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Federal Budget: CDIC Act to be modernized
February 27, 2018
2:50 pm
Doug
British Columbia, Canada
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On page 353 of Annex 3 in the federal budget (the annexes usually have the best "nuggets" of information, in my experience! sf-cool).

Following consultations in 2016 (they don't act quickly, either):

Modernizing the Deposit Insurance Framework

Deposit insurance contributes to maintaining public confidence in the financial system by protecting depositors’ savings in the unlikely event that a deposit taking institution fails. The Department of Finance Canada held public consultations on changes considered to the deposit insurance framework in the fall of 2016.

Budget 2018 proposes to introduce legislative amendments to the Canada Deposit Insurance Corporation Act to modernize and enhance the Canadian deposit insurance framework to ensure it continues to meet its objectives. These changes would modernize the scope of deposit insurance coverage to better reflect products currently offered in the market, address the complexity of trust deposits, help protect depositors and improve understanding of insurance coverage, and ultimately better support financial stability.

While I wouldn't expect an increase in the insured deposit limit per depositor, I wouldn't be surprised if foreign currency deposits were to be included. Similarly, I wonder if the changes vis-a-vis trust deposits might eliminate informal child trust accounts where no official "trust deed" and legal document exists.

Will be interesting to see the changes they propose! 🙂

Cheers,
Doug

February 27, 2018
6:44 pm
Rick
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Doug said
While I wouldn't expect an increase in the insured deposit limit per depositor, I wouldn't be surprised if foreign currency deposits were to be included. Similarly, I wonder if the changes vis-a-vis trust deposits might eliminate informal child trust accounts where no official "trust deed" and legal document exists.

Will be interesting to see the changes they propose! 🙂

Cheers,
Doug  

Doug:
Why wouldn't you expect an increase in the limit? It is the one thing that needs to be attended to. Even recent posts in this forum re minimum amount required for retirement show the lack of reality regarding the 100K limit. I am in the process of setting up and moving funds to Manitoba precisely because of the cap on deposits.
In the EXTREMELY unlikely event of a collapse, I can't live on the proceeds of a 100K guarantee.

February 27, 2018
8:01 pm
gicjunkie
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I totally agree with Rick. Although including other types of investments under the umbrella of CDIC insurance would be nice, a failure to increase limits would be a major disappointment and show a lack of responsibility towards the taxpayer. If the government has seen fit to mention the tweaking of the CDIC , they shouldn't be doing so without attending to a limit increase. That's what is needed the most.

February 27, 2018
10:31 pm
Loonie
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If there are any conveniently available records of the "public consultations", we could probably find out there what is intended. Or we could just wait for it, as there is nothing we can do about it anyway.

Funny, but I don't remember being invited to these "public consultations". There were no ads with my posted bank statements or banners on my screen, and no survey reached me on this subject, all of which is odd considering my obvious interest in examining offerings affected by CDIC. Or is it???
I imagine the banks made representation and that they didn't want to increase CDIC coverage since it would increase their costs, unless they were feeling the squeeze from the CUs on this score.

I doubt this budget will result in any extended coverage. This would have been the perfect time to announce it clearly for maximum political "mileage". In fact, I really don't know what this extract means. It reads like somebody didn't leave time to finish their homework but is hoping teacher won't notice!

I have to agree with Doug's analysis. The closest the document comes to suggesting limits increases is the word "scope", which is vague and does not suggest limits increase, but, rather, some kind of extension as to what is covered. I doubt they will cover USD. The only thing I can see being affected that might matter to us is possibly the five year GIC limit. The banks might support that as they could look forward to tying up our money for longer periods.
CDIC limits have always lagged behind inflation. Any serious attempt to "modernize" must take that into account. I doubt that will happen, but i hope I'm wrong!
I would propose a new limit of 300K or thereabouts, allowing for an inflation catch-up, and then append an annual increase of 100% of inflation.

February 28, 2018
6:43 am
gicjunkie
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This is an analysis from today's Globe and Mail:

"First, the budget announces an upcoming modernization of Canada Deposit Insurance Corp., which insures eligible deposits in guaranteed investment certificates, savings accounts and other products for up to $100,000. GICs are widely used by seniors looking for a safe investing haven.

