What is a Guaranteed Investment Certificate (GIC)?

A Guaranteed Investment Certificate, or GIC, is an investment product where you lend money to a financial institution for a specified period of time, typically at a fixed rate of interest. They’re considered low-risk investments, and you can hold them in regular investment accounts or registered accounts like RRSPs, TFSAs and FHSAs¹.

GICs may be a good choice if your main consideration is keeping your money secure while earning some interest income. If interest rates move lower over your investment time horizon, you benefit because you’ve locked in a higher rate with a conservative and safe investment product. 

The timing and magnitude of interest rate changes are very difficult to accurately predict, even for financial professionals. This makes it difficult to time your GIC purchase to receive a peak rate of interest. However, GICs could still make sense if you’re happy to accept the interest rates offered at the current time, knowing that it’s possible that rates will climb after your purchase. If you have enough funds to purchase several GICs, you can stagger their maturity dates to make sure that you can take advantage of higher rates later, if rates do rise. Alternatively, if rates drop, you’ll still have some money invested at the previous higher rate until those GICs mature.

Another option if you believe interest rates will move higher, is to invest in a variable-rate GIC. For this product, the rate is tied to some benchmark like the issuing institution’s prime rate, which typically increases if the Bank of Canada raises its interest rate. The rates on variable-rate GICs can also move lower if its benchmark rate declines.

Traditional GICs

These are available in two forms:

Cashable/redeemable GICs allow you to withdraw funds before the GIC’s maturity date. However, they usually offer lower rates of interest as compared to non-cashable/non-redeemable GICs and may not pay any interest if money is withdrawn before a minimum holding period. In effect, you’re sacrificing some benefits for the flexibility to access your money before the GIC matures. 

Non-cashable/non-redeemable GICs lock in your funds until maturity and no withdrawals are possible before that date. There are exceptions for some of these GICs in certain cases — death of the GIC holder is one example. Check the details of the product you plan to purchase to know more.

GIC interest can be paid monthly, quarterly, semi-annually, annually or only at maturity. Some GICs compound the interest, meaning that instead of paying it to you during the life of the GIC, the interest is reinvested and earns interest itself until the GIC matures.

If you’ll need funds on certain specific dates, you’ll want to take the maturity and interest payment dates into account when you select a GIC. One to five-year terms are most common with GICs, but you can find shorter terms of a few months and longer terms of seven or even 10 years. Typically, the longer the term, meaning the longer you commit your money, the higher the interest rate. However, there are exceptions, especially when the market believes that interest rates are currently at a peak.

Market-linked GICs

Market-linked GICs combine the principal-protected safety of regular GICs with a return on your investment that’s tied to the return of a specific portfolio or index. This feature means that your ultimate GIC return may be higher or lower than the return of an equivalent, regular GIC with the same term. You won’t know the ultimate return of your market-linked GIC until it matures, as the return is tied to the specific portfolio or index performance over a certain time period and not known in advance. The return could even end up being zero.

The exact formula for calculating the return varies for different market-linked GIC products ─ check the details of the product you’re considering to get the full picture. You may earn a percentage of the index or portfolio returns, be capped at a maximum return or only participate after a certain performance threshold is reached. Regardless, your principal is guaranteed with this product, similar to a regular GIC, so it provides a way to potentially participate in market returns without putting your principal at risk.

Variable-rate GICs

A number of GIC options are available to satisfy Canadian investors’ needs at a time when interest rates are changing and difficult to predict. Here are two examples:

As implied by its name, the interest rate on variable-rate GICs can fluctuate and is tied to a benchmark like the issuing institution’s prime rate, which usually moves when the Bank of Canada changes its benchmark rate. The interest rate paid could move higher or lower depending on the direction of rates after you purchase this investment.

Escalating-rate GICs provide interest rates that increase every year, and you may be obliged to commit your money for a certain number of years with this product. Other details, such as whether the interest is paid to you or left in the GIC to compound, will also vary. Check the product details.

A GIC is considered a safe investment product. Not only is it eligible for insurance, but it’s possible to know the rate of interest you’ll earn on your investment and when you’ll receive payments. 

GICs are eligible for Canada Deposit Insurance Corporation (CDIC) insurance, or provincial deposit insurance in some cases, but there are limits on the insurance coverage. The CDIC insures total deposits, including GICs within each insured category, up to a maximum of $100,000² per separately insured category (this includes principal and interest combined). In addition, the extent of the insurance coverage is affected by other factors, such as how much money you hold in other deposit accounts of the same category with the same issuer.

Note that it’s the financial institution issuing the GIC that must be a CDIC member³, rather than the institution where you purchased the GIC, if that’s different. The CDIC website has all the details if you’d like to know more. If you’re holding more than $100,000 in GICs and other deposit products, you may want to take a close look at the limits of this insurance and consider spreading your GIC purchases across several different issuers.

With many GICs, your money is locked in at a fixed rate for a certain term. This works to your advantage if interest rates are declining but it isn’t ideal if they’re rising. 

There may be a minimum required investment, so this doesn’t make them a good choice if you’re contributing or saving a smaller amount on a regular basis. Of course, the larger required amount could be moved to a GIC once you’ve saved enough to meet the minimum threshold. 

You won’t be able to access your money during the life of the GIC⁴ , unless you choose a cashable or redeemable GIC. As mentioned, cashable GICs typically carry a lower interest rate and you may be more limited in your selection of term and minimum purchase size. There’s usually also an initial period where you can’t cash a cashable GIC. Redeemable GICs don’t have an initial hold period — you can access your funds any time, but you’ll pay a penalty or lose any interest earned if you do so. Both these options typically pay less than a non-redeemable GIC with the same term.

Traditionally, GICs were a fairly straightforward investment. However, renewed interest in this product and an uncertain interest rate environment have pushed financial institutions to respond with some innovative new GIC types and new features.

Both CIBC and other financial institutions offer a number of traditional GICs as well as new-style GICs such as market-linked GICs and escalating-rate GICs. Visit the GIC & Bonds section of your Investor’s Edge account to access the full product lineup available from both CIBC and third-party GIC providers.

¹ Although you can hold GICs in both investment and registered accounts, some GICs can only be held in a certain account type. Check the product details before you purchase.

² If a CDIC member institution fails, GICs issued by the failed member institution are combined with any other eligible deposits (e.g., cash, other term deposits, etc) held at the same institution in the same deposit insurance category and reimbursed up to a limit of $100,000 including interest.

³ https://www.cdic.ca/your-coverage/financial-products/gic/ Opens in a new window.

⁴ with some possible exceptions such as the death of the GIC holder – check the terms of the GIC you’re considering to understand if any exceptions exist