Are you looking for a safe way to grow your money? Guaranteed investment certificates (GICs) might be the answer. This guide will walk you through the ins and outs of GICs in Canada, helping you decide if they’re right for your financial goals.
What Are GICs?
GICs are a type of investment offered by banks and credit unions, such as Innovation CU, in Canada. When you buy a GIC, you’re lending money to the financial institution for a set period. They agree to repay you with interest in exchange.
The “guaranteed” part means you’re assured to get back your initial investment plus the agreed-upon interest. This makes such certificates a low-risk option for savers who want to protect their money while earning some return.
Types of GICs
There’s more than one flavour of GIC. Here are the main types you’ll find:
- Fixed-rate: These offer a set interest rate for the entire term.
- Variable-rate: The interest rate can be adjusted depending on market conditions.
- Market-linked: Returns are tied to stock market performance, but your principal is still guaranteed.
- Cashable: You can withdraw your money before the term ends, usually with a lower interest rate.
- Non-redeemable: These typically offer higher rates but lock in your money for the full term.
How GIC Interest Rates Work
Interest rates on GICs vary based on several factors:
- Term length: Generally, longer terms offer higher rates.
- Amount invested: Larger investments might qualify for better rates.
- Financial institution: Rates can differ between banks and credit unions.
- Market conditions: Overall interest rates in the economy affect GIC rates.
Pros and Cons of Investing in GICs
| Pros | Cons |
| Safety — Your principal is protected, making GICs a good choice for risk-averse investors. | Lower returns — The trade-off for safety is typically lower returns compared to riskier investments. |
| Predictable returns — With fixed-rate GICs, you know exactly how much you’ll earn. | Inflation risk — If inflation outpaces your GIC’s interest rate, your money loses purchasing power. |
| Flexible terms — You can choose terms ranging from 30 days to 10 years, depending on your needs. | Lack of liquidity — Non-redeemable GICs tie up your money for the full term. |
| CDIC protection — GICs from eligible institutions are insured up to $100,000 by the Canada Deposit Insurance Corporation. | Interest rate risk — If rates rise, you might miss out on better opportunities with longer-term GICs. |
How to Include GICs in Your Investment Strategy
GICs can play various roles in your financial plan:
- Emergency fund: Use cashable GICs for funds you might need on short notice.
- Saving for big purchases: If you’re saving for a down payment or a wedding, such investments can safely grow your money.
- Conservative portion of your portfolio: GICs can balance out riskier investments.
- Retirement income: Retirees might use a GIC ladder for steady, predictable income.
Building a GIC Ladder
A GIC ladder is a strategy that involves spreading your investment across guaranteed investment certificates (GICs) with different maturity dates. For instance, you could invest in GICs that mature in one year, two years, three years, four years, and five years.
When each GIC matures, you have the option to reinvest the money into a new five-year GIC or use it as needed. This approach offers you:
- Regular access to part of your money
- Exposure to changing interest rates
- Higher average returns than keeping all your money in short-term GICs.
Tax Considerations for GIC Investments
In Canada, interest earned on such investments is taxed as regular income. However, there are ways to minimize the tax impact:
- Hold GICs in registered accounts: Using TFSAs or RRSPs can shelter your GIC earnings from taxes.
- Consider T-GICs: These pay out interest annually, which can be helpful for tax planning.
- Use GICs in non-registered accounts strategically: They might be suitable for lower-income years or to balance capital gains.
How to Buy a GIC
Buying GICs is straightforward:
- Research rates: Check multiple financial institutions to find the best deal.
- Choose your terms: Decide on the amount, length, and type of GIC.
- Open an account: If you don’t already have one with the chosen institution.
- Make the purchase: This can often be done online, by phone, or in person.
- Keep your confirmation: Save the details of your purchase for your records.
Is This Investment Type Right for You?
A GIC can be a solid choice if you:
- Want to protect your principal
- Have a specific short- to medium-term savings goal
- Are looking to diversify a larger investment portfolio
- Prefer predictable returns over potentially higher but riskier gains.
This investment might not be the best option, however, if you:
- Need quick access to all your funds
- Are seeking high growth potential
- Have a very long-term investment horizon.
Final Thoughts
GICs offer a safe harbour for your money in the sometimes choppy waters of investing. While they won’t make you rich overnight, they provide peace of mind and steady growth.
Keep in mind that the best investment plan is one that aligns with your personal goals, risk tolerance, and financial situation. Consider talking to a financial advisor to see how a GIC might fit into your unique financial roadmap.
