How GIC works in Canada: Your Guide

May 10, 2022
How GIC works in Canada: Your Guide

The Guaranteed investment certificate is one of the most popular investment vehicles in Canada. In fact, millions of Canadians love the GIC so much that every year, there are hundreds of billions of dollars invested into Guaranteed Investment Certificates across Canada.


In our world with ever increasing risk and uncertainty, people are beginning to look for more safe and secure investments, where their principle amount is guaranteed. As risk tolerances get lower and lower due to the state of the world, and an aging population, it’s likely that GIC investments in Canada will only become more and more popular due to its low risk.


What makes the GIC such a popular choice for Canadians? Depending on the person you ask, they may give you different answers. Let’s take a look at the GIC, and find out exactly how GIC works in Canada.  



What is a GIC and how does it work?

AGIC, or guaranteed investment certificate, is a specific type of investment that is available to all investors in Canada. Fun fact: did you know that even a child under the age of 18 can invest into a GIC? The main feature of a GIC is that it is guaranteed. In a later section, you will learn  out exactly how that’s achieved.


You will find that any Canadian bank will offer a GIC, but often times, it can be quite confusing due to a wide range of different associated factors. Generally speaking, a bank will offer a “GIC rate”. This GIC rate is typically a little higher than a savings account interest rate. For example, if a savings account interest rate is 0.3%, the GIC rate might be 0.5%. Another consideration is the length of time the GIC lasts. This is referred to the term of the GIC. In Canada, GIC terms comes in varying lengths. You might find a GIC term as short of 6 months, or a GIC term as long as 5 years.


For the banks, they want to encourage you to keep your money with them as long as possible, so longer GIC terms will offer higher interest rates. Sometimes the banks may even offer to increase the GIC rate every year as you keep your money invested.



Can you lose money in GIC?

Technically, yes, you can lose your money in a GIC, but realistically speaking, this would literally require a type of apocalypse scenario. Barring this situation, no, in Canada you cannot lose money in a GIC. This is because banks are legally obligated to return your principle and your interest. Furthermore, there is a government organization called the Canadian Deposit Insurance Corporation(CDIC) which insures your deposit, should the bank fail.



How GIC interest is calculated?

GIC interest in calculated by giving you the annual prescribed growth rate. For example, if you invest $1000 in a 3 year GIC which advertises a return of  2%, for example, at the end of year one you would have $1020. At the end of year 2, you would have $1040.40. At the end of year 3, you would have $1061.21. Keep in mind that, that you don’t actually have any access to this money until the very end of the 3-year term! Which brings us to the next point.


What are the disadvantages of GIC?

There are some disadvantages to a GIC in Canada, and the main 2 are the lack of liquidity, and the low growth. We know that a GIC in Canada is very predictable and safe, but that can also be a downside, depending on your investment goals.


Firstly, the low liquidity in a GIC can sometimes be an issue. You’ll recall earlier, we mentioned that GICs come with a term. What this means is that you are not able to take out this money until the term is up. If you insist on doing so, then any returns you may have made during this time are forfeit, and go back to the bank or trust.


Secondly, the low growth in a GIC is also a downside, especially if you are a younger investor, still in your working years, you most likely want to have more growth, and you’re probably okay taking on a bit of a higher risk in your investment portfolio. A GIC in Canada would be considered a very conservative type of investment, mainly targeted for retirees or people whose main investment goal is preservation and income, rather than growth.



Where Can GICs be purchased?

GICs can be found in nearly every Canadian bank, credit union, or trust. It is one of the most basic and popular products so it’ll be quite easy to find. Oftentimes you can simply walk into a bank and ask to move your money into a GIC, or you could even do this yourself online without the help of a banker.


Are GICs taxed?

Yes, GICs are taxed as interest. Meaning that every dollar you earn from a GIC will be another dollar of your income on your tax filing that year. However, if you hold your GIC inside a TFSA, then the growth will be tax free!


Are GICs worth it?

This is a great question. Depending on what your situation is, the answer can be very different. GICs are best used for people who are aiming for 2 major goals: the preservation of their capital, and to have a predictable stream of returns. Generally, this would mean people who are no longer working, and rely on their savings for their life expenses. This usually means retirees. It’s no wonder that the people who invest in Canadian GICs skew heavily toward retirees! However, if you are looking for lots of growth, and you still have many years ahead of you to wait out the volatility in the stock market, then it’s probably best to look elsewhere.

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