A Guaranteed Investment Certificate or GIC, is a Canadian investment solution offered by banks and trust companies where you invest a fixed amount of money for a fixed term.
GICs are low-risk investments where you never lose your principal amount.
To know more, keep reading.
What is A GIC?
To put it simply, a GIC is a contractually bound loan that you offer to a bank or a financial institution, like a trust company. You invest a principal amount for a specified period of time, for which you get a fixed interest.
After the term is completed, you receive your accumulated interest as well as the amount you invested initially.
It is usually purchased as an employer-sponsored retirement plan or a pension fund.
A GIC is a safe and smart investment choice under certain circumstances. That’s because banks and trust institutions are legally bound to return your money. Even if they fail to do so, the Canadian Deposit Insurance Corporation (GDIC) assures up to 100,000 Canadian dollars in insurance.
If you prefer conservative investments, a GIC is an excellent choice.
However, on the flip side, GICs have very low-interest rates. Inflation and taxes are two other factors that can eat into your GIC investment. You can check the interest rates and taxes by inquiring your local banks.
Different Types Of GICs
Two major factors that differentiate different types of GICs from one another are the term period and the interest rate. Although each type of GIC can be either short or long-term, financial institutions tailor GICs by different methods of calculating interest.
1. Fixed Rate GICs
As the name suggests, the interest rate is fixed and remains so throughout the contract period. However, you cannot access your principal amount during this time. The interest is calculated at specified intervals or upon maturity.
Fixed Rate GICs are non-redeemable.
2. Cashable GICs
Cashable GICs have a 1-year term period and offer very low-interest rates. You can withdraw the principal amount before your term matures. But given that the term period is already short and the interest rate extremely low, cashable GICs only make for good short-term investments.
3. Escalator GICs
Much like an escalator, your interest rate increases every year if you opt for an Escalator GIC. The longer you keep the money, the higher the interest you earn. You also have the freedom to change to a different type of GIC after the first year.
4. Variable Rate GICs
This is the riskiest type of GIC to invest in. That’s because the interest you earn on a Variable Rate GIC varies according to the financial institution’s prime rates. So, if the prime rate goes up, your interest rate increases, and vice versa.
5. Market-linked GICs
Market-linked GICs are a risky investment too. The return on investment depends upon the performance of the asset your GIC is linked to.
For example, if your GIC is linked to stocks, the returns will depend upon the underlying stock market index. These are essentially hybrid investment products that give you the security of GICs and have the potential for high returns.
So, if the market performs well, you gain a higher profit, but if the market does not perform well, you still have your principal amount.
Are GICs Taxable?
GICs held in registered accounts like a standard Tax-Free Savings Account or a Registered Retirement Savings Plan are non-taxable.
However, for non-registered accounts, GICs are taxable.
In the case of non-registered accounts, the interest you earn is treated like regular income and taxed accordingly. So, unlike capital gains income and dividend income, a GIC does not receive any favorable treatment.
Difference Between Registered And Non-Registered GIC
The major difference between a registered and a non-registered GIC is that the former is held in accounts registered with the Canadian government and is tax-free. The latter is an independent investment and therefore taxable.
Registered GICs are held in Government registered accounts like TFSAs, RRIFs, RRSPs, RDSPs, and RESPs. These GICs are non-taxable, so you do not have to pay any taxes during the term.
As the tax is applicable only on the withdrawal amount, you get a higher return.
However, registered GICs come with a set of rules and regulations – there are intended to be used for specific purposes only.
Registered accounts have age limits. You can start contributing or withdrawing funds depending on the account’s age limit. One other thing to keep in mind is the contribution limit some registered GICs have.
Non-registered GICs are not held in a registered government account.
So, you have to pay tax on the income generated by the account each year (can skim up to 50% of the account’s earnings).
However, non-registered GICs are not regulated by the government. So, there are no age or contribution limits.
Also, there are no limits on withdrawal. You can withdraw your money when your GIC matures without having to pay any penalty.
Choosing Between Registered And Non-Registered GIC
If you are saving money for future investments, like a child’s education, retirement, wedding, down payment for a house, etc., investing in a registered account like RRSP, RESP, or, TFSA makes more sense.
Investing for the long term will help your money grow and you do not have to pay taxes for it.
In case you want an emergency fund or a more immediate goal is the reason behind your investment, a non-registered GIC is the way to go. With more flexibility in accessing returns, it is a better choice for you.
TFSA Vs GICs
TFSA (Tax-Free Saving Account) is a government-registered savings account that can hold many types of investments including GICs.
GICs on the other hand, only hold cash. Thus TFSAs are much more flexible. However, whether TFSA is better or GIC will vary according to your financial needs.
TFSAs are exempted from tax and thus are more profitable in the long run.
However, if you only use your TFSA for cash deposits, they won’t turn out to be very beneficial to you. Many investors hold both high-risk(like stocks and mutual funds) and low-risk funds (like bonds and GICs) in their TFSA accounts.
When balanced correctly, a TFSA account will yield you a much higher tax-free return in comparison to a GIC.
One setback of the TFSA account is that the government of Canada has a restriction on the yearly contribution. So, you can only invest up to the contribution limit, crossing which can cause you penalties.
GICs only allow cash investments. The profit is taxable unless the GIC is held in a registered account. So, while you have guaranteed earnings, taxes can eat into a big chunk of your earnings.
You can get higher returns by investing in variable GICs.
However, if you prefer easy accessibility over higher returns, you also have the flexibility of investing in redeemable GICs.
Both TFSA and GIC are great investment options.
What Is A Cashable GIC?
As mentioned earlier, a cashable GIC comes with a 1-year term period.
But what makes it unique and flexible is that it is a liquid investment that locks your money only for 30 to 90 days. After the lock-in period, you can cash out your GIC without paying penalties.
Cashable GICs offer very low-interest rates. It is best for people who need their money to be accessible at all times or as an emergency fund.
The flexibility can also become profitable when interest rates change. If higher interest rates are available, you can withdraw your money and reinvest.
What Is A Non-Redeemable GIC?
A Non-Redeemable GIC is not a liquid investment. So, once you have set a period, your money is locked until the term is completed.
You can withdraw your money along with your interest only after your GIC matures.
Non-redeemable GICs offer higher interest rates and you can decide the term to be either short (as short as 30 days) or long (10 years). As the length of your term increases, your interest rate increases as well.
But, if under any circumstance, you break the contract, you will have to pay a penalty. Non-redeemable GICs are better for long-term plans like buying a house, retirement, etc.
Recent GIC Rates In Canada
The recent rise in GIC interest rates makes them a lucrative investment proposition.
You can earn between 4.65-4.70% interest in 1-year term plans and up to 5% on 5-year plans. You can check your local banks for the best GIC rates right now.
Also, with the proposals of pausing interest rate hikes fresh in the air, investing in a long-term GIC can turn out to be very beneficial.
Are GICs Worth It?
GICs are one of the safest investment options out there. They offer guaranteed returns and the money is locked in till the term is completed. Moreover, a part of the money is insured by the Canadian Deposit Insurance Corporation (CDIC).
They are very much worth it if you want a relatively safe and hassle-free investment.