Home » GICs Explained: A Look at Canada’s Fixed Income Instrument

GICs Explained: A Look at Canada’s Fixed Income Instrument


A Guaranteed Investment Certificate (GIC) is a type of investment provided by different banks or trust companies in Canada. They are an easy and secure way to grow your investments. If you save money under a GIC for a specific period, you will receive a guaranteed rate of return, making it an attractive option for income investors or retirees.  

You can hold a GIC within specific accounts like your RRSP (Registered Retired Savings Plan) or a TFSA (Tax-Free Savings Account). If you choose to invest through your TFSA account, the interests become tax-free even on withdrawal. However, under an RRSP, you will have to pay taxes to the Canada Revenue Agency on any withdrawal.

How do GICs work?

In a GIC, you get the liberty to choose how you want your interest compounded. For example, if it’s compounded quarterly, that means interest is added four times a year to your principal amount.

According to Investopedia, buying a GIC is basically lending the bank money and getting paid interest in return for the favor. The interest rate you get on your investment varies. Typically, the longer you are willing to invest, the higher the interest rate you’ll receive.

GICs are considered safe because financial institutions that sell them are obligated to return your principal amount and interest. Even if the bank fails, investors are insured for up to $100,000 by the Canadian Deposit Insurance Corporation.

When you invest money into a GIC, there is no possibility of expecting a loss due to market fluctuations like in stocks, making them safe and conservative investments.

As GICs are low-risk investments, the returns have also been historically lower compared to equities or real-estate. In fact, the maximum interest rate you can receive on your GIC is below 2%.

Types of GICs

Registered and non-registered GICs are significantly different from each other. Registered GICs lets you grow your money tax-free within government registered accounts like RRSPs, TFSAs, and RESPs. Non-registered GICs are held as independent investments and are taxed by the CRA, meaning you will lose a portion of the interest that you earn.

According to RateSupermarket, financial institutions offer different GICs depending on various factors. Investing in a GIC in which the interest rate does not change throughout your investment term is known as a fixed-rate GIC. For example, if you invest $1,000 in a fixed GIC with a 2% annual interest for a year, you know that at the end of the term you will get $1,020.

Similarly, the interest rate of a variable GIC will vary throughout the term depending on how well the stock market is doing. This has a higher risk than fixed-rate GICs because you never really know how much you will earn in the end.

Cashable or redeemable GICs allow you to withdraw your money before the end of your term without applying a penalty, making it a flexible investment option. Non-redeemable GICs charge a penalty if you want to withdraw your investments before the term ends.

There are also market-linked or equity-linked GICs available which are riskier than other types. These are essentially part GIC and part stock market investment. The interest depends on the performance of the stock or the equity market throughout that term. These offer a small amount of guaranteed interest but you will still get your principal account.

Choosing the Right GIC

According to RateHub, the rate of interest you earn on your investment significantly differs between institutions. This is why it is very important to choose the correct GIC that is flexible for you. You should understand how long you want to commit your money into an investment and then choose the appropriate option accordingly.

Registered GICs are a suitable option if you are looking for a long-term savings plan that offers tax-free interest and guaranteed returns. You might prefer a non-registered GIC if you want a more flexible option where you can access your funds when they mature or in case of an emergency.

Another major factor you can consider while choosing a GIC is based on the term of the investment. Short term GICs take less than a year to mature and are reasonably liquid. Long term GICs on the other hand, usually guarantee you a higher interest rate. Depending upon your goal, you can choose the appropriate option.

If you are comfortable with taking a certain amount of risk while investing, then you can also opt for a market-linked GIC.

GICs are overall an excellent investment option that suits individuals with low-risk appetite and retirees. It gives you several options and you can carefully study every option before you choose a GIC to invest in.

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