The changes draw on consultations done in 2016 on the future of CDIC. Details on the upcoming changes were not provided, but government officials said the consultations looked at adding registered disability savings plans and registered education savings plans to the list of registered accounts that are covered and adding foreign currency deposits to covered products. This would benefit snowbirds keeping large deposits in U.S.-dollar accounts.

Other reforms could add coverage for guaranteed investment certificates longer than five years. Increasing the current $100,000 coverage limit for eligible deposits does not appear to be in the government's plans."

I guess the government just doesn't care about what we really need.

February 28, 2018
7:07 am
Top It Up
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gicjunkie said

I guess the government just doesn't care about what we really need.  

First and foremost the Liberals are and always have been vote buyers i.e. always appealing to the lowest fruit on the tree - raising the insured deposit limit has nothing to do with their political reach.

It's like TFSA limits - their voter base are undoubtedly the lowest contributors to the savings plan NOW, so why increase the contribution limits - absolutely nothing to be gained politically. In fact, doing so, just leaves them open to the noisy poverty industry.

February 28, 2018
7:10 am
AltaRed
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Expanding scope of products covered, such as USD deposits and other registered plans, should be an advantage to Fixed Income investors, would it not? There are already plenty of online bank opportunities to spread CAD fixed income around to keep within current CDIC limits.

February 28, 2018
7:27 am
gicjunkie
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AltaRed said
Expanding scope of products covered, such as USD deposits and other registered plans, should be an advantage to Fixed Income investors, would it not? There are already plenty of online bank opportunities to spread CAD fixed income around to keep within current CDIC limits.  

I am not discounting the benefits of expanding the scope of the products insured. This expansion caters to "special interest" accounts, which is appreciated by many investors. It would just be nice not to have to "spread CAD fixed income" around so much, just to satisfy CDIC insurance limits.

February 28, 2018
9:06 am
Doug
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Loonie said
...

Funny, but I don't remember being invited to these "public consultations". There were no ads with my posted bank statements or banners on my screen, and no survey reached me on this subject, all of which is odd considering my obvious interest in examining offerings affected by CDIC. Or is it???
I imagine the banks made representation and that they didn't want to increase CDIC coverage since it would increase their costs, unless they were feeling the squeeze from the CUs on this score.

I don't know that it would increase their costs so much as put more burden on government by increasing the insured deposit limit. That becomes an added liability for the federal government, even if partially or fully self-sustaining. Remember, CDIC actually holds relatively few assets, most of its bailout regime (if it needed to be tapped, and that's a big "if" as they can order a bank to take on all the deposits of a failed CDIC member) comes in the form of an undrawn line of credit from the federal government. 🙂

As far as public consultations go, I think I remember seeing something in Canada Gazette or in the "bowels" of the CDIC's website in their "public notifications" or "press releases" area, but that's it. Such is typical of governments with respect to public consultation, unless it's something major, they just post a required regulatory notice, and receive only a handful of submission papers (probably from CBA and a few others). 🙁

I doubt this budget will result in any extended coverage. This would have been the perfect time to announce it clearly for maximum political "mileage". In fact, I really don't know what this extract means. It reads like somebody didn't leave time to finish their homework but is hoping teacher won't notice!

I have to agree with Doug's analysis. The closest the document comes to suggesting limits increases is the word "scope", which is vague and does not suggest limits increase, but, rather, some kind of extension as to what is covered. I doubt they will cover USD. The only thing I can see being affected that might matter to us is possibly the five year GIC limit. The banks might support that as they could look forward to tying up our money for longer periods.
CDIC limits have always lagged behind inflation. Any serious attempt to "modernize" must take that into account. I doubt that will happen, but i hope I'm wrong!

