms will earn more interest than short term ones. When your Guaranteed Investment Certificate reaches the end of its term (otherwise known as ‘maturity,’) you will be able to access not only your initial sum of cash, but the earned interest as well.
Some Canadian Guaranteed Investment Certificates require that the amount of money you invest initially remain ‘locked in’ for a minimum period of time (30 days for example). Other GIC’s will allow you to access your money before the maturity date. There are even Guaranteed Investment Certificates that allow you to add to your initial cash amount by making weekly, biweekly or monthly contributions.
Redeemable vs. Non-redeemable
Guaranteed Investment Certificates can be redeemable or non-redeemable. As aforementioned, there are some GIC’s which allow you to access your cash during the term. This is referred to as ‘redeemable.’ With redeemable assets, you will be able to withdraw your cash before maturity. Some redeemable GIC’s specify that you will earn less interest if you cash out prior to maturity. The non-redeemable counterparts do not allow withdrawals before the maturity date. Non-redeemable GIC’s may offer higher interest rates than redeemable ones.
Interest
This particular type of Canadian asset can be offered at either fixed or variable interest rates.
Fixed Rate GIC’s
With a fixed rate GIC, your money will earn interest at a set rate. That is, the interest earned will be consistent throughout the term of the investment. The benefit of fixed rate GIC’s is that you can predict exactly how much your total assets will be worth on the maturity date.
Variable Rate GIC’s
Variable rate Guaranteed Investment Certificates are either linked to the Canadian prime interest rate or to stock-market performance. With interest-rate linked GIC, you are guaranteed that your money will grow, but you will not know at which rate until maturity. With market-linked GIC’s, you can earn more interest if the stock market does well, but your initial investment will be protected either way.
Benefits of GIC’s
The most important benefit offered by this type of investment is safety and security. Your initial cash amount will be protected. With fixed-rate GIC’s you can also enjoy guaranteed growth and an easy way to project value at maturity. GIC’s are also known to offer excellent interest rates. Finally, GIC’s are typically pretty flexible investments. You can enjoy flexibility in length of term as well as how often you receive payments.
If you live in Canada and are interested in investing your money in a safe instrument, a Guaranteed Investment Certificate may be right for you. To find out more about what is available in your area, visit your local bank.
Whether you are looking for a mortgage refinance, fixed, variable, open or closed Mortgage loan, our financial Coaches can help you figure out which one is just right for you. We offer the most convenient GIC rates on the market
GIC FAQ:
Question: What is the difference between a CD and a GIC?
What is the difference between a CD and a GIC and which is better when interest rates are climbing/falling.
Answer: CD – Certificate of Deposit. Time deposit with a US Bank.
GIC – Guaranteed Investment Certificate. Time deposit with a Canadian Bank.
Best rate depends on which country you live in. If you are in the US and put the money in Canada, and the Canadian dollar drops, then your “real” rate drops due to a change in value in currency, when you convert your Canadian dollars back to US dollars.
Question: What’s the difference between RSP, GIC and mutual fund?
And what do you recommend for someone who’s trying to save up for a downpayment?
Answer: RRSP – These are savings that are allowed to be tax deductible (to a certain point). They are usually for retirement. The money withdrawn is taxed though.
GIC – These will allow your money to gain a guaranteed interest rate for the term. These are available anywhere from 1-10 years usually, and the rate depends on your bank.
Mutual Funds: These work on the principle that the greater amount of money invested the more money can be earned. This is a collection of your money and other investors money that is managed by a 3rd party to maximize profits. However, some banks will guarantee, some won’t. However you can select what you invest in be it high risk/reward, or low risk/reward.
Depending on your own personal finances, how much you can contribute, the investment options available, your income tax bracket , the answer to which you should choose could differ. It would be best to make an appointment with a financial adviser.
Question: Are people from Ont. who are on ODSP allowed to have GIC’s or stock up to a certain amount?
I have someone wishing to give me either a GIC or a few shares in some stock. They figure that way I have something for when I retire, to help me out since I don’t have anything else. The question is whether I am able to have them without my monthly cheque becoming all messed up? Or in what ways it can affect my cheque depending on the amount?
Answer: I’m not on ODSP but a buddy of mine was and let me tell you, he almost lost his benefits because of non-reporting income. Here’s a suggestion, ask a friend to inquire with ODSP about GICS and don’t mention your name, since ODSP is provincial funding I suggest if they are going to get you a GIC or RRSP maybe out of province would be a good idea, or perhaps instead of GIC’s because of the economy the way it is how about Federal Bonds, maybe in a child’s name?
Question: Is an insurance or GIC with a named benificiary included in the estate subject to a will?
Answer: You can structure your insurance different ways.
If you have a named beneficiary (a person) the money flows directly to the beneficiary tax free and bypasses a will.
Should the insurance be payable to an estate then it will be subject to the will. Some people use an insurance policy paid to an estate to cover the taxes arising from the taxation triggered by a death. (ie capital gains on investments)
For GICs if they’re held solely in the name of the deceased they flow to the estate and will. If its joint it flows to the other joint owner, bypassing the will.
Question: In Canada, does one have to pay taxes for interest earned in a gic investment with Royal Bank of Canada?
Also, if I have no work income, no medical expenses, do I even need to declare?
Answer: Yes you have to claim it as income, although interest is not treated like employment income.
If you truly have NO income you still want to apply for GST credit, Social Assistance and other programs, and you need to have the current years taxable income for those calculations.
In doing your income taxes the GST and child and family benefits are how you apply.
Question: I live in Ontario Canada. How safe is my money in a GIC at CIBC?
If anything ever happened that the bank went down would I lose my money too?
Answer: If the CIBC, the country’s biggest bank, goes under we have much more important issues to worry about.
However, your deposit is covered up to $100,000 per account by the Canadian Deposit Insurance Corporation. 100% safe.
Question: Is it safe to keep my mutual funds or should I sell at least half of them and get things such as GIC?
Would I be selling my mutual funds at a very low value (since the markets have really gone down lately) or will I save some of it’s value (since the markets might get worse)?
Answer: Investing is never safe. It’s always risky. Having said that, if you sell now then you lock in your loss. If you can hold out for 5 years you will historically have recovered your losses.
The markets go up and the markets go down. Historically, they tend to go up. If you need cash and have to sell, then sell. If you can’t stand the risk and have to sell, then sell. Otherwise hang on, collect your dividend payments, and ride it out (We’re all in the same boat here). You may want to contact your financial advisor before making a decision.
Question: Where to find best GIC Rates?
I know there’s public posted rates but I hear there are also discount brokerages? What’s the difference?
Answer: All GIC rates are very low these days. Among the banks, the best rate I have seen is at Canadian Western Bank: about 3.5% for a 5-year term. ING Direct might be about the same. Credit unions like VanCity also offer slightly better rates than banks.