GIC Guide

A Guaranteed Investment Certificate (GIC) is a secure investment product offered by Canadian financial institutions. When you purchase a GIC, you're essentially lending your money to the bank or financial institution for a specific period of time, in exchange for guaranteed interest payments.

GICs are considered one of the safest investment options in Canada because:

• Your principal (the amount you initially invested) is guaranteed
• The interest rate is fixed and guaranteed for the term you choose
• Many GICs are eligible for coverage by the Canada Deposit Insurance Corporation (CDIC) for up to $100,000

When you purchase a GIC, you agree to leave your money invested for a specific term, which can range from 30 days to 10 years. Generally, the longer the term, the higher the interest rate you'll receive.

There are several types of GICs available to Canadian investors, each with different features to suit various investment goals:

1. Non-Redeemable GICs

These GICs cannot be cashed before maturity without penalty or special permission. In exchange for this commitment, non-redeemable GICs typically offer higher interest rates than redeemable options.

2. Redeemable (Cashable) GICs

These offer more flexibility, allowing you to cash out before the maturity date without penalties. The trade-off is usually a lower interest rate compared to non-redeemable GICs.

3. Fixed-Rate GICs

With a fixed-rate GIC, the interest rate remains constant for the entire term. This provides predictable returns and protection against interest rate decreases.

4. Variable-Rate GICs

These GICs have interest rates that fluctuate based on the prime rate or other market indicators. They may offer higher returns than fixed-rate GICs if interest rates rise during your term.

5. Market-Linked GICs

Also known as index-linked or equity-linked GICs, these products tie their returns to the performance of a market index, a basket of stocks, or other market indicators. They offer the potential for higher returns with the security of principal protection.

6. Foreign Currency GICs

These GICs allow you to invest in foreign currencies, potentially benefiting from both interest income and currency exchange rate movements.

7. Escalating Rate GICs

These offer a predetermined interest rate that increases over the term of the investment, providing higher returns the longer you stay invested.

Benefits

• Safety: Your principal investment is guaranteed, making GICs one of the safest investment options available.
• Predictable returns: Fixed-rate GICs provide guaranteed interest rates, allowing you to calculate your exact returns before investing.
• CDIC protection: GICs from eligible financial institutions are covered by CDIC insurance for up to $100,000 per insured category.
• No fees: Unlike many other investments, GICs typically don't have management or administration fees.
• Diverse options: With various terms and features available, you can find GICs that match your financial goals.

Risks and Limitations

• Inflation risk: If the inflation rate exceeds your GIC's interest rate, your investment's purchasing power will decrease over time.
• Opportunity cost: By locking in your money at a fixed rate, you might miss out on higher returns from other investments if interest rates rise.
• Liquidity constraints: Non-redeemable GICs lock in your money for the full term, making it unavailable for emergencies or other investment opportunities.
• Lower returns: GICs typically offer lower returns compared to riskier investments like stocks or mutual funds.
• Interest rate risk: If you invest in a long-term fixed-rate GIC and interest rates rise significantly, your money is still locked in at the lower rate.

Selecting the right GIC depends on your financial goals, time horizon, and risk tolerance. Here are key factors to consider:

1. Term Length

Consider how long you can comfortably keep your money invested. Shorter terms (3 months to 1 year) offer more flexibility but typically lower rates. Longer terms (1-10 years) generally provide higher interest rates but limit access to your funds.

2. Interest Rates

Compare rates across different financial institutions to find the best return. Even small differences in rates can significantly impact your returns, especially for larger investments and longer terms.

3. Redeemable vs. Non-Redeemable

Assess your potential need for the funds before maturity. If you might need the money, a redeemable GIC offers flexibility but at a lower rate. If you're confident you won't need the funds, a non-redeemable GIC will typically provide a higher return.

4. Interest Payout Schedule

Consider when you want to receive interest payments. Options typically include:

• Compounded interest: Interest is reinvested with the principal, earning "interest on interest"
• Annual interest: Paid out once per year
• Monthly or quarterly interest: Provides regular income payments

5. CDIC Insurance Coverage

Ensure your GIC is covered by CDIC insurance. If your total GIC investments exceed $100,000, consider spreading them across different CDIC member institutions or insured categories to maximize protection.

6. Fixed vs. Variable Rates

Consider the current interest rate environment. If rates are expected to rise, a variable or shorter-term GIC might be preferable. If rates might fall, locking in a longer-term fixed rate could be advantageous.

Understanding the tax implications of your GIC investments is important for maximizing your after-tax returns:

Non-Registered GICs

Interest earned on GICs held outside registered accounts is fully taxable at your marginal tax rate. Important tax considerations include:

• Interest must be reported annually on your tax return, even if you haven't actually received the money yet (accrual basis).
• For GICs that compound interest until maturity, you must still report the interest earned each year, not just when the GIC matures.
• Financial institutions issue T5 slips reporting the interest income.

Registered Plans

GICs held within registered accounts have different tax implications:

• TFSA (Tax-Free Savings Account): Interest earned is completely tax-free and doesn't need to be reported on your tax return.
• RRSP/RRIF (Registered Retirement Savings Plan/Retirement Income Fund): Interest grows tax-deferred until withdrawal, at which point it's taxed as income.
• RESP (Registered Education Savings Plan): Interest grows tax-deferred and is taxed in the student's hands when withdrawn for educational purposes.

Tax Strategies

• If you're in a high tax bracket, prioritize holding GICs in registered accounts like TFSAs or RRSPs when possible.
• Consider GICs that pay annual interest rather than compounding until maturity if held in a non-registered account and you need the income.
• For non-registered accounts, timing the purchase of your GIC in late December and maturing in January (of a later year) can defer some tax liability to a future year.