What Is a Canadian Guaranteed Investment Certificate (GIC)?

If you’re looking for a low-risk Canadian investment that provides guaranteed returns, then Guaranteed Investment Certificates (GICs) could be the right option for you.

When you buy a GIC, you sign a contract with a bank or credit union guaranteeing you a certain rate of return over a given period. As is the case with most financial institutions, you’ll get a higher rate of return if you agree to lock funds away for a longer period.

Namely, the interest rate on a five-year GIC is significantly higher than that on a one-year product. 

As you might expect, GIC terms differ from those of standard equities. When you purchase a GIC, you are essentially signing a contract with the financial institution borrowing the money from you and agreeing to pay a fixed rate for the privilege. You’ll then receive this cash at the end of the term. 

Unlike many other savings products, conventional GICs typically have fixed interest rates, so you don’t need to worry about the interest rate changing. Hence, even if the base rate goes down before the end of the contract, your interest rate payment will remain unaffected. 

In some cases, you can withdraw funds before the GIC’s term is up. However, you may incur penalties, and you may not receive the full interest payment. Even though you can get “redeemable” GICs that you can convert to cash at any time, rates on these tend to be lower. 

Types of GICs

Lenders offer different types of GICs to help investors better balance their portfolios. 

• Fixed-rate: Fixed-rate GICs are what most people refer to when they talk about GICs. These pay you a fixed rate of annual interest across the duration of the GIC. 
• Variable-rate: Variable-rate GICs can offer different interest rates throughout the term. So, if you expect rates to rise, this could be a good option. However, if rates fall, the amount of money you get back will also fall. 
• Market-linked: Many investors don’t want to risk money in the stock market, but they do want higher rates of return. Market-linked GICs offer returns that scale with stock performance while protecting your principal. 
• Foreign Exchange: If local rates aren’t enough, you can opt for foreign exchange GICs instead. These let you earn interest in a foreign currency (i.e. US dollars).
• Registered and non-registered GICs: The Canadian government registers registered GICs, letting you grow savings tax-free, up to a predefined limit. Non-registered accounts don’t offer tax perks, but there’s no limit to how much money you can invest in them.

Advantages of GICs

Some of the main advantages include:

• Protection of your principal – you will not end up losing money.
• Wide variety of products available.
• Higher interest than regular savings accounts.
• Low or zero charges for opening an account.
• Ability to make small investments.
• Can be held in registered accounts, such as RRSPs and TFSAs.

Disadvantages of GICs

Unfortunately, there are also some disadvantages you should be aware of: 

• Low rates of return compared to other investment categories, such as stocks and real estate.
• The requirement to lock up your money for several years to earn reasonable rates of return.
• Penalties on some GICs if you withdraw money early.
• The risk of losing the real purchasing power of your money during periods of high inflation.

How GICs Compare to US Treasury Securities

These are both safe or risk-free investments. Moreover, both promise to pay a guaranteed sum on maturity.

A T-bill, T-note, or T-bond, for example, is a contract with the US government to pay you a certain sum of money upon maturity. The government issues a bond at a discount and agrees to buy it back from the market at a higher price on the date of maturity, thereby generating a de facto interest rate.

The process is similar for GICs. In this case, though, private institutions agree to pay back the money borrowed, and the interest rate is explicitly set out in a contract.

How To Buy a GIC

Buying a GIC is easy since virtually every major financial institution offers them. You can do this online, too, so you don’t even have to go to a branch to get started. 

Don’t forget, you can hold GICs in various tax-advantaged accounts, including a Tax-Free Savings Account (TFSA), a Locked-In Retirement Account (LIRA), a Registered Retirement Income Fund (RRIF), and a Registered Retirement Savings Plan (RRSP).