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My advice • August 22, 2022

Everything you need to know about GICs

We answer all your questions.

Despite being simple enough for beginner investors, guaranteed investment certificates (GICs) are often misunderstood. How they work, their characteristics, and their advantages have elicited many questions. Here, Julien Beaulieu, an advisor at Laurentian Bank, answers a number of your questions.

Are GICs safe?

Yes, GICs are very safe investments. There is nothing more predictable than a GIC. Not only is your principal guaranteed, but you’ll also know what your return will be in advance.1 When it matures, you will receive the exact amount you were informed about when you began investing in it.

There’s another major protective feature that applies to your GIC investments: deposit insurance protection, provided by the Canada Deposit Insurance Corporation (CDIC). This federal entity ensures your investments’ protection against financial institution bankruptcy up to the amount of $100,000 per person, per deposit category, and per CDIC-member institution.2

Can you invest in a GIC even if you don’t have a lot of liquid assets?

Absolutely. The minimum amount you can invest in a GIC is $500. This makes it a very accessible option that suits both new investors as well as those who already have savings. Both simple and completely safe, it’s the ideal product for getting started in the world of investing, especially during this period of stock market volatility.

Should we invest in a GIC now or wait, given the trend for rising interest rates?

This is a good question that doesn’t have an easy answer. One very important aspect to take into account when thinking about the question is the opportunity cost.

In concrete terms, this means you need to consider the financial loss you will experience if you don’t invest right away. In order for it to be more advantageous for you to wait, the additional return you would receive on a future investment would need to cover the interest not being generated in the short term. This is hard to predict.

In this context, the key is diversification. By dividing the amount you have to invest into several investments with different due dates, you can make your savings start working for you right away while keeping open the possibility of regularly reinvesting to take advantage of potentially better rates in the future.

A Laurentian Bank advisor can help you determine the best investment strategy based on your situation and the current economic context.

Should GICs only be considered as long-term investments?

With terms varying between 90 days and 10 years, GICs will work for any investment project. Whether you’re saving for travel or to buy a house or car, or even planning for retirement, the predictability of GICs enables you to properly plan and reach your goals.

GICs are perfect for people whose goal is to safeguard their assets. With the competitive interest rates offered by Laurentian Bank, you can also benefit from obtaining an excellent return.

What would happen if you needed to access your money before the due date?

Savings invested in a GIC are not redeemable before the investment due date. That’s why it’s important to plan your investments. Before investing, you should first ensure you have easily accessible liquidity, typically called emergency funds, in case of any unforeseen events.

Then, by diversifying your investments, both in terms of products as well as due dates, you will ensure you have access to these assets on a regular basis. Our advisors will be able to guide your financial planning in this respect.

However, there are some exceptions to the non-redeemable nature of GICs. Laurentian Bank, for example, allows the redemption of a GIC in the case of a withdrawal from a RRIF, which is the disbursement vehicle for the RRSP.

How is the interest paid?

A GIC is a very flexible investment vehicle. Depending on the term selected, investors can have two different options for interest payment1. First, you can receive interest payments annually. The advantage of this simple interest option is obtaining a regular, stable payment during the investment period.

The second option involves reinvesting the interest, which enables you to generate an additional return. This is called compound interest. With this option, your savings will grow more quickly.

Are GIC returns taxable?

The GIC can be held inside a registered savings plan or not. The answer depends on the investment vehicle you choose. If you opt for a TFSA, your return will not be subject to tax.3 With an RRSP, taxes on the amount invested as well as on your return will be paid later, when you start making withdrawals. If you go with a non-registered account, the return on your GIC will be taxable on a yearly basis.

What service fees are charged for a GIC?

GICs do not have any management fees, neither at the time of investment nor at their due dates. You keep 100% of your principal and the interest you have been promised.

Our advisors, your best allies

There’s no doubt that GICs can be advantageous to your investment portfolio no matter what your needs are. Still have a few questions about GICs? Our advisors will take the time to answer them to help you make the best investment decisions. Get in touch with them today.

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