A Guaranteed Investment Certificate (GIC) is a fixed-term savings method available in Canada, where the rate of return is fixed or variable, and the investor’s money is backed by a government scheme if the bank fails. GICs offer higher interest rates than deposit accounts but lower than investment products like stocks. Registered GICs offer tax benefits, and banks issuing GICs are covered by the Canada Deposit Insurance Corporation.
A Guaranteed Investment Certificate, or GIC, is a method of saving money, available in Canada. The guarantee refers to the fact that the rate of return is fixed, although in some versions it may be variable and it is simply the conditions that are fixed. Guarantee does not refer to the certainty that the investor will get their money back, although a guarantee investment certificate will normally be backed by a government scheme in case the bank issuing the certificate fails.
The concept covered by a guaranteed investment certificate is known in other countries as term deposit or term deposit. It means that money is deposited for a fixed period of time and then paid back with the addition of an agreed interest rate. In effect, the person who takes out the guaranteed investment certificate is lending his money to a bank. In general, the interest rate earned will be higher than in a deposit account, reflecting the fact that the money is tied up, but lower than in investment products like stocks, where there is more risk.
Most GICs simply offer a fixed rate of return. This will be agreed upon when the certificate is withdrawn and will generally vary depending on the amount invested, the length of the fixed term, and prevailing interest rates for other forms of lending and investment. Some forms of GIC will pay at a variable interest rate based on the performance of a designated stock market over the life of the certificate. In most cases, these will be capped so that there is a maximum interest payment, even if the designated yield exceeds this rate. Meanwhile, if the market has a negative rate of return, the saver will still get their money back in full, but of course they won’t earn any interest.
Banks will list whether or not a particular guaranteed investment certificate is registered. This refers to your tax status regarding saving for retirement. With a registered GIC, the saver will be able to deduct the amount they pay into the scheme from their taxable income, up to fixed limits. You also won’t have to pay taxes on the growth of the money you put into the plan until you withdraw the money. Many savers will simply roll over the money from each GIC into a new GIC and then pay the tax at retirement.
Most banks that issue GICs are covered by the Canada Deposit Insurance Corporation. This means that if the bank fails, the saver will get back the money they invested, but they won’t necessarily get any interest payments. This protection only covers GICs with fixed durations of five years or less.
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