Guaranteed Investment Certificates or GICs belong to the fixed income group of investment assets that also include corporate bonds, government bonds, and term deposits.
By fixed income, it infers that you are generally paid a fixed percentage of interest (income) for lending your money to a bank/financial institution. The longer the duration of your GIC investment, the higher the interest you are paid.
When you buy a GIC, it’s like putting money into your savings account, with the difference being that you may not be able to withdraw your funds for a period of time. In the U.S., a GIC-type investment is referred to as a “Certificate of Deposit” or CD.
Returns on GICs are often much lower compared to investments in stocks, mutual funds, and other higher-risk investment assets.
The popularity of GICs is mainly tied to their safety and the guarantee that your principal and interest income is assured. For those who like ‘safe’ and ‘boring’, the GIC is a friendly investing tool.
GIC Types, Features, and Terms
There are many types of GICs on the market. They often come with various features, investment terms, and payment options. Examples include:
Traditional or Fixed GIC
This is the most common type of GIC available. It’s simple – you invest your funds for a fixed interest rate that is paid at specified periods, or at maturity.
Cashable or Redeemable GIC
This GIC gives you the option to withdraw your funds or cancel your contract before the end of your term without penalty. This type of GIC is good if you want flexibility for accessing funds should you need to. They may come with a brief lock-in period (e.g. a month) when you are unable to cash out.
Unlike their cashable counterpart, funds are locked-in for the duration of your contract. They are also referred to as non-redeemable GICs. If you want to withdraw funds before the GIC has matured, you will have to pay a penalty fee.
Non-cashable GICs attract a higher return than cashable GICs.
Foreign Currency GIC
These GICs are denominated in foreign currency such as the U.S. dollar (U.S. GIC), and can be used as a vehicle to hold your foreign currencies while earning some interest. GICs denominated in a currency other than the Canadian dollar are not covered by CDIC insurance.
This GIC-type allows you to stagger the maturity dates of your investment, such that you can take advantage of higher interest rates and fluctuations, while still having access to some of your funds periodically.
For example, say you want to invest $25,000 in a laddered GIC. You can choose to put $5,000 in each of a 1-year, 2-years, 3-years, 4-years, and 5-years GIC. This way, 20% of your portfolio will mature each year. When your 1-yr GIC matures, you can either cash-out, renew it for the same rate, or re-invest for another term with a more attractive interest rate.
Instead of tying down your $25,000 investment in a GIC with one maturity, you ladder it for flexibility and potentially higher return.
GICs come with different terms ranging from a few months to several years. Popular terms are 6 months, 1 year, 2 years, 3 years, 4 years, and 5 years. Longer terms (up to 10 years) are also available. As mentioned earlier, the longer the term, the higher the interest that is paid.
GICs also come with different interest payment options: Interest may be paid monthly, quarterly, semi-annually, annually, or at maturity.
GIC Investment Options
GICs can come in handy for various investing/savings purposes including:
1. GIC in Regular Savings
GICs can be used to hold funds that you want to keep liquid while gaining some returns in the meantime. For instance, if you plan on keeping cash in your savings account for 1 year before using it, a 1-yr GIC may offer better returns.
GICs may not be appropriate for an emergency fund if it means you’re penalized for wanting to withdraw your funds before the maturity date. A high-interest savings account may be more suitable and may even offer similar or higher interest rates compared to a GIC for short-term savings goals.
2. GIC in Registered Accounts
You can hold GICs in your registered investment accounts including TFSAs, RRSPs, RDSPs, and RESPs. Depending on what assets you have in your TFSA, it can be tailored to serve as a source of funds for emergency needs.
GICs can fit into most portfolios to account for some of the fixed-income asset allocations.
Are GIC Investments Safe
GICs are one of the safest investments available for conservative/risk-averse investors.
They are guaranteed by the Canada Deposit Insurance Corporation (CDIC) up to $100,000 (principal + interest) per depositor per eligible financial institution. GICs with a maturity greater than 5 years or that are denominated in foreign currencies are not insured by CDIC.
As long as you don’t have more than $100,000 in GIC in each of your banks, you should be covered if they collapse. GICs purchased through some credit unions and other non-bank financial institutions may be insured through provincial deposit insurance plans.
GIC Risk vs. Reward
Following from the previous section, GICs are also considered safe because your return is usually guaranteed from the start.
If you understand the dynamics between risk and reward, then you know that the higher the potential reward, the higher the risk, and vice-versa. GICs are low-risk and as such the expected return is often significantly lower than for other “riskier” options like stocks, mutual funds, ETFs, etc.
A look at some of the best non-redeemable GIC rate offerings from the big banks for a $100,000 investment in June 2020 are as follows:
- 1-year term: 0.55%
- 2-year term: 0.65%
- 3-year term: 0.85%
- 4-year term: 1.10%
- 5-year term: 1.25%
As you can see, these rates are far from being mouth-watering! Credit unions and deposit brokers often have slightly higher rates, but they are in my opinion, just as dismal!
Persistent low-inflation rate numbers and generally lower interest rates mean that GIC numbers stay low. If you lock into a long-term GIC (say 5 years) and interest/inflation rates rise, you could start earning a negative return if the inflation rate exceeds your GIC interest rate.
For potentially higher rates available to market or index-linked GICs, your expected return becomes variable, increasing your investment risk.
GIC Interest Income Taxation
If a GIC is not held in a tax-sheltered account e.g. RRSP or TFSA, tax is due on any interest income earned. This income is taxed like your other regular income, using your marginal tax rate.
GIC Taxation Example
If you invest $50,000 in a 1-year GIC that pays 1% interest at maturity, you will earn an interest income of $500. If your marginal tax rate is – say 43.75%, it implies that:
- Interest Income Earned: $50,000 x 1% = $500
- Marginal Tax rate: 43.75%
- Tax Payable: $500 x 43.75% = $218.75
- After-Tax Income: $500 – $218.75 = $281.25
- After-Tax Return: $281.25/$50,000 = 0.56%
A measly 0.56% return has been generated after-tax.
I did use GICs several years ago when I was a graduate student (and new immigrant to Canada) and the bank had required that the only way for me to obtain a credit card from them was for me to secure it using a GIC. I have not owned any for a while, as they do not fit into our investment strategy for now.
That said, GICs have their place and can do a lot of good in the average portfolio. It can represent your fixed-income assets in place of cash and other cash equivalents.
Always exercise caution and seek advice from a financial advisor (if necessary) when you are making decisions that impact your pocket.
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This article was initially published in 2018 and is regularly updated.