What Is a Canadian Guaranteed Investment Certificate GIC

A Canadian Guaranteed Investment Certificate (GIC), sold by Canadian banks and trust companies, is a low-risk fixed rate deposit investment. It is often purchased for retirement plans and offers a degree of insurance by the Canadian government. Like Certificates of Deposit in the U.S., GICs in Canada are marketed similarly. However, they are created and promoted by insurance companies in the U.S.

Key Takeaways:

– A GIC is an investment sold by Canadian financial institutions.

– When buying a GIC, investors deposit money in the bank for a fixed length of time and receive interest and the principal when the investment matures.

Understanding Canadian Guaranteed Investment Certificates:

GICs work similarly to U.S. certificates of deposit. You deposit money in the bank, earn interest on it, and must hold the money for a fixed length of time. The interest rates vary based on the commitment period. When buying a GIC, you are effectively lending money to the bank in exchange for interest.

GICs are considered safe because the financial institutions selling them are legally obliged to return the principal and interest. In case of bank failure, investors are insured for up to 100,000 Canadian dollars by the Canadian Deposit Insurance Corporation (GDIC).

How Banks Profit From GICs:

Banks profit from the difference between lending rates and the rates paid on GICs. The bank’s profit is the margin when mortgage rates are higher than GIC rates.

GICs offer a slightly higher return than Treasury bills (T-bills), making them an excellent option for diversifying a portfolio with safe, liquid securities. Trust companies, which act as fiduciaries or trustees for individuals or businesses, may sell GICs and have a legal obligation to protect the interests of their clients.

GICs and U.S. Treasury Securities:

Other safe and income-producing securities are U.S. Treasury securities, including T-bills, T-notes, and T-bonds.

– T-Bills mature at various intervals and are issued at a discount but mature at par value.

– T-Notes have longer maturity terms and pay interest semiannually.

– T-Bonds mature at 20 or 30 years and also pay semi-annual interest.

GICs and U.S. government securities can be foundational to portfolio strategies that rely on safe income streams or balance riskier investments.