Guaranteed Investment Certificates (GICs) are classified as a type of fixed-income investment that offers low risk, no volatility and an often-guaranteed rate of return over a specific period or term. They are considered the most secure and predictable investment option due to their principal protection and the offering of a guaranteed interest rate. GICs allow investors to earn interest while ensuring that their principal investment is protected. This makes them a safer investment option in contrast to other investment products, while also giving them traditionally higher rates of returns compared to a savings account. Because of their stability, coupled with the recently high interest rates in Canada, GIC popularity and inflows had drastically increased across the nation up until 2024. This allowed investors to save for short-term goals or look for stable long-term investments without much worry due to their unique ability to offer various terms, payout options, and strategies. But what exactly are GICs and how do they work?
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Defining GICs: What is a Guaranteed Investment Certificate (GIC)?
GICs are a type of fixed-income investment where an investor deposits a sum of money with a financial institution for a set period (called the “term”) and then receives payment of the initial principal investment and the interest earned. Some financial institutions call the action of investing into a GIC, “purchasing a GIC” based on their respective marketing tone, but the two terms (“investing” vs “purchasing” a GIC) are interchangeable.
What sets GICs apart from other investment products is that the issuing institution guarantees that the investor will receive their principal or initial investment back at the end of the term if the GIC is held until the term end or “maturity”. The interest rate that the investor earns is generally linked to the overnight lending rate set by the Bank of Canada. This guarantee, however, is at risk if the issuing institution defaults. This is because banks and credit unions often use the investor’s capital for further financing, lending, and other business building activities. If the activities from the bank or credit union are risky, it can, impact the issuer’s ability to honour the guarantee of return and potentially the investor’s principal investment.
Types of GICs: what are the different GIC options?
Banks and credit unions offer a variety of GICs designed to meet the requirements of their clients and potential prospects. However, not all institutions will offer all GIC options. In fact, many non-bank institutions limit their offering to Fixed-Rate GICs due to their simplicity. This is why it is important to assess what the GIC offering is prior to purchasing or opening an account.
| Types of GICs |
| Fixed-Rate |
- Provides a set interest rate for the term, offering predictable returns
- One of the more popular GIC types offered
- Lower risk GIC
|
| Variable-Rate |
- Interest rate fluctuates based on prime rate, which can lead to higher or lower returns on an investment
- Higher risk GIC
|
| Cashable |
- Allows early withdrawal after a minimum holding period, but usually offers lower interest rates
- Lower risk GIC
|
| Non-Redeemable |
- Cannot be cashed out before maturity but generally offers higher interest rates
- Lower risk GIC
|
| Market-Linked |
- Returns are often tied to stock market performance or a specific benchmark
- The principal is protected, but returns are not guaranteed
- Higher risk GIC
|
| Foreign-Currency |
- GICs that are in foreign currencies
- Often seen as US Dollar GICs, but are not limited to other foreign currencies
- Exposes an investor to exchange rate fluctuations
- Higher risk GIC
|
GIC account types: where can an investor hold a GIC?
GICs can be held in various investment accounts, from registered accounts to non-registered accounts. Of course, the account type that is holding the GIC will have its own unique tax implications. Below is a summary of account types that can hold GICs, as well as their potential tax implications. Note, it is recommended to connect with a tax expert for more details on how your unique situation may be impacted from the interest earned on a GIC. Alternatively, view the CRA’s website for more details on the various account types.
- Tax-Free Savings Account (TFSA): Interest is tax-free, making it ideal for saving without tax or implications
- Registered Retirement Savings Plan (RRSP): Interest earned is tax free until withdrawn from the RRSP. Once withdrawals take place from an RRSP, the entire amount (principal and interest) is taxed as regular income based on the individual’s marginal tax rate
- Registered Retirement Income Fund (RRIF): Converts an RRSP into retirement income. Like an RRSP, interest earned is tax free until withdrawn from the RRIF. When withdrawn from an RRIF, the entire amount (principal and interest) is taxed as regular income based on marginal tax rate
- Registered Education Savings Plan (RESP): Helps to save for a child’s education. Only the interest earned is taxed upon withdrawal, while the principal or contribution is tax free
- Non-Registered Accounts: Interest is fully taxable as income based on the investor’s marginal tax rate and there is no tax credit or tax break for interest income on GICs
GIC terms: how long can an investor invest in a GIC?
GICs are available in various term lengths, ranging from as short as 30 days to as long as 10 years. Of course, there is a trade-off for an investor. Often, shorter term GICs will be more appealing and potentially have promotional rates that may be higher than other rate terms. This is done to entice investors to lock in for the shorter terms and potentially create what is known as a laddered GIC strategy or to be an active investor within the institution. Longer term GICs allows the investment to compound as long as the interest is reinvested, but they can be less appealing due to their longer lockup period. The downside of a longer term GIC is the foregone potential to earn a higher interest rate if the Bank of Canada raises interest rates. However, the opposite is the true if investors lock into a longer term GIC and the Bank of Canada lowers interest rates, as they will be invested at a higher rate of return versus what would then be currently offered.