Hadn't thought about lifting the 5-year limit on GICs, but now that you mention it, that makes complete sense. BoC is intent on raising rates; banks are intent to lock money up for longer periods to better match their assets versus liabilities. If they could offer a 7- or 10-year non-redeemable GIC at, say, 4-5%, they might just do it. They get to make a big, splashy marketing campaign with that "high rate," subtly hiding the term it's locked up for, to say, "it's market-leading." Plus, industry tends to command government's actions or, the tail tends to wag the dog. I still think we could see some inclusion of foreign currency deposits, which would remain in their currency in the event of insolvency, but for the purposes of calculating insured deposit limits, be calculated using the BoC's FX rate on a date the CDIC deems as the failed FI's "insolvency date."

I would propose a new limit of 300K or thereabouts, allowing for an inflation catch-up, and then append an annual increase of 100% of inflation.  

You might see an inflation-targeted increase in the limit, I agree with you there, but I think they'll try and keep it at $100,000. If it does go up, my money's (pardon the pun) on $125,000, possibly as high as $150,000.

They could also do something more radical like not allowing different people to put deposits into different names to skirt the insured deposits limit and go with more of a "beneficial ownership rule." They might increase the limit to $250,000 or even $300,000-500,000, but with a "catch," in that might be inclusive of all deposits two people hold in their own names or jointly (in the case of spouses). This would unfairly penalize married couples, though, but when has ever worried about being fair ever stopped the government? 😉

Cheers,
Doug

February 28, 2018
9:09 am
Doug
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gicjunkie said
This is an analysis from today's Globe and Mail:

"First, the budget announces an upcoming modernization of Canada Deposit Insurance Corp., which insures eligible deposits in guaranteed investment certificates, savings accounts and other products for up to $100,000. GICs are widely used by seniors looking for a safe investing haven.

The changes draw on consultations done in 2016 on the future of CDIC. Details on the upcoming changes were not provided, but government officials said the consultations looked at adding registered disability savings plans and registered education savings plans to the list of registered accounts that are covered and adding foreign currency deposits to covered products. This would benefit snowbirds keeping large deposits in U.S.-dollar accounts.

Other reforms could add coverage for guaranteed investment certificates longer than five years. Increasing the current $100,000 coverage limit for eligible deposits does not appear to be in the government's plans."

I guess the government just doesn't care about what we really need.  

Thanks, gicjunkie. Glad the Globe covered this "budget nugget" so quickly. I wasn't expecting that, but am glad I beat the Globe. 😉

Looks like I nailed the foreign currency deposits inclusion and you on the GIC term limits, Loonie. 🙂

I hadn't thought about adding RESP and RDSP, but this makes total sense, too. They will definitely do that, especially on the latter, which government is keen to promote. (I question its use.) As for the banks, they get to roll out yet another marketing campaign like, "Now serving CDIC insured deposits in your RESP. Call us today!," when they've really added very little if they already offered RESPs and RDSPs. 😉

Cheers,
Doug

February 28, 2018
10:04 am
Bill
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An increase in the $100K limit is needed for registered (e.g. RRSP, RRIF) accounts but is not needed in unregistered accounts. Or at least that's what I need. Anyway, it's a non-issue for 99% of Canadians, I've rarely if ever heard anyone I know talk about the inadequate $100K CDIC limit. In any event, the Liberals will not do what's right for the country, they'll do what's best for their vote count - maybe different CDIC limits based on gender?

February 28, 2018
10:22 am
Top It Up
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Bill said

... In any event, the Liberals will not do what's right for the country, they'll do what's best for their vote count ...  

YEP - and there they were yesterday, playing philanthropers with the taxpayer's hard earned dollars -

"A fund set up by Gord Downie, the former Tragically Hip frontman and outspoken advocate on First Nations issues, will receive a one-time investment of $5 million to promote reconciliation and educate Canadians about the legacy of the residential school system."

eau what a dynamic twosome Trudeau and Morneau make!

February 28, 2018
11:35 am
Doug
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Bill said
An increase in the $100K limit is needed for registered (e.g. RRSP, RRIF) accounts but is not needed in unregistered accounts. Or at least that's what I need. Anyway, it's a non-issue for 99% of Canadians, I've rarely if ever heard anyone I know talk about the inadequate $100K CDIC limit. In any event, the Liberals will not do what's right for the country, they'll do what's best for their vote count - maybe different CDIC limits based on gender?  

