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What Are (GICs) Guaranteed Investment Certificates?

There is this quote by Peter Lynch:

Know what you own, and know why you own it.”  

Well as simple as this quote is, it holds significant importance when you are investing your hard-earned money. Investment can be tricky if you are new to it but with knowledge and the right skills, you can make this opportunity profitable. There are various types of investment available in order to build wealth. If you want to go safe then fixed income securities your friend. One such financial instrument is Guaranteed Investment Certificates (GIC). But what are GICs? Well, let’s find out.

Read: Do You Have to Pay Canada Inheritance Tax?

What are Fixed Income Instruments? 

You may have heard about investing in equity instruments like stock, indexes, or buying Mutual Funds or ETFs. Equity instruments are risky and give higher returns, while instruments that are safe in nature and give a fixed percentage of income over time are called fixed income instruments.

Some of the examples of fixed income instruments are Government Bonds, commercial papers, treasury bills, repurchase agreements, certificates of deposits, and of course guaranteed investment certificates. Most of these instruments are issued by institutions that have gained some credibility over a period of time. 

The time frame for this instrument varies from short term to long term which means from 1 year to10 to 15 years. As these instruments are safe in nature they do not provide high returns like equity instruments. But yes you will surely get a fixed interest income over a period of time.

Also Know: Understanding Guaranteed Income Supplement (GIS) Canada

What are GICs?

Guaranteed investment certificates are just like the certificate of deposits. It can be a little boring if you are looking for a thrilling investment but if you are looking for a safe one then this is the perfect instrument for you. 

You can invest in a GIC for a few months to a period of years. Some of the popular GIC time frames are 6months, a year, 2 years, 3 years, 4 years, 5 years, and even 10 years. The longer the time frame the more interest you will get overtime. You can expect interest payments monthly, 3 months, 6 months, or yearly. 

Read: Do You Know How is CPP Calculated?

Types of GICs

There are a few types of GIC. Let’s get to know that to know what is GICs.

Redeemable GIC 

As the name suggests this pic can be redeemed before it matches without paying any fine on the same. It means that if you have invested your money in this GIC for a period of 5 years but after one year you need money you can redeem it without paying any penalties. There is a lock-up period for a few months depending on the GIC you are investing in, during which you will not be able to withdraw any amount.

Non-redeemable GIC 

It is just the opposite of redeemable GIC. You cannot redeem any amount during the time you have invested your money. As this is not a redeemable instrument it is also called non-cashable GIC. If in case you really need the money and you want to withdraw it then you are liable to pay a penalty fine. As the money is locked in for a long period of time you can expect a higher interest rate in this instrument. 

Read: Tax For Self-Employed In Canada: How Much To Set Aside For CPP & EI?

Traditional/Fixed GIC 

It is one of the most prevalent GIC types in which you invest money and gain pre-decided and fixed rates of interest over a specific period of time or at the time of maturity. For example, you invest in a fixed GIC that pays you 5% interest annually on your investment of $10,000. It means that every year you will get 5% interest which is fixed for 5 years.

Laddered GIC 

Sometimes small steps make a big difference. That’s what GICs help you do. As the name is self-explanatory, you invest in this step-by-step. This means every year you invest a little amount and reach the target goal. For example, if you want to invest $5000 in 2 years, you can invest $2500 each year. This gives you the flexibility of paying a smaller amount and yet invest as you have desired. You can also withdraw money from this year as per your requirement because a part of the investment matures each year. Though if you keep it for a long period of time or till it matures, you are likely to get a higher interest rate return.

Foreign GIC

It is nominated in a foreign currency mostly in the US dollar. You can also use this GIC to enjoy the benefits of holding foreign currency and gaining some interest returns. One thing you should know for investing in GIC is that if you are investing in GIC of any other countries currency then you may not get CGIC insurance in Canada.

Read: How Much Money Do You Need to Save for Retirement in Canada?

Reasons to Invest in GIC 

Now that you have known what are GICs, let’s talk about how they are used. 

It Works as a Savings Plan

Just like any other instrument you can use GIC to save your income and achieve your long-term goal. Based on the GIC type, you can hold till it matures or can have the flexibility to withdraw the amount whenever you need. If you compare saving in a bank account and saving in a GIC, then definitely GIC would offer you a higher return. 

Though this does not mean that you shouldn’t save in a bank. It is advisable for you to have some emergency funds saved in your bank account because GIC is not a liquid instrument and you may find it hard to convert it into cash if you get into a tight situation.

Read: How To Choose The Right Life Insurance In Canada?

As a Registered Account 

One of the best things with GIC is that you can mix it up with other regular investment accounts like RRSPs, ERSPs, TFSA, etc. Diversification is always good and one should use it wisely based on the requirements. 

How Safe is It to Invest in GIC? 

Well, this is a valid question because if you are investing your money you should know how much risk it possesses and is it even safe at all. As mentioned earlier GIC is one of the secured instruments available for investors that look to minimizing the risk. Canada Deposit Insurance Corporation (CDIC) guarantees GIC for an amount up to $100,000. It includes the interest and principal amount for each qualified financial institution. 

This means that if you do not hold a GIC exceeding this amount in each bank, then you are secured. Based on the credibility even the non-financial organizations GICs are covered by CDIC. One major benefit of the GIC is that the return rate is fixed from the beginning. So, you can know how much you are going to get over a period of time. 

Are There Any Taxes on GIC? 

The answer is yes. Income earned from GIC is included in your regular income. Thus the marginal tax rate is applied for the same.

Read: How To Buy A Home In Canada: Understanding Closing Costs


Jason Cohen

Jason is a writer and personal finance expert at YourFirst.ca. He is a finance enthusiast and loves to talk about Canadian Finances, Real Estate and Financial Freedom. He is an advocate for financial literacy and is helping to make a difference by educating Canadians on personal finance via his platform at YourFirst.ca

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