More About Guaranteed Investment Certificates (GIC)
In Canada, a Guaranteed Investment Certificate or GIC is an investment normally issued by banks, credit unions, or trust companies. The institutions will offer a guaranteed rate of return over a fixed time period. People tend to purchase GICs as part of their retirement plans because they offer a low risk rate of return. Because of its low risk, they are apt to receive a lower return than other investments such as mutual funds, stocks, and bonds. If for some reason a bank defaults, it is only the principal that is at risk,
How Guaranteed Investment Certificates Work
When you buy a Guaranteed Investment Certificates (GIC) from a financial institution, the institution pays to borrow your money for a specified time period. The period can be months or years. The end of the time period is called the maturity date. You must agree to the terms and conditions specified by the institution. For instance, the set term of the investment can be as little as 30 days, one year, or up to 10 years. You select how long you want the time period to be. Most people purchase GICs for one, three, or five years.
A certain amount of money has to be invested in the GIC. It is generally at least $500.00. You will be paid the interest that is accrued over the time period. Therefore, if your GIC is set for ten years, you will make more of a return in interest over the time period. The less time period, the less interest you will receive. It is important to remember if you take your money out before the end of the set term, there may be a penalty or early withdrawal fees. You may even not receive any interest. However, there are some GIC options that will allow a certain portion of the interest to be paid each year if you have a term that is set at a certain number of years.
You can normally receive your interest payments monthly, every three months, or once or twice a year. If you choose a monthly payment, interest payments will be lower.
Types of Guaranteed Investment Certificates (GICs):
Each financial institution may design their own GIC packages for their clients with different options, but there are two main types of GICs.
1. The safest GIC investment is one where an interest rate is set for the specified period of time. This is known as a fixed rate. Your money will be used at a specified interest rate that will not fluctuate with the market conditions. Because interest rates often change, always check to make sure that you are getting the best rate.
2. Purchasing GICs where the interest rate is based on the conditions of the stock market, rates will vary according the market conditions. It gives the investor a chance to possibly have a higher interest rate thereby earning more if the market is doing well.
What the Bank does with your Money
The bank takes the amount you invested in the GIC, and lends it to other financial groups. The bank will charge a much higher interest rate than the rate that they are paying you. The bank makes its money from the higher interest rate charged to their borrower. The difference between what they pay you and what they charge the borrower allows them to make a profit
It is important to remember that with GICs, the bank’s costs are factored into the price you pay. So, when comparing investment options, you have to look at what the total return would be on a GIC. As well, Guaranteed Investment Certificates are considered lower- risk, not no-risk investments. When your investment depends on market conditions, risk is higher. However, you will not lose the principal. Also, taxes on GIC interest that you receive tend to be high.
We all want to make the right choices when planning for our future, especially our retirement. Guaranteed Investment Certificates are a great way to make an investment with lower risks.
Get the current listing of GIC rates currently in effect for your investment needs at Ontario credit union. Providing mortgage refinance options, mortgage loan and investment options for all your financial requirements.
GIC FAQ:
Question: Which bank has the best one-year fixed deposit/GIC/etc low-risk investment rate?
As I’m going to be out of the country for a year, I’m looking to park my money in a fixed deposit, GIC or some other low-risk investment option with guaranteed returns. Does anyone know which bank has the best interest rate for what I’m looking for? I’m new to this and very overwhelmed by the amount of info I’m getting from the banks.
Answer: Premium Money Market Fund, only worth a few percent a year, but liquid as cash at any time, usable to buy stocks at my bank at a moments notice. It is what I do until I find something better.
Question: I am looking to invest in the CIBC’s GIC’s in the escalating investment but I need a few questions answered first?
On the subject of investments when it says interest is annually does that mean every month week or day? Can I add on to my investment as time passes? How do banks make a profit off investments? Is there a fee of something in fine print I have missed?
Answer: Guaranteed Investment Certificate pays interest at the end of a year when it says interest annually. You can buy more GICs anytime you want with new money but you can’t include your present GIC money until it’s term ends, or you lose any accrued interest. Banks make a profit by lending your GIC Money out at higher rates than they pay you. There are no fees for buying, just loss of interest if you sell before the term date.
Question: Difference between RRSP and GIC RRSP?
Can you please explain to me the difference between an RRSP and and RRSP GIC? Are both tax-sheltered? What are the benefits of each?
Answer: A GIC RRSP restricts investment to Guaranteed Investment Certificates and are offered by banks and credit unions. Contributions are tax deductible.
A normal RRSP is also tax deductible and is not as restrictive in the type of investment allowed. Mutual funds for example are also allowed. There are a number of potential products that can be bought or transferred into an RRSP including stocks, bonds, stock options etc.
Question: What is the difference between a registered and non-registered GIC?
Answer: A registered investment means it is registered with the government. These investments are essentially guaranteed to the government so you can’t use them as an asset for the most part at a financial institution. A registered investment is most commonly put into an RRSP (Registered Retirement Savings Plan) which is used for your retirement, but there is also the option of an RESP (Registered Education Savings Plan), which would be for your child’s education.
A non-registered investment is one that is just a regular investment. It’s just there with no set singular purpose and is considered an asset.
Any type of investment can be classed as a Registered or non-registered investment.
Question: Do you have to pay income tax on a gic if you use money from a buyout?
Answer: Interest earned from a GIC is reported on your income tax return and therefore, yes, you pay income tax. The only exception is if the GIC is part of your TFSA.
Question: RRSP, GIC or Savings Account?
I already have 2 savings accounts with pretty good interest rates. I was wondering if I should stick with those or should I get an RRSP or GIC to save some extra money? Keeping in mind that I am going on Maternity leave soon. My husband already does separate investments and he is planning on opening a RRSP with our mortgage.
Answer: The RRSP is the best investment of the three. You don’t pay income tax on the interest unless you take them out before age 65. GIC you pay tax on the interest when they mature i.e. a 5 yr. GIC you would pay tax on the interest accrued after 5 yrs–10 yr GIC you pay tax on interest accrued after 10 yrs etc. Savings accounts, not enough interest to make it worthwhile.
Question: GIC Interest, Where Does It Go?
This is my first time doing taxes on my own. I entered GIC interest along with bank deposit interests in the “Interest from Canadian Sources” in Box 13 of the T5 slip (StudioTax). Is this correct?
Answer: If this was not an RRSP account, then yes, you entered it correctly.
Question: Should I invest in GIC?
I got about two grands which I believe will be sitting around in my savings account anyway. So I thought I would rather have them in BMO GIC since it’s highly liquidity with no risk, well low rate. Is there any other investment which may be a bit riskier than GIC but still highly liquidable and with a higher rate?
Answer: A GIC is not highly liquid, it is locked in for the period of time you select. 1, 3 or 5 years. If you get a cashable GIC, then you must accept a lower interest rate.
In your situation, if the ability to access the money in an emergency is an issue, I would recommend a money market account, which is a type of mutual fund, which usually pays higher interest than a savings account, but you can get the money out within 1 or 2 days. BMO can do it for you.