What Is a GIC?
A Guaranteed Investment Certificate (GIC) is a popular type of investment in Canada since you can earn interest without risking your initial investment. On this page, we'll explore what a GIC is, how it works, the different types of GICs, and their benefits and drawbacks.
- A Guaranteed Investment Certificate (GIC) can be purchased from banks, credit unions, and other financial institutions, and they offer a guaranteed rate of return over a set term.
- GICs are for investors looking for stability and predictable returns on their savings, backed by deposit insurance protection by the Canadian Deposit Insurance Corporation (CDIC).
- There are different types of GICs, including non-redeemable and redeemable options, registered or non-registered accounts, and fixed or variable GIC rates.
- When investing in a GIC, consider the GIC provider’s rates and features, your investment goals, and your risk tolerance.
What is a GIC?
GIC stands for Guaranteed Investment Certificate (GIC), and it’s a financial product offered by banks and credit unions throughout Canada.
A GIC is a type of investment that provides a guaranteed rate of return over a specific period. The interest rate on a GIC varies, depending on the length of the investment and the institution where it is purchased.
In general, the longer you invest in a GIC, the higher the interest rate and ROI you'll earn. However, there may be penalties if you need to access the money early.
How GICs Work
GICs are a type of deposit that is held at a financial institution. When you invest in a GIC, you are “purchasing” the GIC by agreeing to leave your money on deposit for a specific period, such as one year, three years, or five years. In exchange for putting your money on deposit, the financial institution agrees to pay you a guaranteed rate of return.
Once the GIC matures, which is the end of the term, you can choose to either renew your GIC or cash it out. If you cash it out, you’ll get back your original investment amount, plus the interest earned. In some cases, interest can be paid to you monthly or annually, rather than when the GIC matures. Typically, interest is compounded or paid annually.
The interest rate on a GIC is generally lower than what you can earn with other investments, such as stocks or mutual funds, but they’re usually higher than what you would earn in a savings account. GICs are considered low-risk investments because they offer a guaranteed rate of return, plus, the government insures your deposits at each financial institution for up to $100,000.
When purchasing a GIC, you can choose between a variety of criteria. Note that you also have the opportunity to buy foreign currency GICs, such as GICs in U.S. Dollars. This could be a good idea if you're frequently visiting or have income in another country and want to minimize exchange rate risk by keeping your GIC in your local currency rather than constantly exchanging currencies.
GIC Features
Non-redeemable GICs have a set term that cannot be changed and do not allow for early withdrawals. This means that once you invest in this type of GIC, your money is tied up until the maturity date. Non-redeemable GICs typically offer higher interest rates compared to redeemable GICs, as your money is locked-in.
CDIC (Canada Deposit Insurance Corporation) insurance protects your principal investment in GICs up to $100,000 per account type at each financial institution. This means that if the financial institution holding your GIC goes bankrupt, you will receive your initial investment and accumulated interest back from CDIC.
Both cashable and redeemable GICs allow for early withdrawals but have lower interest rates. With a redeemable GIC, you’ll redeem your deposit at a lower early redemption interest rate. Cashable GICs have a set rate for the entire term. Cashable or redeemable GICs are more suitable for those who may need to access their money before the maturity date.
You can invest in GICs in other currencies, such as GICs in U.S. Dollars, through certain financial institutions. These GICs are ideal for investors looking to diversify their portfolio and potentially benefit from fluctuations in currency exchange rates, or those that have U.S. Dollars to invest.
Types of GICs
Fixed-Rate GICs
Fixed-rate GICs are the most common type of GIC in Canada. They offer a fixed rate of interest for the entire term, meaning that your investment will earn the same amount of interest regardless of market fluctuations. This type of GIC is ideal for those who want to have a guaranteed return on their investment without any risk. You can calculate your exact returns by using a GIC calculator.
Learn about:
| 3-Month GICs | 6-Month GICs | 1-Year GICs | 2-Year GICs | 3-Year GICs | 4-Year GICs | 5-Year GICs |
Variable-Rate GICs
Variable-rate GICs have an interest rate that changes based on the prime rate. This means that your investment can earn more or less interest depending on how the prime rate changes.
