What Is a GIC?: Everything You Need To Know

A Guaranteed Investment Certificate, commonly referred to as a GIC, is a type of investment where you deposit money for a set period of time, earning your initial investment and interest back when the time period concludes. The “guaranteed” part applies to the principal balance— the initial money you invested—which will always be returned to the investor upon completion of the investment term. This is the number of days or years your money will be invested in the GIC.

GICs either come with fixed interest rates or variable rates linked to the prime rate or stock market index. Investors choose a term length, typically spanning from 30 days to 10 years, and deposit their funds knowing they typically won’t receive their funds back until the end of the term. The principal amount along with the accrued interest is returned to the investor at the end of the specified term. It’s also important to note that while GICs provide a predictable return, opting for an early withdrawal during the term will generally incur a financial penalty, unless the investor dies and the funds are requested by their next of kin.

The safety of GICs is underscored by CDIC insurance. This protects your original deposit, and any interest earned, up to $100,000, if the issuing institution fails. As such, GICs are one of the lowest-risk investment options available in Canada.

A Guaranteed Investment Certificate (GIC) functions as a financial arrangement similar to a loan, but in this case, you are the lender and the bank is the borrower, paying you interest for the length of the term.

This structured system ensures a guaranteed return for GIC buyers, as they are promised the principal amount they invested along with the agreed-upon interest at the end of the investment term. On most GICs, the interest rate is fixed at the time of purchase, mitigating the uncertainty associated with market fluctuations.

GIC Terms

GICs offer two main options: long-term and short-term. Long-term GICs last over a year up to ten years and generally provide higher interest rates because they tie your money up longer, they’re best suited for investments with a longer time horizon.

Conversely, short-term GICs have durations of 30 days to a year. In exchange for flexibility, they generally have lower interest rates. Short-term GICs are ideal for immediate financial goals or as a place to park cash while awaiting the next investment opportunity.

Occasionally, investors stack GIC terms in one-year increments, known as GIC laddering. For example, instead of taking $25,000 and investing it in a five-year GIC, you would split that into five investments of $5,000 and invest each of those into five GICs that have a different term length from one to five years. Now, the investment in one of your five GICs will mature each year. This gives you maximum flexibility because you can:

1. Reinvest the $5,000 (plus interest) into another five-year term.
2. Take the money from the now matured one-year GIC without paying any early withdrawal penalties.

Staggering your GICs in a laddering strategy still allows you guaranteed returns without exposing you to early-withdrawal penalties and still giving you convenient access to your money. It allows you to respond to fluctuating interest rates, too.

GIC Interest Rates

The Bank of Canada’s overnight rate influences GIC interest rates the most. Since March 2, 2022, the bank has raised the rate ten times, making GICs especially attractive.

That said, TD Economics believes rates will fall from 5.00% to 2.25% or 2.5% by the end of 2025. Locking in a fixed-rate GIC ensures your interest rate doesn’t change throughout the term, regardless of the Bank of Canada rate.

Secondary factors influencing GIC interest rates are the issuing institution and term length. Online banks typically offer higher GIC rates than traditional brick-and-mortar banks.

How to Purchase a GIC

You can purchase GICs directly from banks or credit unions or through your financial advisor. Most financial institutions offer the option to buy GICs online through their websites or self-directed investing platform, allowing you to browse available GIC products, choose terms and complete the purchase electronically. The final, and arguably most popular, way to purchase GICs is via your stock broker online.

What Accounts Can GICs be Held In?

GICs can be held in many types of accounts, including both registered or unregistered accounts. The difference between these options is the taxation and withdrawal flexibility.

GICs within registered accounts allow investors to grow their savings without incurring immediate tax liabilities on the earned interest. Instead, taxes are deferred until withdrawal of the invested funds. Registered accounts mainly include Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs). Some institutions, like EQ Bank, are beginning to offer FHSA GICs, although this development is relatively new.

An unregistered GIC isn’t held in a tax-advantaged investment account, allowing for more flexibility. However, the interest earned is taxed as income in the year earned, based on your marginal tax rate.

