What Is a Canadian Guaranteed Investment Certificate (GIC)?

What Is a Canadian Guaranteed Investment Certificate (GIC)?

Let me explain what a Canadian guaranteed investment certificate, or GIC, really is. It's a deposit-based investment product that you can get from Canadian financial institutions like banks and trust companies. Essentially, a GIC is an investment they sell which gives you a fixed rate of return. I often see people buying these as part of their retirement savings because they offer a low-risk way to earn that fixed return.

Key Takeaways on GICs

Here's what you need to know right away: A GIC is an interest-paying deposit account you can access through Canadian financial institutions. It's very similar to the certificates of deposit that U.S. banks offer. When you buy a GIC, you're depositing money for a fixed period, and in return, you get interest plus your principal back when it matures.

Understanding Canadian Guaranteed Investment Certificates (GICs)

A GIC operates much like a certificate of deposit in the U.S. You deposit your money with the bank, and it earns interest over a fixed period. The interest rates depend on how long you're committing the money for. In Canada, these are marketed just like U.S. banks promote their CDs to customers. But keep in mind, in the U.S., GICs are actually from insurance companies and target a slightly different audience.

What makes GICs safe is that the institutions selling them are legally required to return your principal and interest. If the bank fails, you're covered up to $100,000 Canadian by the Canadian Deposit Insurance Corporation (CDIC). That's a key point for your peace of mind.

Important Note on CDIC Coverage

Something important happened in 2020: The CDIC started covering U.S. dollars and other foreign currencies. However, the coverage is still only up to $100,000 Canadian for principal and interest combined, so the actual amount in U.S. dollars you get insured for will vary with exchange rates.

How Banks Profit From GICs

Banks make money from GICs by lending out the funds you deposit at a higher interest rate than what they pay you. For instance, if they're selling mortgages at 8% and paying 5% on GICs, they pocket a 3% profit. GICs also give you a bit higher return than Treasury bills, or T-bills, which makes them a solid choice for diversifying safe, liquid securities in your portfolio.

Many Canadian banks and trust companies offer these. Remember, a trust company doesn't own your assets but might have legal duties to manage them. In those cases, they act as fiduciaries, agents, or trustees, safeguarding the money and investing it only in your best interest.

Fast Fact on Safe Investments

GICs, T-bills, Treasury bonds, and similar securities are safe and fairly liquid, which is why they're especially appealing to retired investors who want a stable income stream.

GICs and U.S. Treasury Securities

Other safe, income-producing options include U.S. Treasury securities like T-bills, T-notes, and T-bonds. T-bills mature in periods from 4 to 52 weeks, the shortest for government bonds. They're issued at a discount and mature at par, with your profit being the difference.

T-notes come in 2 to 10-year terms, issued at $1,000 par value, maturing at the same, and paying interest every six months. T-bonds, known as the long bond, mature in 20 or 30 years, also at $1,000 par with semi-annual interest.

Both GICs and U.S. government securities can form the foundation of portfolios focused on safe income or as hedges against riskier assets like growth stocks and derivatives.

Can a U.S. Citizen Buy a GIC in Canada?

Yes, you can. As a U.S. citizen, you need to open a checking account at a Canadian financial institution and buy it through an authorized broker.

What Is the U.S. Equivalent of a Guaranteed Investment Certificate?

In the U.S., guaranteed investment contracts are issued by insurance companies, not banks. They work similarly, paying fixed interest on a deposit for a set time.

What Is the Drawback of a Canadian Guaranteed Investment Certificate?

GICs are some of the safest investments out there, and you can be confident you'll get your money back with the promised interest. That said, you're not going to see huge gains; it's about choosing safety over potential higher returns.

The Bottom Line

Guaranteed investment certificates from Canadian banks are a relatively safe way to grow your savings. They're government-insured and provide a steady return, even if it's not exciting. You'll find them used mostly by retirees for income and by savers of all ages aiming for specific goals.