When the Bank of Canada hikes its policy rate, banks will increase their prime rate by the same amount. When the Bank of Canada lowers its policy rate, then prime rates will decrease too.
This means that the interest rate on your variable-rate GIC will also increase or decrease. Variable-rate GICs are ideal if you believe that the prime rate will go up in the future.
Market-Linked GICs
Market-linked GICs, also known as indexed GICs or index-linked GICs, offer a return based on how a specific market performs on an underlying asset, such as stocks, bonds, or commodities. They have a guaranteed minimum return and the potential for higher returns depending on the performance of the underlying market.
Market-linked GICs are for those who want to potentially earn higher returns than a fixed-rate GIC, but with some level of risk involved. In this case, the risk is that if the market performs poorly, you may end up with a lower return than a fixed-rate GIC. Many market-linked GICs have a guaranteed minimum return of 0%, meaning that you won’t make any interest if the market had a negative return, but you won’t lose any money either.
If the market performs well, you may hit your market-linked GIC’s maximum return cap, which means that you would have been better off investing in the underlying asset directly.
Registered GICs
Registered GICs are GICs that are held within a registered account, such as a Tax-Free Savings Account (TFSA) GIC or Registered Retirement Savings Plan (RRSP) GIC. The benefit of investing in a registered GIC is that any interest earned within the account is tax-sheltered. For example, you won’t have to pay taxes on the interest from a TFSA GIC.
Registered GICs often have the same GIC rates as non-registered GICs as well. If you still have contribution room and don’t plan on using it on other registered account investing options, you might want to consider using it for your GICs. Any interest earned from non-registered GICs is subject to taxes.
Types of Registered GICs
If the GIC is held in a registered account, such as a Tax-Free Savings Account GIC (TFSA GIC) or a Registered Retirement Savings Plan (RRSP), you will not have to pay any tax on the interest payments you receive.
However, regardless of the account, you still may face penalties if selling a non-redeemable GIC early. This section will compare the tax advantages of holding a GIC in the following accounts.
| Save Taxes on Contributions | Tax-Free Withdrawals | |
|---|---|---|
| TFSA | ||
| RRSP | ||
| FHSA | ||
| Non-Registered |
Tax-Free Savings Account (TFSA) GICs
The Tax-Free Savings Account (TFSA) was introduced in Canada in 2009 to help Canadians save for retirement. The TFSA is a registered account that allows you to earn tax-free investment income.
Contributions to your TFSA are not tax deductible. However, the TFSA shines when you withdraw money from your account. Withdrawals are not taxed, so you can remove money from the account free of taxes. The TFSA is ideal if you expect to withdraw funds in a higher income tax bracket.
The TFSA is a great way to save for retirement because it allows you to grow your investment without paying any taxes when you withdraw later. You can think of it as paying taxes when you are in a lower income tax bracket and avoiding paying taxes when you are in a higher income tax bracket. Additionally, any interest earned from your GIC investments won't be taxed.
Registered Retirement Savings Plan (RRSP) GICs
Next, the Registered Retirement Savings Plan (RRSP) is a registered account that allows you to save for retirement. The tax structure is the opposite of the TFSA. This is because you receive an income tax deduction on deposits but must pay income taxes on withdrawals. As a result, the RRSP is ideal if you are in a high-income tax bracket and plan to withdraw when you are in a lower tax bracket.
Like the TFSA, any interest earned from your GIC deposits in this account is tax-free. However, you must pay income taxes on withdrawals. The RRSP offers tax benefits that make it an attractive option for retirement savings. While these accounts save you taxes, you may still have penalties for selling a non-redeemable GIC early.
First Home Savings Account (FHSA) GICs
The recently announced First Home Savings Account (FHSA) combines the best of a TFSA and RRSP. Similar to an RRSP, you receive an income tax deduction on deposits. However, similar to a TFSA, there will be no withdrawal tax. This means you save taxes on both deposits and withdrawals. Previously, you would have to choose one.
The catch with the FHSA tax-free withdrawals is they must be used to purchase a home within 15 years of opening the account.
Comparing GIC Rates
When comparing GIC rates, it's important to consider not only the interest rate but also any additional features and fees associated with the GIC.
