Guaranteed Investment Certificates
Traditional GICs are classified as Fixed Income investments because they possess a fixed maturity date and a fixed interest rate or rate of return. When you invest in a traditional GIC, you know what you your investment will earn in each period and you know that your capital will be returned on a certain date in the future. The following list outlines the features associated with traditional GICs:
- Term to Maturity: A GIC term to maturity can range from 30 days to as long as 10 years. GICs with a term to maturity of five years or less qualify for CDIC insurance.
- Minimum Investments: Most GIC issuers require a minimum initial investment of $500.00 for GIC purchases. There may also be different minimum investment levels for a registered account and GICs with different interest payment options. GICs denominated in a currency other than Canadian dollars (for example, U.S. dollars) may require a minimum initial investment of $5,000.00. Investors should verify purchase minimums with their financial institutions.
- Flexibility: Investors can select from a number of options that will dictate their access to the GIC capital between the initial purchase date and the final maturity date including the following:
- Fixed or Non-Redeemable GICs: With this type of GIC the investor is not able to access the GIC principal until the maturity date.
- Redeemable GICs: This type of GIC provides an investor with access to the principal of a Fixed Rate GIC, but with severe penalties.
- Flexible or Cashable GICs: With this type of GIC investors will have access to the GIC principal prior to the maturity date. They may be able to “cash-in” a portion or all of the GIC prior to the maturity date. There may be restrictions and penalties that apply to early withdrawals, so investors should understand the GIC’s structure. Typically, investors accept a lower interest rate for flexible/cashable GICs than for Non-Redeemable GICs.
- Laddered GIC: This is type of non-redeemable GIC is structured such that a portion of the principal matures and becomes accessible on the annual anniversary. So, for example, if a $20,000.00 Laddered GIC is purchased with a five-year maturity date, then on each of the five annual anniversary dates, 20%, or $4,000.00, matures and becomes available for reinvestment or other uses. Typically, if the investor does not indicate otherwise, the maturing portion would be rolled-over and reinvested for another 5-year term.
- Income Payment Options: Investors have a number of options for the calculation and payment of the interest income they earn on their GICs including the following:
- Annual Interest: Here the GICs interest income is calculated as simple interest and paid once a year on the annual anniversary date of the GIC. Simple interest is calculated by taking the principal amount of the GIC and multiplying it by the GICs stated interest rate.
- Annual Compound Interest: With this option, the GICs interest income is calculated as simple interest on the annual anniversary date and the interest amount is added to the GICs principal amount. In the following 12 months, the GIC principal and accumulated interest to date, will earn the GICs stated annual interest return. No annual interest payments are made to the investor. On the GIC's maturity date, the investor will receive their original principal plus all calculated compounded interest income.
- Monthly/Quarterly/Semi-Annual Interest Payments: With this option investors can receive their earned interest in periodic installments. This is an attractive option for investors that wish to use the interest income to help support their lifestyles or match interest payments with regular expenses.
- Interest Rate Options: There are number of interest rate options available to investors such as the following:Currency: GICs are available in currencies other than those denominated in Canadian dollars. Foreign currency GICs will have different features and details. Investors should check with their respective financial institutions for full details. Because foreign currency GICs are issued by Canadian institutions, there is no withholding income tax applicable for Canadian residents and non-residents. In addition, accounts and investments denominated in currencies other than the Canadian dollar are not eligible for insurance from CDIC.
- Fixed Rate: The interest rate is set at the time of purchase and does not change during the GIC's term to maturity.
- Variable Rate: The GIC's interest rate is set and changes according to a published interest rate (Bank Prime Rate, for example). The GIC's interest rate is variable and it changes, up or down, depending on the underlying rate.
- Escalating or Step-Up Rate: The GIC's interest rate will increase from the initial rate on each annual anniversary. For example, if the GIC is set to mature in 5 years, then the first year’s interest rate might be 1.50% in the first year, 2.00% in the second year, 2.50% in the third year, 3.00% in the fourth year and 5.0% in the fifth year. This structure would provide an average annual interest return of 2.80%.
- Registered Account Eligible: Yes.
- Transferable: Some GIC issuers permit the transfer of ownership from one entity to another. Investors should check with the financial institution.
- CDIC Insurance Coverage: See our section on CDIC for a more complete discussion. For Canadian dollar denominated GICs with terms to maturity of five years or less, CDIC insurance is available. CDIC will insure up to $100,000 of principal and interest, for all deposits with any one member financial institution.
- Taxation: Interest earned, but not received, and interest paid to investors, in any calendar year, is reported on a T5 Income Tax information slip issued by the financial institution at the end of each calendar year. Typically, financial institutions only issue a T5 Income Tax slip if the interest earned exceeds $50.00, however, the interest must still be reported on your annual income return.
Note: Guaranteed Investment Certificates sold by Credit Unions or caisses populaires carry guaranteees and insurance against investor losses that differs from that offered by CDIC. Deposits in credit unions or caisses populaires are covered under provincial deposit insurance plans which vary between provinces. You can request the specific details from your individual credit union branch or contact your provincial deposit insurer to find out how your deposits are protected.
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