In Canada, a guaranteed investment certificate (GIC) is a deposit investment offered by Canadian banks and trust companies. These investments are popular for retirement plans because they offer a low-risk, fixed rate of return and are partially insured by the Canadian government.
These GICs are marketed similarly to Certificates of Deposit in the United States. However, GICs in the U.S. are primarily created and promoted by insurance companies, targeting a slightly different clientele.
Key Highlights
- A Guaranteed Investment Certificate (GIC) is a safe, fixed-income investment sold by Canadian financial institutions.
- When purchasing a GIC, investors deposit money for a predetermined period and receive interest along with the principal upon maturity.
Understanding Canadian Guaranteed Investment Certificates
GICs operate quite like Certificates of Deposit in the U.S. When you buy a GIC, you lend your money to the bank and, in return, earn interest. The key condition is the deposit must be for a fixed term, with interest rates varying based on the length of commitment. Essentially, it’s you lending the bank money and receiving interest as your reward.
GICs are considered safe investments because financial institutions selling them are legally bound to return both the principal and the interest. In case a bank fails, investors are insured up to 100,000 Canadian dollars by the Canadian Deposit Insurance Corporation (CDIC).
How Banks Profit From Guaranteed Investment Certificates
The profit margin for a bank is the difference between lending rates and the rates they pay on GICs. For instance, if mortgage rates stand at 8% and GIC interest rates are at 5%, the bank profits from the 3% difference.
GICs offer returns slightly higher than Treasury bills, making them a superb choice for diversifying a portfolio with liquid, secure assets. Aside from banks, many trust companies also sell GICs. While trust companies don’t own their clients’ assets, they often have a fiduciary responsibility to safeguard and make investments in the clients’ best interests.
Trust companies act as fiduciaries, agents, or trustees for individuals or businesses. As caretakers, they ensure investment choices like GICs, T-bills, Treasury bonds, and other income-producing securities aid in preserving wealth, particularly valuable for retirees without a steady income source.
Comparing GICs and U.S. Treasury Securities
Other forms of safe, income-producing securities include U.S. Treasury securities such as T-bills, T-notes, and T-bonds.
- T-Bills mature within 4, 8, 13, 17, 26, and 52 weeks, having the shortest maturity period among government bonds. Issued at a discount, they mature at par value, and the interest is the difference between purchase and matured value.
- T-Notes offer longer maturity of 2, 3, 5, 7, and 10 years. Issued at a $1,000 par value, they also mature at this value and provide semi-annual interest payments.
- T-Bonds (also called “long bonds”) are similar to T-Notes but with even longer maturity—20 or 30 years. They also offer semi-annual interest and mature at $1,000 par value.
Both GICs and U.S. government securities can be fundamental components of various portfolio strategies. They provide reliable income streams and act as a sturdy base in portfolios balanced with riskier investments like growth stocks and derivatives.
Related Terms: Certificates of Deposit, Treasury Bills, Treasury Notes, Treasury Bonds.
References
- HSBC Bank Canada. “What Is a Guaranteed Investment Certificate?”
- TreasuryDirect. “Treasury Bills”.
- TreasuryDirect. “Treasury Notes”.
- TreasuryDirect. “Treasury Bills in Depth”.
- TreasuryDirect. “Treasury Bonds”.