That's true, I would agree with that, Bill. The only consideration might be for the vast majority of Canadians, their registered accounts are not primarily made up of GICs (or at least they shouldn't be, in my view, unless you're older). In that way, perhaps I would prioritize RRIFs, followed by RRSPs, as the priority(ies) to increased CDIC limits. With RRIFs, you can't contribute any more to them (other than transfers in to co-mingle assets) and there's minimum annual withdrawal limits that have to be withdrawn for tax purposes. Similarly, it all gets taxed in the year or second year following your death so I see no reason why the RRIF CDIC limit couldn't be unlimited actually.

Increasing substantially, or making unlimited, the CDIC limits on RRSPs and TFSAs, though, might encourage increased risk aversion and a rush of conversions of capital from equities- and related instruments with higher risk/return profiles into cash and cash equivalent instruments. If that were to happen, the banks and CUs would be even more awash in cash deposits and be able to further cut deposit rates even as the BoC continued (foolishly, in my view) to hike the central bank's key lending rates. So, on that score, I offer only a few words, "be careful what you wish for." (As proud bank shareholders, though, you and I might love to see that, assuming the extra "earnings firepower" didn't go unevenly into the senior executives' pockets in the form of increased bonuses!) sf-cool

Cheers,
Doug

February 28, 2018
2:03 pm
Loonie
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Governments of all stripes normally do what they think will work at the ballot box. Nothing new there. Before the last election, the Conservatives tried to buy votes by irresponsibly increasing the TFSA limit. While I enjoy the benefits of TFSA, and would enjoy higher limits even more, I can't honestly think of any valid reason why they should exist at all. If it were up to me, I'd get rid of all these registered plans, but i'm sure that would be hugely unpopular with the voting public, so it will never happen.

Although I would like it, to be honest, I don't see why we should be insuring foreign currency of any kind.
I appreciate Doug's compromise, insuring at only the Cdn value on D-day. However, if Cdn dollar should fall subsequent to that, CDIC might be unreasonably on the hook.

I must admit, I wasn't aware that RESPs and RDSPs weren't covered. They should not be excluded.

Deposit limits are an issue though, in all kinds of deposits. I agree with gicjunkie. However, if they aren't going to do it universally, then certainly it makes sense to start with RIFs as Doug suggested. It's far too much bother, for seniors and for their POAs, to have to deal with several institutions. Also, when first spouse dies, the RIF suddenly becomes much larger and more difficult to deal with - just at the time when GICs are probably essential. There should at least be transitional coverage, which would cover an RSP/RIF GIC which was within limits and existed at time of death, even if spouse has another one which brings total above limit, until such time as deceased's GIC matures and can be transferred, without fee. Transfer fees are particularly inexcusable when the reason for doing so is to keep up with CDIC policies.

As Doug suggests, I imagine most of these ideas came from the banking sector or at least have its blessing. In fact, in my post above, I considered suggesting that the headline of the thread might better have been "tail wags dog - again", but figured the usual chorus would bay against it so decided to keep the joke to myself.

February 28, 2018
4:56 pm
AltaRed
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Loonie said
Although I would like it, to be honest, I don't see why we should be insuring foreign currency of any kind.
I appreciate Doug's compromise, insuring at only the Cdn value on D-day. However, if Cdn dollar should fall subsequent to that, CDIC might be unreasonably on the hook. 

I don't see why it matters whether I hold $50k USD, or $50k Euro or $50k CAD in CIBC. It is the loss of the investment due to failure of the institution that CDIC is covering. The form of currency should make no difference. I wouldn't mind if the cap remained at $100k CAD equivalent although that cap is becoming worth less and less. It is my choice whether my $80k USD could be slightly at forex risk due to depreciation of the loonie.

I also think they should limit it to deposit accounts. There is no reason to extend it to assets in operating businesses such as mutual fund trusts, exchange traded fund trusts, real estate investment trusts, or equities in general. We all know we are taking investment risk in purchasing those products, including, in theory money market mutual funds. If there was CDIC insurance on those, the issuing institutions would become more reckless in their own lending practices.

