Is My Money Safe in a GIC?

Can I lose the money I put in a GIC? Is a GIC like buying a stock?

Yes, your money is safe in a GIC (Guaranteed Investment Certificate) because no matter what happens in the financial markets, you will not lose the money you put into it. You are guaranteed to get your principal investment and interest at the end of the fixed term you’ve chosen for your GIC.

How are GICs different from stocks?

A GIC is not like buying a stock because you can’t lose the principal amount you have invested.

When you buy stocks, which are shares in a publicly traded company on a stock exchange, they can be volatile and their value can fall, causing you to lose money on your investment in them. GICs are stable investments.

Can I lose money with a GIC?

Yes, you can potentially lose money if you choose a market-linked or equity-linked GIC. Linked to the stock market, this type of GIC gives you the security of a traditional guaranteed investment certificate, but with the potential for a higher return if the market goes up or a lower return if it goes down.

What is the risk with market-linked GICs: GICs with interest rates that are linked to the financial markets can come with unpredictable returns, depending on whether the stock market rises or falls.

You won't know how much interest you'll earn until the market-linked GIC matures and you could have no growth if the market goes down and end up with just your original investment.

Reminder: There's no chance of losing the money you originally invested in a market-linked GIC, but you may end up making nothing extra.

How does a basic GIC work?

When you invest in a GIC, you deposit a specific sum of money for a fixed period, as short as 30 days and as long as 10 years. During the time period you choose, your financial institution pays you a fixed rate of interest on your investment.

Did you know? The minimum investment for a Guaranteed Investment Certificate is usually $500.

Should I put my GIC in a TFSA?

Yes, it’s a good idea to put your guaranteed investment certificate in a Tax Free Savings Account (TFSA).

Why?

The interest earned on a GIC can be taxed depending on the type of account they’re held in. To avoid paying taxes on any gains, consider putting any GICs in your TFSA, or RESP, RRSP, RIFF.

Tax advantage: Generally, you do not pay tax on any interest earned on your TFSA.

What is a TFSA?

A TFSA is a government-registered account that allows you to invest the money you save in it without having to pay taxes on any capital gains.

Any Canadian resident who is over 18 and has a Social Insurance Number (SIN) is eligible to open a TFSA.

Are you a cautious investor?

A Guaranteed Investment Certificate can be a good choice if you are saving for short-term goals or aren’t comfortable investing in stocks, especially when the market can be unpredictable and interest rates can be unstable.

Pros and cons of a GIC

Pros:

Interest can be higher than a regular savings account and there are a variety of GICs that are available.
No fees or low fees.
A GIC is a safe investment if you are cautious and are without investing experience.
Your interest rate is locked in for a specific period of time.
No matter what happens with the market, you won’t lose your initial investment.

Cons:

You'll need to lock your money for the entire term of your GIC if you want to get the full return.
The interest rate offered on GICs may not beat inflation.
You'll be taxed on the interest earned if your GIC is held outside of a registered account, such as a TFSA.
There’s typically a minimum amount required to invest in a GIC, usually $500.

What are the different types of GICs?

Guaranteed-return GIC: Both principal and interest payments are guaranteed when held to maturity.

Market-linked GIC: This type of GIC allows you to invest in the market without risking your initial investment. A market-linked GIC has the potential for higher returns from the stock market, but it does not have a guaranteed rate of return.

Variable-rate GIC: The interest rate for this type of GICs is based on a fluctuating benchmark, usually the bank's prime rate. If the prime interest rate increases, your return on investment will increase and will go down of the prime rate decreases.

Foreign currency GIC: This type of GIC is denominated in a foreign currency, such as the US dollar. Investing in a foreign currency GIC can diversify your portfolio.

How do I buy a Guaranteed Investment Certificate?

You can buy a Guaranteed Investment Certificate online through many banks, through a broker, or in person at your financial institution.

What do I need to know before buying a GIC?

Consider the following:

Interest rate: Is it fixed or variable and how it's calculated
Term: How long the GIC will last, and when it will mature
Penalties: Whether there's a penalty for withdrawing money early
Minimum investment: How much money you need to invest in a GIC
Payment options: How often you'll receive interest payments
Taxation: How will you be taxed on the interest you earn
Protection: Is your GIC protected by insurance

Don’t forget to ask all the questions you need answered so that you understand investing in a GIC and whether it’s right for you.

Is my GIC financially protected?

The Canadian Deposit Insurance Corporation (CDIC) insures a GIC, both the principal amount and any interested earned, at participating Canadian financial institutions up to $100,000.