How to Cash Out a GIC

Cashing out a GIC before maturity is impacted by your GIC type. You can typically cash out a GIC through your broker’s online investment portal, but you may be required to call them if you are trying to sell a non-redeemable GIC.

Non-redeemable GICs, charge penalties for early withdrawal. These penalties may result in a reduction of the interest earned or taking away a portion of your initial investment.

On the other hand, cashable GICs allow flexibility for early withdrawal without penalties. However, they usually offer lower interest rates than non-redeemable GICs.

At maturity, GICs typically offer the option to reinvest the funds, cash out the entire amount or renew the GIC for another term.

Cashable GICs

Also known as redeemable GICs, cashable GICs offer penalty-free withdrawals after an initial lockup period. However, withdrawing early means forfeiting remaining interest and these GICs typically offer lower interest rates to accommodate the flexibility.

Non-Cashable GICs

Non-cashable GICs are the standard option, providing higher interest rates, but limited flexibility. Early withdrawals result in penalties, often forfeiting any accrued interest.

Market Growth GICs

Market-linked GICs tie their interest rates to stock market benchmarks like the TSX or S&P 500. Offered by major banks, they have a range of minimum and maximum returns, fluctuating alongside the benchmark’s performance.

These GICs differ from fixed-rate GICs as their rates vary based on the benchmark performance, providing a guaranteed range without the risk of losing invested capital.

Foreign Currency GICs

These GICs enable investors to invest with currencies other than Canadian dollars. They provide exposure to foreign exchange markets and appeal to investors seeking diversification or those anticipating currency appreciation.

The GIC still earns a predictable interest rate, but you’ll have to deal with the future exchange rate if you convert your funds back to CAD. Generally, foreign currency GICs introduce an additional layer of risk compared to GICs held in the investor’s domestic currency.

Short-term GICs, ranging from 30 days to one year, offer swift access to funds but typically yield lower interest rates. Long-term guaranteed investment certificates (GICs) typically have durations of one, two, three, four, five, and sometimes seven and ten years. While these options empower investors to optimize interest income, they do come with the trade-off of diminished liquidity over extended periods.

When it comes to choosing a GIC, consider the following:

• Term Length. Consider the duration of the GIC, aligning it with your financial goals and needs for access to funds. Longer terms often offer higher interest rates but lock in your money for a more extended period.
• Fixed vs. Variable Rate. Decide between a fixed interest rate (guaranteed for the GIC term) or a variable rate (subject to market fluctuations). Fixed rates provide stability, while variable rates might offer more flexibility but can change over time.
• Cashable vs. Non-Cashable. Choose between cashable GICs allowing early withdrawal without penalties but potentially offering lower interest rates, or non-cashable GICs with higher rates but strict penalties for early withdrawal.

GICs provide predictable income without the volatility of stocks. Furthermore, you’ll receive deposit insurance within CDIC thresholds. Additionally, GICs qualify for registered account protections, making them a valuable option for tax sheltering and safeguarding hard-earned savings.

If you hold a GIC over a long period of time, returns may not beat inflation, providing negative real growth over time. Long-term GICs also lack redemption flexibility, impacting the ability to access funds as needed due to set maturity dates and associated penalties. Leveraging redeemable and laddered GIC strategies can make your investment more flexible and adaptable.

GICs are insured by the CDIC for up to $100,000 per financial institution, protecting the principal even in cases of default or bankruptcy, making them one of the safest investment vehicles.

GICs can be easily purchased at competitive rates from major banks and credit unions through online banking, over the phone, or in branches with the help of advisors.

WealthONE offers a 6.00% interest rate on their 1-year GICs, one of Canada’s highest returns. Regarding the big banks, RBC offers an ESG Market-Linked GIC with a 5% interest rate and CIBC has the Canadian Financials Market Return GIC (5 years) with a 4.9% interest rate.

For conservative investors prioritizing predictable returns, GICs are a great option. The variety of options appeals to various risk tolerances, from fixed-rate to market-linked. Though rates of return may lag inflation, their security and CDIC qualification make them foundational portfolio components.