In most cases, if an investor cancels the purchase of their GIC prior to the term ending, the interest earned is foregone, meaning that the investor does not earn any interest or growth on their principal. This makes the term of the GIC extremely important when it comes to determining how much cash is needed for living expenses and other aspects of their life. A laddered GIC strategy may assist investors when they are looking to capitalize on various terms.
| GIC terms |
| Short-term GICs (30 days to 1 year) |
- GICs below 12 months are often viewed as being best for when cash is needed to be more liquid or when interest rates are expected to rise
|
| Medium-term GICs (1 to 3 years) |
- Offers a balance between liquidity and better interest rates
- One of the more popular GIC terms in recent years, especially with digital banks, is the 18-month GIC due to its higher payout rate, compounding potential, and flexibility on payment options
|
| Long-term GICs (3 to 10 years) |
- Typically provides the highest interest rates (not including promo or bonus) but requires a long-term commitment
- GICs beyond 5 years are often offered by traditional banks, but are starting to be seen with challenger banks and other digital banks and credit unions
|
Interest payout options: how payment options can affect returns
When investing in a GIC, investors are often given the freedom and flexibility to choose how they want their interest to be paid as well as the frequency of the payment. Of course, there are various types of payout options, but each payout opportunity comes with its own unique set of benefits and drawbacks. As a result, it is important that an investor considers these payout factors prior to purchasing or investing in a GIC to determine if regular income may be more important vs compounding effects for higher returns.
| Interest payout options |
| Type |
Strength(s) |
Drawback(s) |
| Monthly payout |
- Ideal for steady income stream / payouts
|
- Often has a smaller interest rate associated with the term
- Limited to no compounding
|
| Semi-Annual payout (every 6 months) |
- Provides regular income while still allowing the ability to compound
|
- Limited to 12 month or longer term GICs
- Less compounding compared to annual or maturity payout options
|
| Annual payout (once a year) |
- Suitable for investors who prefer lump-sum interest payments
- Can allow for compounding on longer term GICs
|
- Less compounding than a payout at maturity
- Requires waiting a full year before receiving interest payments
|
| At maturity |
- Allows for maximized compounding benefits
- Interest accumulates and is paid in full at the end of the term allowing for higher overall returns
|
- No access to interest until the GIC matures
- Less flexibility with handling interest payments over time (generally non-redeemable GICs)
|
GIC fact check: are they truly guaranteed?
GICs are one of the safest investment products for Canadians because they are insured by the Canadian Deposit Insurance Corporation (CDIC) or other provincial deposit insurance programs based on the individual institution. An investor can easily find which governing body has insured the issuing institution by locating the logo of the insurer at the bottom of the web page near their disclaimers and trademarks. If the logo is not featured, the insurer information will often be noted on the disclaimers page of their institution and within the paperwork filings when purchasing the GIC. Asking questions and reviewing relevant legal documents prior to investing can be crucial for an investor’s financial health and well-being.
The two main types of deposit insurance are:
- CDIC: The most well-known insurer, CDIC protects eligible GICs up to $100,000 per account type, per financial institution. Coverage applies only to terms of five years or less and excludes market-linked or foreign currency GICs
- Provincial deposit insurance: Each province has different coverage amounts on deposits. For credit unions in Ontario, many are covered under The Financial Services Regulatory Authority (FSRA) which provides insurance coverage up to 250,000 for non-registered accounts and potentially unlimited coverage on registered accounts. In provinces like Alberta (under CUDGC), and British Columbia (CUDIC), credit unions offer GICs with higher or even unlimited coverage based on the account
Because of their lower risk and guarantees, GICs provide consistent and stable income compared to other investment products. Their fixed and guaranteed returns make them insulated from market volatility, unlike bonds or equities. However, unlike bonds or equities, which can benefit from yield changes and price appreciation, GICs cannot, as the deposit is locked in and capped at the agreed-upon rate of return.
Final thoughts: summarizing GIC investments
GICs are a simple yet elegant way to provide a lower risk, guarantee of income that grows beyond a savings account. With various payout options, compounding benefits, and numerous terms, GICs can optimize an investor’s returns while maintaining financial flexibility and stability. Whether saving for a short-term goal or planning for the future, GICs remain and continue to be a reliable investment choice for many Canadians.
Disclaimer
This article is independently written and not sponsored by any financial institution. The views expressed are solely those of the author(s) based on their research and analysis. The content is for informational purposes only and should not be considered financial advice. Always consult a qualified financial professional before making investment decisions. Reading this article does not create a professional relationship with the author(s) or affiliated organizations. It is not a substitute for personalized financial guidance.
Investing involves risks, including potential loss of principal. Readers are solely responsible for their investment decisions. Past performance does not guarantee future results. Historical or projected returns may not reflect actual future performance. The use of information in this article is at the reader’s own risk. The author and publisher are not responsible for any errors, omissions, or resulting losses/damages.
