All you need to know about Guaranteed Investment Certificates (GICs) in Canada

Whether you’re moving to Canada as a permanent resident or as an international student, being able to sustain and support yourself is important. There are many financial products in Canada that can help you keep your money safe, grow your savings, and achieve your financial goals. 

A Guaranteed Investment Certificate (GIC) is one such financial product. In this article, we will deep-dive into GIC, learn about different types of GICs, understand how they work, and look at some of the benefits they offer. 

What is a Guaranteed Investment Certificate (GIC)?

In simple terms, a GIC is a low- to no-risk investment product sold by financial institutions. 

The financial institution guarantees your principal amount (initial money you invested), and even if the institution should fail, deposits are usually insured up to $100,000 CAD. GICs lock in your money for a predetermined amount of time – typically ranging from one month to ten years, with a fixed or variable interest rate. The interest rate is directly proportional to the time you choose, i.e. the longer the time, the higher the interest rate. Note that financial institutions also offer redeemable/cashable GICs that allow the holder to redeem or cash out their principal before maturity. Interest rates are typically lower on these types of GICs, compared to their non-redeemable counterparts. 

Here’s how a GIC differs from a regular savings account:

• Interest rates for a GIC do not fluctuate unless you have opted for one with variable interest. 
• GICs are typically non-redeemable/cashable (i.e. your money is locked in for the term you selected). Should you decide to break your non-redeemable GIC, you may be charged a penalty. 

How does a GIC work?

A GIC is like a savings account – you deposit money into it for a fixed term and earn interest on that money. Purchasing a GIC is very easy: you can simply approach a financial institution such as banks, credit unions, trust companies, and some brokerages and inquire about a GIC. 

Once you own a GIC, the interest is paid out to your savings account at regular intervals (payment frequency depends on the type of GIC), or it can be added to your initial investment and paid at maturity. When the investment term is over, and your GIC matures, you can choose to automatically invest in another GIC or have the earnings deposited into your savings account. 

Purchasing a GIC as an international student

International students applying for a study permit to Canada through the Student Direct Stream (SDS) are required to have a minimum GIC of $20,635 CAD (or $15,078 if you’ll be studying in Quebec) from a participating Canadian financial institution such as the Royal Bank of Canada (RBC). Having a GIC is optional if you’re applying through the general application process. 

How does the RBC international student GIC account work?

International students can fund their education in Canada through the purchase of a non-registered one-year non-redeemable GIC in the amount of $20,635 CAD (or $15,078 if you’ll be studying in Quebec). Scheduled payments are made to the student from the GIC at regular intervals. The amount from the GIC can help you cover living expenses during your course of study in Canada. 

Here’s an overview of the steps involved in opening a GIC account at RBC:

The student purchases the GIC in their home country. International students from China can find more details on the Chinese International Student GIC page. Students based in India can refer to the process below.

1. 1. If you qualify for a study permit under Canada’s Student Direct Stream (SDS) program, you can sign up online to be contacted by RBC. You will then receive an application package to purchase an RBC GIC. 
   2. Review the application package, gather required documents (passport and letter of acceptance from a Canadian institution), fill out, sign the forms, and submit the application via RBC’s Secure Email.
   3. Once the documents are confirmed to be in order, your investment account will be opened within three business days to hold your GIC and you will receive a confirmation email with detailed instructions on how to wire the required funds to RBC to purchase your GIC. 
   4. Your GIC Contribution Details Document (also referred to as Investment Confirmation) will be issued and sent to you by email (typically within three business days of RBC’s receipt of your funds). You can then use your GIC Contribution Details Document, along with any other required documents, to apply for your student permit.
   5. Once you have arrived in Canada, book an appointment at an RBC branch to complete mandatory identity verification, and to provide payment instructions for the personal deposit account into which you’d like the proceeds of your GIC to be deposited. You will need your passport and study permit for this appointment.
   6. Once you confirm your preferred account into which you’d like your GIC reimbursement payments deposited, your initial GIC will be redeemed for its full value (principal plus accrued interest) and an initial lump sum payment will be made to your designated account. The remaining balance will be invested in a new GIC in order to meet the requirements of the SDS program.
   7. This new GIC’s principal will be divided into 12 equal payments, and each payment (along with accrued interest) will be paid to you each month until funds are depleted in the 12th month.

Benefits of GIC

Some key benefits of GICs as an investment option include:

• Low-risk and predictable returns: When you purchase a GIC, you know exactly how much interest you’ll get and when to expect it. You’re also protected from interest shocks – even if the interest rates drop dramatically during the time period of your investment, you’ll still earn the same interest locked in at the time of purchase. 
• Principal amount is insured: Your initial investment in a GIC of up to $100,000 CAD is insured by the Canada Deposit Insurance Corporation (CIDC) or by a provincial insurance company.
• Good option for short- or mid-term financial goals: GICs are a good way to lock up some money for milestones such as down payment for a home, a child’s education, rainy day funds, or retirement planning. 

Types of GICs

GICs are an attractive investment option because it allows you to choose from a wide range of options, including product features, investment terms, interest payment frequencies and access to funds. Here are some basic types of GICs to be familiar with.

1. Guaranteed-return GICs

This type of GIC guarantees the interest rate and principal amount, so you don’t have to worry about changes in the markets or the economy. Guaranteed-return GICs allow you to invest in Registered Retirement Savings Plan (RRSP), Tax-Free Savings Account (TFSA), Registered Education Savings Plan (RESP), Registered Disability Savings Plan (RDSP), retirement plans such as Registered Retirement Income Fund (RRIF) or Life Income Fund (LIF), or foreign currency.

2. Interest rate-linked GICs

This type of GIC offers a variable interest rate that is linked to changes in the prime rate. Upon maturity, your principal amount is guaranteed. During your investment term, if the prime rate increases, your investment earns a higher interest rate. If the prime rate decreases, you can cash out your investment and reinvest in another financial product. 

3. Market-linked GICs

This type of GIC is tied to the stock market (such as the S&P 500 Index) or equity benchmarks. They guarantee your initial investment and may sometimes provide a small interest rate. Additionally, they may offer the possibility of earning a return that can beat inflation. Each market-linked GIC’s performance is tied to a different benchmark for a specified period of time. The returns you earn are calculated as a percentage of the benchmark’s posted gain, or are limited to a maximum amount – be sure to check which formula your GIC uses. If the benchmark incurs a loss or does not perform well, you will still get your initial investment back, but its purchasing power will have decreased.

Tip: Use the RBC GIC tool to find the right GIC plan for you based on your goal.

Financial products like GICs can be included in your broader investment portfolio to ensure it is diversified and well-balanced. Speaking with an investment advisor will help you understand options that are right for you and provide clarity on how you can start building your investment portfolio. With professional advice and the right resources, you’ll be better prepared to achieve your financial goals in Canada.