What Is a Canadian Guaranteed Investment Certificate (GIC)?
A guaranteed investment certificate (GIC) is an investment sold by Canadian banks and trust companies that provides a fixed rate of return to investors. GICs are often purchased as retirement savings vehicles plans because they provide a low-risk fixed rate of return.
GICs are insured by the Canadian government for up to $100,000 Canadian per account.
They are marketed in Canada in much the same way U.S. banks market certificates of deposit to their customers. In the U.S., GICs are created and promoted by insurance companies and have a slightly different client focus.
Key Takeaways
- A guaranteed investment certificate (GIC) is an interest-paying deposit account available through Canadian financial institutions.
- GICs are similar to certificates of deposit sold by banks in the U.S.
- When buying a GIC, investors deposit money for a fixed length of time, receiving interest on that money and the principal when the investment matures.
Understanding Canadian Guaranteed Investment Certificates (GICs)
A GIC works much like a certificate of deposit in the U.S. You deposit money in the bank and earn interest on that money. The money must be deposited for a fixed length of time, and interest rates vary with the length of the commitment.
When you buy a GIC, you are lending money to the bank money and getting paid interest in return.
GICs are considered safe investments because the financial institutions that sell them are legally obligated to return investors' principal and interest. Even if the bank fails, investors are insured for up to $100,000 Canadian by the Canadian Deposit Insurance Corporation (GDIC).
How Banks Profit From GICs
A bank profits from offering GICs by lending out the money deposited at a higher rate than the interest it pays on GICs. If the bank sells mortgages at 8% interest and its GICs pay 5%, the bank earns 3% in profit.
GICs offer a slightly higher return than Treasury bills (or T-bills), making them an excellent option to diversify a stream of liquid, safe securities in a portfolio. As noted above, many Canadian banks and trust companies sell GICs. While a trust company does not own the assets of its customers, it may assume some legal obligation to take care of them.
In these instances, trust companies act as fiduciaries, agents, or trustees on behalf of a person or business entity. They are a custodian and must safeguard the money and make investment selections that are solely in the interest of the outside party.
GICs, along with T-bills, Treasury bonds, and other income-producing securities are safe and relatively liquid investments, making them particularly attractive to retired investors seeking a stable stream of income.
GICs and U.S. Treasury Securities
Other forms of safe and income-producing securities are U.S. Treasury securities, including T-bills, T-notes, and T-bonds.
- T-bills mature at 4, 8, 13, 17, 26, and 52 weeks. Those are the shortest maturities of any government bonds. The U.S. government issues T-bills at a discount, and they mature at par value. The difference between the purchase and sale prices is essentially the investor's profit.
- T-notes have longer maturity terms of 2, 3, 5, 7, and 10 years. The U.S. government issues Treasury notes at a $1,000 par value, and they mature at the same price. T-notes pay interest semiannually.
- T-bonds (called the “long bond”) mature at 20 or 30 years. Like T-notes, T-bonds are issued and mature at a $1,000 par value and pay semi-annual interest.
GICs and U.S. government securities can be cornerstones of certain portfolio strategies—either those that rely on safe streams of income or as a hedge that balances out riskier investments such as growth stocks and derivatives.
What Is the 'Guarantee' in Guaranteed Investment Certificates?
The bank or other institution offering GICs is guaranteeing that the investor will get back the principal deposit plus the promised interest payment.
What Is a Guaranteed Investment Certificate in the U.S.?
In the U.S., guaranteed investment contracts are savings vehicles issued by insurance companies, not banks. Otherwise, they work much like their Canadian counterparts, paying a set amount of interest for a deposit for a set length of time.
Most of the purchasers of GICs in the U.S. are pension funds or retirement savings plans. If you have a 401(k) account, guaranteed investment contracts may be one of your investment choices.
Confusingly, certificates of deposit (CDs) are more like Canadian guaranteed investment certificates than U.S. guaranteed investment contracts, since CDs are available primarily at banks and credit unions in the U.S.
Is There a Downside to the Canadian Guaranteed Investment Certificate?
Canada's guaranteed investment certificates are among the safest and most reliable investment choices. Their investors can be very confident that their money will be returned and the promised interest will be paid.
That said, nobody is going to double their money investing in GICs. You're choosing safety over the potential for higher returns on your investments.
The Bottom Line
Guaranteed investment certificates issued by banks in Canada are a relatively safe way to build savings. They are government insured and deliver a steady if unspectacular return on investment.
GICs are primarily used by retirees seeking a steady stream of income and by savers of all ages working towards a specific financial goal.