Some institutions may offer higher rates for longer terms or larger investment amounts, while others may offer more frequent compounding or interest payments.
Also, keep in mind that GIC rates can fluctuate over time, so it may be beneficial to regularly check GIC rates and compare between banks, credit unions, and other providers.
How to Invest in a GIC
You can purchase a GIC from most financial institutions, such as banks, credit unions, or even online investment platforms. The steps to invest in a GIC may vary slightly depending on the institution, but generally, you will need to follow these steps:
- Determine the type of GIC you want to invest in (non-registered, TFSA, RRSP, etc.) and the term length.
- Decide on a financial institution that offers competitive GIC rates and is eligible for CDIC insurance, or provincial deposit insurance in the case of credit unions.
- You’ll need to have an account with the financial institution to purchase a GIC. If you don’t already have one, you’ll need to open an account with them.
- Decide on the amount you want to invest in the GIC.
- Choose between a non-redeemable or redeemable term, as well as any additional features such as automatic contributions or how your funds are handled at maturity.
- Complete and sign all necessary forms and agreements.
- Your funds will be transferred over to purchase the GIC.
- Wait for the maturity date, or cash out early if you need to if it's a redeemable or cashable GIC, keeping in mind that early redemptions can come with a lower interest rate. Your interest will be paid out at maturity or periodically throughout the term, depending on your chosen option.
- Reinvest the funds or explore other investment options once your GIC matures.
With an online brokerage, you will need to log in to your account and place an order to buy a GIC.
With a full-service brokerage, people will call their full-service broker and explain what GIC you are looking to invest in. The broker will find a qualifying investment and inform you of the specifications. Your broker will then place the order and purchase the GIC on your behalf. After the GIC matures, you will receive the interest payments directly into your investment account.
With a bank, you can visit a branch and speak to a representative. You will likely be limited to purchasing the GICs offered by that bank. For example, you won't be able to buy Scotiabank GICs from an RBC branch. If you already have a bank account with your bank or credit union, then you can purchase their GICs online using online banking.
Comparing Types of GICs
Cashable vs Non-Redeemable GIC
When you invest in a GIC, you have two main options: cashable or non-redeemable. Redeemable GICs are another option, allowing you to withdraw money early but at a lower interest rate as a penalty.
| Cashable GIC | Non-Redeemable GIC |
|---|---|
Your investment can be withdrawn early, without penalty. For example, if you invest in a one-year cashable GIC and decide you want to remove your money after six months, you can do so without penalty. | Your investment cannot be withdrawn early without penalty. For example, if you invest in a five-year non-redeemable GIC and decide you want to withdraw your money after two years, you will have to pay a penalty or lose all interest earned. |
The decision between which type of GIC is right for you depends on your needs and preferences. In general, a non-redeemable GIC provides you with a higher return on investment. This is because financial institutions prefer predictability. You can think of the tradeoff between cashable and non-redeemable GICs as flexibility or a higher return on investment.
Fixed vs Variable Rate GIC
GICs are available in two different types: fixed rate and variable rate.
| Fixed Rate GICs | Variable Rate GICs |
|---|---|
Offer a guaranteed interest rate for the term of the investment. For example, if you invest in a three-year fixed-rate GIC, the financial institution will guarantee to pay you the same interest rate for three years, even if interest rates go up or down during that period. | Offer an interest rate linked to a financial market index, such as the prime rate. Market-linked GICs may follow indices such as the Toronto Stock Exchange (TSX) or individual stocks. The interest rate on a variable-rate GIC will go up or down depending on how the index performs. |
Your decision between investing in a fixed vs variable rate GIC depends on your risk tolerance and market outlook. For investors to be compensated for more risk, they require a higher expected return on investment. This is why fixed GICs tend to have lower rates than their variable counterparts. However, your fixed rate is guaranteed, while your variable ROI is not. Even then, market-linked GICs have a minimum and maximum allowed return, providing you with some predictability.
GIC Terms and Maturity Dates
A GIC term refers to the length of time you agree to leave your money on deposit. The maturity date is when your GIC investment will finalize, and you will receive your money back plus interest. GICs are available in various terms, usually from one month to 10 years. Some GICs are available for as little as one day!