In any event, there is $1 million CIPF protection against insolvency, fraud, etc for investment accounts at brokerages, etc. The value of the assets themselves have no protection, only against loss due to shenanigans of the holding institution (brokerage).

February 28, 2018
6:15 pm
Doug
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AltaRed said
I don't see why it matters whether I hold $50k USD, or $50k Euro or $50k CAD in CIBC. It is the loss of the investment due to failure of the institution that CDIC is covering. The form of currency should make no difference. I wouldn't mind if the cap remained at $100k CAD equivalent although that cap is becoming worth less and less. It is my choice whether my $80k USD could be slightly at forex risk due to depreciation of the loonie.

On this point, I tend to agree with AltaRed, Loonie. As long there's a provision to convert it back to CAD equivalent for the purposes of calculating whether one is within their insured deposit limit, I don't have any problem with this. I also don't see how it puts extra risk onto CDIC in any way (in most cases anyway, another FI assumes the deposits, so CDIC limits do not apply). And, once the "insolvency date" is set by CDIC, they would calculate what is or isn't insured. When funds are ultimately transferred, either to another FI or a newly-formed subsidiary of CDIC if they're to operate it and wind it down (i.e., when CDIC limits would apply), the funds stay in their foreign currencies. 🙂

I also think they should limit it to deposit accounts. There is no reason to extend it to assets in operating businesses such as mutual fund trusts, exchange traded fund trusts, real estate investment trusts, or equities in general. We all know we are taking investment risk in purchasing those products, including, in theory money market mutual funds. If there was CDIC insurance on those, the issuing institutions would become more reckless in their own lending practices.

In any event, there is $1 million CIPF protection against insolvency, fraud, etc for investment accounts at brokerages, etc. The value of the assets themselves have no protection, only against loss due to shenanigans of the holding institution (brokerage).  

There is no CDIC insurance on those sort of things, AltaRed, unless you mean GICs held inside of a mutual fund or real estate investment trust, but that trust is a "person" as much as anyone else. If you mean corporate deposits shouldn't be CDIC insured, I'd disagree. Corporations are as much a "person" as you and I, in a strictly legal sense anyway. However, equities, REITs and mutual fund units are not CDIC insured. CIPF, which is similar to CDIC, insures investments in the event of the broker-dealer's, or IIROC carrying or introducing broker's, failure up to insured limits (believe it's $1 million CAD equivalent per account), but does not insure for losses due to market or other risks. For instance, ABC Brokers Ltd. fails on Jan. 1st. Your assets of that date were $987,000 in a non-registered account. That'd be protected, i.e., if they made off with the funds or didn't have the assets to show for it, CIPF would reimburse you up to that amount but, if your investments dipped below that number before you got paid out, they'd reimburse you for the lower market value as of the date that you were to be reimbursed (I believe).

Cheers,
Doug

February 28, 2018
6:28 pm
AltaRed
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Doug said
There is no CDIC insurance on those sort of things, AltaRed, unless you mean GICs held inside of a mutual fund or real estate investment trust, but that trust is a "person" as much as anyone else. If you mean corporate deposits shouldn't be CDIC insured, I'd disagree. Corporations are as much a "person" as you and I, in a strictly legal sense anyway. However, equities, REITs and mutual fund units are not CDIC insured. CIPF, which is similar to CDIC, insures investments in the event of the broker-dealer's, or IIROC carrying or introducing broker's, failure up to insured limits (believe it's $1 million CAD equivalent per account), but does not insure for losses due to market or other risks. For instance, ABC Brokers Ltd. fails on Jan. 1st. Your assets of that date were $987,000 in a non-registered account. That'd be protected, i.e., if they made off with the funds or didn't have the assets to show for it, CIPF would reimburse you up to that amount but, if your investments dipped below that number before you got paid out, they'd reimburse you for the lower market value as of the date that you were to be reimbursed (I believe).

Cheers,
Doug  

My post meant exactly as you have explained.... so why the discussion up thread on CDIC insuring RRSPs and RRIFs as complete accounts? They are no different than any other non-reg investment account, e.g. brokerage, that might be any value such as $500k or $1000k consisting of a variety of holdings. It is only holdings like GICs within those RRSPs that are insured up to $100k CAD per issuing institution.

