A Guaranteed Investment Certificate or GIC is a Canadian investment that offers a guaranteed rate of return over a fixed period of time, most commonly issued by trust companies or banks. Due to its low risk profile, the return is generally less than other investments such as stocks, bonds, or mutual funds. It is similar to a time or term deposit as known in other countries.
GICs can be registered or non-registered, and come in many forms, from conventional term deposits to market investments. GIC’s regularly have lifespans of 6-month, 1-, 2-, 3-, 4-, 5- or 10-year terms. Usually, to own a GIC you must deposit at least $500.00. At maturity they can be cashed as taxable income or renewed for another term. For most GICs, if you withdraw money before the term is done, you will not be paid any interest and may even be required to pay a fee. Usually, regular term deposits for financial institutions carry an interest rate from 1-9% depending on the various factors, such as the length of the term and specified interest rates from the Bank of Canada.
However, other GICs such as Market Growth GICs or Market Stock-Indexed GICs have their interest rates determined by the rate of growth of a specific stock market (such as the TSX or S&P 500). For example; if the TSX has a market growth increase of 30% in 3 years, beginning at the same point in time the GIC was issued, the GIC will return with an interest of 30%. However, unlike other GICs there is always a possibility that the market could perform poorly, having even no growth at all, in which the interest rate could return at 0%. Just like regular GICs, Market Growth GICs are extremely low-risk; your capital is guaranteed to remain intact (though the purchasing power is not), even if the stock market shrinks. It should be noted, however, that all Market Growth GICs have a maximum return. For example; if the GIC has a maximum return of 25% over 3 years, and the TSX has a market growth increase of 30% in 3 years, the GIC will return with an interest rate of only 25%. Maximum returns will typically range from 7% to 15% per year, depending on the market in which the GIC is invested and the length of the investment term.
The guarantee for GICs is provided by the Canada Deposit Insurance Corporation.