What is a Guaranteed Investment Certificate?

A guaranteed investment certificate, or GIC, is a method of saving money, available in Canada. The guarantee refers to the fact that the rate of return is fixed, though in some versions it can be variable and it is simply the conditions that are fixed. The guarantee does not refer to the certainty that the investor will get his money back, though a guarantee investment certificate will normally be backed by a government scheme in case the bank issuing the certificate fails.

The concept covered by a guaranteed investment certificate is known in other countries as a term deposit or a time deposit. It means that the money is deposited for a fixed period of time and then returned with the addition of an agreed rate of interest. In effect, the person taking out the guaranteed investment certificate is lending his money to a bank. Generally, the rate of interest earned will be more than on a deposit account, reflecting the fact that the money is tied up, but less than on investment products such as stocks, where there is more risk.

Most GICs simply offer a fixed rate of return. This will be agreed upon when the certificate is taken out and will usually vary, based on the amount invested, the duration of the fixed term, and prevailing interest rates for other forms of lending and investing. Some forms of GIC will repay at a variable rate of interest based on the performance of a designated stock market during the duration of the certificate. In most cases, these will be limited so that there is a maximum interest payment even if the designated performance outperforms this rate. Meanwhile, if the market has a negative rate of return, the saver will still get his money back in full, but of course will not earn any interest.

Banks will list whether a particular guaranteed investment certificate is registered or unregistered. This refers to its tax status regarding saving for retirement. With a registered GIC, the saver will be able to deduct the amount they pay into the scheme from his taxable income, up to fixed limits. He will also not have to pay tax on the growth in the money he put into the scheme until he withdraws the money. Many savers will simply reinvest the money from each GIC in a new GIC and then pay the tax upon retirement.

Most banks that issue GICs are covered by the Canada Deposit Insurance Corporation. This means that if the bank fails, the saver will recover the money he invested, but will not necessarily get any interest payments. This protection only covers GICs with fixed durations of five years or less.