Added: I am fully cognizant on CIPF coverage. There have been many discussions on financial forums on what that is, and what the limitations are.

February 28, 2018
7:09 pm
Norman1
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Loonie said

I must admit, I wasn't aware that RESPs and RDSPs weren't covered. They should not be excluded.
…  

Neither was I.

I think that is actually incorrect. RESP's and RDSP's deposits are covered, but not necessarily separately, as RRSP's, RRIF's, and TFSA's are.

Government may be thinking of a "notwithstanding subsection (2)…" subsection for RESP deposits and RDSP desposits in section 2 of the CDIC Act Schedule as there currently is for RRSP deposits, subsection 2(5); RRIF deposits, subsection 2(6); and TFSA deposits, subsection 2(6.1):

Registered retirement savings plan deposits
(5) Notwithstanding subsection (2), for the purposes of deposit insurance with the Corporation, where moneys received by a member institution from a depositor pursuant to a registered retirement savings plan, within the meaning given that expression for the purposes of the Income Tax Act, constitute a deposit or part of a deposit by or for the benefit of an individual, the aggregate of those moneys and any other moneys received from the same depositor pursuant to any other registered retirement savings plan and that constitutes a deposit or part of a deposit by or for the benefit of the same individual shall be deemed to be a single deposit separate from any other deposit of or for the benefit of that individual.

Registered retirement income fund
(6) Notwithstanding subsection (2), for the purposes of deposit insurance with the Corporation, where moneys received by a member institution from a depositor pursuant to a registered retirement income fund, within the meaning given that expression under the Income Tax Act, constitute a deposit or part of a deposit by or for the benefit of an individual, the aggregate of those moneys and any other moneys received from the same depositor pursuant to any other registered retirement income fund and that constitutes a deposit or part of a deposit by or for the benefit of the same individual, is deemed to be a single deposit separate from any other deposit of or for the benefit of that individual.

Tax-free savings account
(6.1) Despite subsection (2), for the purposes of deposit insurance with the Corporation, if moneys received by a member institution from a depositor in accordance with a tax-free savings account, within the meaning assigned by section 146.2 of the Income Tax Act, constitute a deposit or part of a deposit by or for the benefit of an individual, the aggregate of those moneys and any other moneys received from the same depositor in accordance with any other tax-free savings account that constitute a deposit or part of a deposit by or for the benefit of the same individual is deemed to be a single deposit separate from any other deposit of or for the benefit of that individual.

February 28, 2018
9:39 pm
Doug
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AltaRed said
My post meant exactly as you have explained.... so why the discussion up thread on CDIC insuring RRSPs and RRIFs as complete accounts? They are no different than any other non-reg investment account, e.g. brokerage, that might be any value such as $500k or $1000k consisting of a variety of holdings. It is only holdings like GICs within those RRSPs that are insured up to $100k CAD per issuing institution.

Added: I am fully cognizant on CIPF coverage. There have been many discussions on financial forums on what that is, and what the limitations are.  

I figured you were familiar with CIPF coverage actually. I thought I should clarify for others, though, or in case I was mistaken. sf-cool

At any rate, are you saying why insured registered plan deposits separately than non-registered? In other words, why not have one insured deposit limit, per depositor and per CDIC member issuer but have it be inclusive registered and non-registered plans? That's not a bad idea, in theory, actually. In practice, though, with separate custodial trustees involved in holding the registered plan assets, it's logistically much more challenging. What could be done, though, is to have one non-registered limit, one RRSP/RRIF/RESP/RDSP limit and one TFSA limit.

Cheers,
Doug

August 9, 2018
10:05 pm
Loonie
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I received a consumer satisfaction survey today from one of the CDIC-insured FIs that is on our charts.
One of the questions stated that CDIC is thinking about raising the insurable TERM LIMITS. That would be a broadening of "scope" and probably wouldn't cost the banks any more (per $ per year). It just ties up your money longer, for better or worse.
Considering that the MB CUs that offer insured 6 and 7 yr GICs are not giving particularly good rates on them, it doesn't sound very helpful at the moment or in any rising-rate environment.

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