What is a GIC and how does it work? (2024)

What is a guaranteed investment certificate (GIC)?

A guaranteed investment certificate (GIC) is considered one of the safest ways to invest. It’s an investment that works like a special kind of deposit. You are guaranteed to get the amount you deposited back at the end of the term (a set number of months or years).

When you buy a GIC, you are agreeing to lend the bank or financial institution your money for the term of the deposit. In general, the longer the term, the higher the interest rate you will earn.

The minimum amount you can invest is typically $500. There is no maximum limit to the amount you may invest in a GIC.

Most GICs pay a fixed rate of interest for a set term, such as six months, one year, two years or up to 10 years. The term ends on the maturity date. Some GICs offer variable interest rates, based on the performance of a benchmark, such as a stock exchange index. You may get paid interest on your GIC monthly, every three months, every six months, once a year or only on the maturity date.

If you might need your money before the end of the term, buy a GIC that allows you to cash it in early without a penalty. With some GICs, you pay a penalty to get your money before the end of the term. Other GICs — called cashable or redeemable GICs — allow you to get your money back at any time with no penalty.

You can hold GICs in registered investment accounts like RRSPs, RRIFs and TFSAs. These types of registered accounts can hold many kinds of investments, not just savings deposits. The interest you earn on a GIC will be fully taxed if you hold it outside of a registered plan. Learn more about how investments are taxed.

How do you choose a GIC?

There are many options to consider when you’re thinking of buying a GIC. Make sure you know your time horizon and shop around to compare interest rates.

1. Choose a term that fits with your investment goals – You can choose six months, one year, two years or up to 10 years. The interest rates will vary with the term length.

2. Decide if you want to lock in your money – Is there a chance you will need your money early? Most GICs lock your money in for the entire term. You may pay a penalty for taking your money out early. With a redeemable or cashable GIC, there’s no penalty, but the interest rate will be lower.

3. Choose between a fixed or variable rate – Most GICs pay you a fixed interest rate for using your money for a certain amount of time. You know how much you’ll get back at the end of the term. Index-linked or market-linked GICs pay varying amounts of interest, based on how well the stock market (or a related index) is doing. You can’t predict how much interest you’ll receive when your GIC matures. If the stock market or related index doesn’t do well, you may make less than a fixed-rate GIC — or nothing at all.

4. Decide if you need regular income – To get regular income from GICs, you can buy a GIC that makes regular interest payments. For example, you could buy a five-year GIC that automatically pays you interest each month. You can then count on a predictable amount of interest income each month.

5. Decide if you want to set up a GIC ladder – You could buy GICs that mature at different times and pay interest on different dates. For example, if you have $5,000, you could put $1,000 into a one-year GIC, $1,000 into a two-year GIC and so on. That way you would have $1,000 of principal maturing every year for five years. If you set up a GIC ladder you have flexibility each time one of the GICs matures. You can either reinvest it in another GIC for whatever term you want, or cash out the matured GIC.

CAUTION

While index-linked or market-linked GICs protect your principal investment, there is no guarantee you will make money. If the underlying index performs poorly, you may only receive your original investment amount at the end of the term — but inflation will reduce the buying power of that money.

How do you cash in a GIC?

When you buy a GIC, you will have to decide what to do with your money when the term comes to an end — on the maturity date.

There are 3 main options when your GIC matures:

• Roll it over – Invest all or part of it in another GIC.
• Buy another type of investment – Use the money to invest in something else.
• Cash in the GIC – Tell the financial institution you either want the money deposited in your bank account or ask for a cheque.

Cashing in a GIC early

Before you buy a GIC, find out if there will be a penalty if you have to cash it in early.

• Cashable or redeemable GICs – You can cash them in early, before the maturity date, without paying a penalty.
• Regular GICs – You will likely have to pay a charge or penalty for taking your money out early. Even if you only need some of your money, you might have to take it all out. Also, you may not earn any interest on your money.

What are the risks of investing in GICs?

GICs are considered lower-risk investments. That’s because you are guaranteed to get back the amount you invest — the principal — when your GIC matures. Still, GICs have some risks that include:

1. May not keep pace with inflation – Because regular GICs have a relatively low return, they may not keep pace with inflation.

2. Variable returns with index or market-linked GICs – These GICs don’t pay a fixed rate of interest. Instead, your return is based on the performance of a benchmark, like a stock market index. If the stock market does well and the index rises, your index GIC could do better than a fixed-rate GIC. If the index doesn’t do well, you may make less, or nothing at all.

If you’re choosing a GIC make sure to compare rates and consider your investing goals. You are guaranteed to get back the amount you invest, which means your money won’t go down. This can bring peace of mind during periods of market volatility. However, GIC interest rates may be lower than the rate of inflation.

Insurance companies sell an investment similar to a GIC. It’s called a GIA (Guaranteed Interest Annuity or Guaranteed Interest Account).

What fees will you pay on your GIC investment?

There are no fees or charges to buy or hold GICs. Your bank covers its costs when it sets its GIC rates. But you may pay a penalty if you cash in your GIC before its maturity date. Make sure you understand what these penalties are before you buy a GIC.

If you think you may need your money early, consider buying a cashable or redeemable GIC. You won’t have to pay a penalty to cash in these GICs early, but the interest rate may be lower.

When you invest in a GIC at a financial institution, such as a bank, you lend it your money for a period of time. The bank pays you interest. At the same time, the bank can lend your money to others. The bank will charge a higher rate to those borrowing the money.

The bank makes money on the difference between the interest it pays to you, and the interest it charges to the borrowers. This is known as the spread. The money earned on the spread helps the bank cover its costs and make a small profit. So, even though there is no fee when you buy a GIC, the bank still makes money using your money.

How is your GIC investment protected?

Your GIC is insured if you bought it at:

• any major Canadian bank (Banks are members of the Canada Deposit Insurance Corporation (CDIC).)
• a credit union or caisse populaire

Similar insurance is available for deposits. This means you will get your money back if the financial institution where you bought your GIC closes or is unable to pay you when the GIC matures. Coverage depends on the value and type of GIC you hold. For example:

• CDIC insurance covers you for up to $100,000 in GICs at each financial institution.
• Eligible deposits held in foreign currency and deposits with terms longer than five years may be protected. Verify if your deposits may be eligible at CDIC.

The insurance is automatic. You don’t have to do anything, and you don’t have to pay anything extra, to get it. To help you stay within the $100,000 limit per financial institution, you can:

1. Buy GICs at different financial institutions or their related companies. For example, a bank may have a mortgage company or trust company that sells GICs.

2. Put some of the GICs in your name and some in your spouse’s name.

3. Own GICs jointly with your spouse.

How to make saving automatic with a GIC

You can arrange for a set amount to be taken each month, from your bank account or from your pay, to put toward buying GICs. This is often called a pre-authorized debit (PAD), pre-authorized contribution (PAC) or pre-authorized purchase (PAP).