Guaranteed Investment Certificate – GIC

A Guaranteed Investment Certificate is popular Canadian investment vehicle issued by Canadian financial institutions – banks, credit unions and trust companies. In essence when you buy a Guaranteed Investment Certificate or simply GIC from financial institution you lend the financial institution money for a predetermined period of time.

Most GIC require a minimum investment, which can go as low as $500. When you buy guaranteed investment certificates you consent to remain invested in the GIC for certain period ranging from a few months to a few years. You will receive interest on your GIC, which is usually higher than the interest you will get on the average Canadian savings account. If you buy a guaranteed investment certificate with longer period, you will get higher interest rate in general.

If you need your money before the end of the GIC period, you might be penalized for cashing out. With most regular GIC investments you will have to pay penalty if you decide to take your money early. If want to avoid that, then it's better to choose a redeemable GIC, which you can cash without penalty. If you choose a redeemable GIC, keep in mind that it pays less interest than regular GIC.

Types of Guaranteed Investment Certificates

There are 2 main types of GIC, depending on the interest rate they are paying. The first type of GIC pays fixed interest rate for certain period. The second type of guaranteed investment certificate pays variable interest rate, which is tied to performance of an index or a stock market.

Buying Guaranteed Investment Certificates

You can buy GICs from any of the major Canadian banks and there is no transaction cost associated with buying GIC. If you sell the GIC the on maturity date (the end of the GIC term) there will be no cost associated with the transaction either. Different financial institutions offer different GIC, and if you plan to invest in this financial instrument, ask your bank for more details.

GIC Risk Level

Guaranteed investment certificates are considered low-risk investment, compared to stocks, bonds and mutual funds for example. However they usually provide low return (fixed rate GIC) or are more risky if the GIC interest rate is tied to an index. In general GIC are considered to be a conservative investment.

GIC Return Taxes

The interest rate you receive on money invested in GIC is taxable along with your personal income, which means that you will pay a lot of what you have earned in taxes. With the high real inflation rates in Canada, most likely you will be losing money by investing in GIC, if you take in account the inflation rate and the taxes you have to pay on the interest you have earned.