The longer the GIC term you have, the higher the annual interest rate you will receive. For example, 5-year GIC rates are generally higher than 1-year GIC rates. This is because investors expect to receive a higher return for locking up their money longer. However, this isn’t always the case.
The Best GIC For You
As you now understand, many characteristics subdivide GICs in Canada. This section will further discuss the best choices depending on your investment goals. First, know that you have the decision between:
- Penalty-free withdrawal vs. higher interest rate
- Lower guaranteed rate vs. potentially higher speculative rate
- Shorter investment period vs. higher interest rate
Now we can discuss your options based on your goals.
| Maximum Interest Rate, Low Flexibility | Lowest Interest Rate, Maximum Flexibility |
|---|---|
|
|
GIC FAQs
A GIC is a type of investment that offers a guaranteed rate of return over a fixed period. The money you invest in a GIC is not accessible until the end of the term, and there may be a penalty for withdrawing your money early. Considering GICs are low-risk investments, they are popular among retirees and other investors who are looking for a safe place to grow their money.
Your GIC account is the location you hold the investment. You can open an investment account at partnering financial institutions. There are many different accounts ranging from a TFSA, RRSP, and FHSA to non-registered accounts. The tax benefits you receive on your GIC investment depend on the type of account you hold it in. The interest you receive will be deposited into your account.
A GIC investment is a low-risk way to grow your money. With a GIC, you invest a fixed sum of money for a specified time, and in return, you receive a guaranteed or variable rate of return. The interest you earn on your investment is paid to you at the end of the term. If you withdraw your money before the end of the term, you may be subject to a penalty.
GIC stands for guaranteed investment certificate. This is because you receive a guaranteed return on your investment.
It depends on your personal investment goals. If you prefer a low-risk investment with predictable returns, it may be worth it. While the returns are not as high as other investments, such as stocks and mutual funds, you are guaranteed to get your original investment back, plus interest. If you have outstanding debt, such as a mortgage or credit card debt, you will want to prioritize paying them off before considering a GIC. That’s because mortgage rates and credit card interest rates can be significantly higher than the rates that you would earn with a GIC.
A GIC does not lose money because it is guaranteed by the Canada Deposit Insurance Corporation CDIC, with up to $100,000 in deposits insured at each financial institution. This means that you are guaranteed to get your original investment back plus interest. GICs issued by credit unions are insured by provinces rather than the federal CDIC. Many provinces have higher limits than CDIC meaning you are insured on larger deposits. For example, Ontario’s FSRA will insure your GIC up to $250,000, while some provinces allow for unlimited deposits to be insured and protected.
A GIC ladder is a strategy that can help you maximize your returns and minimize your risk. With a GIC ladder, you spread your money across different GICs with different maturity dates. This way, you have money coming due every year to reinvest it at the current interest rates
For the best ROI on your GIC, it's best to wait for your term to end. However, if you can find a better return elsewhere it could be better to withdraw the funds and re-invest in a different asset. Although make sure to account for early withdrawal fees when calculating if your next opportunity is better.
The interest rate on a GIC can vary depending on the type of GIC and the term. For example, a short-term GIC will usually have a lower interest rate than a long-term GIC.
You may be able to cash in your GIC early, even for non-redeemable GICs, but you may be subject to a penalty. Your GIC provider may impose a penalty, such as 2% of the GIC amount, for cashing it in early. Or, they may reduce the interest paid significantly, such as decreasing it by 50%.
Yes, you can transfer a GIC from one bank to another. However, you may be subject to a penalty if you cash in the GIC early. Additionally, the new bank may not offer the same interest rate as the original bank.
Disclaimer:
- Any analysis or commentary reflects the opinions of WOWA.ca analysts and should not be considered financial advice. Please consult a licensed professional before making any decisions.
- The calculators and content on this page are for general information only. WOWA does not guarantee the accuracy and is not responsible for any consequences of using the calculator.
- Financial institutions and brokerages may compensate us for connecting customers to them through payments for advertisements, clicks, and leads.
- Interest rates are sourced from financial institutions' websites or provided to us directly. Real estate data is sourced from the Canadian Real Estate Association (CREA) and regional boards' websites and documents.