Learning Centre -
Guaranteed Investment Certificates explained
Our IP Profiler raises certain standard questions regarding GICs and other investment instruments. In order to assist you in your investment planning, we have provided a more in-depth explanation here.
|Instrument issued Term (years)
banks, Credit Unions, etc. issue Term Deposits (T.D. unless
otherwise noted). Term deposits are pre-encashable prior to maturity
and carry a fixed rate to maturity. Term Deposits range from 30
days up to seven years. You lend the institution the money.
Trust Companies issue Guaranteed Investment Certificates (GICs) which are normally locked-in for periods of one to five years. The terms coincide with the Canada Deposit Insurance Corporation (CDIC) coverage who will not insure a deposit beyond 5 years.
Bank Mortgage Subsidiaries and Savings and Loan Companies issue Debentures (DEB). In the context of mortgage loan companies, the term debenture means much the same as a Guaranteed Investment Certificate.
Note: Please read one to five years as one, two, three, four and five years or one to three years as one, two and three years etc. Some institutions offer investment terms in months. For example: 12, 13, 14, up to 60 months.
Short term deposits range from 30 days up to 364 days and you may choose any maturity date. No interest is paid on terms less than 30 days.
Cashable GICs differ from Term Deposits in that they are redeemable after 60 or 90 days without incurring an interest rate penalty. They are somewhat similar to a Canada Savings Bond (CSB) but with the benefit of encashment on any date to receive full interest, rather than just at month end.
Linked GICs are different in that they are tied specifically
to the performance of a chosen index on the stock market. The offer
potentially higher returns than a traditional GIC with the benefit
of guaranteed principal. They are normally offered for term of 3
to 5 years and generally do not qualify for early redemption.
Escalator GICs are generally offered in terms ranging from one to five years and can only be cashed on the anniversary date of the investment. Interest is paid at a fixed rate but the rate varies from year to year, usually on an upward trend. In most cases, interest can be paid or compounded on a yearly basis. If interest is compounded yearly, investors will receive the blended interest rate at the end of the investment term. Even if interest is compounded, investors will receive a yearly T-5 and must claim the amount of interest earned each year to avoid tax implications at the end of the GIC term.
Canada Savings Bonds (CSBs) are encashable at any major institution at any time however, interest loss will occur if cashed at any time other than month end.
|Certificate / Confirmation issued
A certificate is the legal document providing proof of the investment. A Power of Attorney form can be used to transfer ownership however, if the certificate is lost, the issuer requires a Bond of Indemnity (an insurance against fraud).
A confirmation is no more than a official receipt. Only the certificate can be lodged as security for a loan.
In addition to the type of note issued, we wish to point out that upon maturity, we are referring to whether the certificate or confirmation need be surrendered in order for redemption.
|Interest payment frequency - Minimum deposit
In most cases, semi-annual payments are a division of the annual rate minus one quarter of a per cent (1/4), divided by two. The same method is employed for quarterly, which is divided by four and monthly, which is divided by 12 using simple interest calculations.
The interest paid on short term deposits is determined by dividing the annual rate by 364 and multiplying that by the number of days to maturity.
Deposit minimums change, as the rate may be reduced, depending on the schedule by which the institution pays you.
|How are cheque with JTWRS worded
= Joint Tenants With Rights to Survivor. This means that if the
death of one of the registered owners occurs, the full value of
the investment becomes the sole property of the surviving registrant.
This type of registration is used in estate planning.
use of joint registration is to take advantage of the coverage
provided by the CDIC. Certificates could be registered in the
following formats, Viz:
Alex Bell -
single owner to a maximum $100,000.
Mary Bell - single owner to a maximum $100,000.
Alex Bell (and/or) Mary Bell JTWRS, to a maximum $100,000.
This would allow
a total investment of $300,000 for a couple with any one institution.
The CDIC provides
coverage for investments to a maximum of $100,000 per person which
includes any accrued interest. For full coverage, the amount of
interest due in between the payment date should be deducted. For
example, if the investment is $95,000 and interest is 10 per cent,
the total due at maturity is $104,500 and therefore the $4,500 is
not covered since it is over the $100,000 CDIC limit.
|Rate reduction from annual rate
||The more frequently the interest payments are made, the institution will lower the rate. For example, 60 annual payments made over five years as compared to five made annually over five years. See interest payment frequency
|Interest payment dates
||The date the institution has promised to pay the interest.
|Instrument maturing on anniversary date/business day
||If the certificate matures on a non-business day such as a Sunday or a holiday, your money is not working for you. It is the responsibility of the depositor to check that the maturity date is acceptable.
|Mail Interest cheques
||This is the date that the institutions will mail out the interest payment to you. If you believe that there is insufficient time for you to bank the cheque or if you are unable to do so, you can have them direct the interest payment to your bank to have it paid directly into your account.
|Compounding option (s)
Compounding is a mathematical function. The more time a rate is compounded, the higher the return. It is the effective rate of return that is the deciding factor.
$100 at 10 per cent, compounding annually over 5 years equals a total return of 12.21 per cent.
First year: $100 with $10 interest - total after first year: $110
Second year: $110 with $11 interest - total after second year: $121
Third year: $121 with $12.10 interest - total after third year: $133.10
Fourth year: $133.10 with $13.31 interest - total after fourth year: $146.41
Fifth year (at maturity): 146.41 with $14.64 interest - total at maturity: $161.05
This figure is then divided between the five years with the $61.05 being the amount of interest earned over the term. The effective rate of return is therefore 12.21 per cent.
an investment instrument is transferable, the ownership of the certificate,
the principal amount and all future interest payments can be transferred
from one party to another. However, when a certificate is sold,
a Power of Attorney form is filed with the issuer, thus allowing the
ownership of the instrument to change hands. The seller would receive
interest up to settlement date (normally within 7 days) and the buyer
would pay all accrued interest to the seller.
||Simplistically, this feature allows the temporary change of ownership or a part interest, to a third party. For example, you wish to borrow some money and, using the certificate as collateral, you assign over the interest payment to your lender and/or a share in the certificate. For the assignment to be binding, the issuer of the certificate must register the name of the person that the assignment is to, on the books of the corporation.
|Redeemable / redemption penalty
||Some Institutions will allow full or partial redemption on term deposits. For short term deposits that are redeemed prior to 30 days, no interest is paid thereafter and an interest rate adjustment may occur. Redemption penalties differ between institutions therefore it is best to inquire as to the method employed for redemption. Normally, it is the difference between the certificate rate and the then current rate for the remaining term of the note, plus fee.
|GICs cashable / Transferable upon death
||Upon the demise of the registered owner, the industry allows for early encashment. The investment is also transferable to the Estate. Under normal circumstances, the full principal and accrued interest is paid out.
The listed documentation is required in full or part by the issuer, allowing the change of ownership. Full release of this information is provided by Government or legal counsel
Normal documentation may include: birth certificate, letter of indemnity, Letters of Probate and copy of the Will.
||Most institutions do not charge for death related transfers.
||EFT = Electronic Funds Transfers
Notice:- Fiscal Agents Financial Services Group are not engaged in rendering tax, accounting or legal professional services or advice. The comments on this page are not intended, nor should they be relied upon, to replace specific professional advice. Before acting on material contained herein, readers should seek advice that is appropriate to their personal circumstances from a professional advisor.