All GICs Are Not Created Equal

Given the performance of equity markets over the past year many people have decided to return to more secure investments such as a Guaranteed Investment Certificate (GIC). Even though we are currently experiencing historic lows in interest rates there are some who have decided it’s better to be safe rather than take any risk in the markets.

A recent survey of Canadian financial institutions told us that the rates quoted on a 5-year deposit were between 1.5 and 4%, and on a 1-year deposit were quoted between 0.1 and 3%. In a non-registered account, and depending on your taxable income, these deposits may be yielding a negative return after inflation. It is important to remember that guaranteed investments do carry a risk, that being purchasing power.

In the event you are deciding to invest in a GIC you should know that there are different institutions that have different features and benefits associated with guaranteed deposits. We will focus our discussion on insurance company and bank GICs.

Insurance and bank GICs are equal on a couple of fronts. Both offer guaranteed interest income with options for compound or simple interest and various options to draw interest income. Both have deposit insurance protection up to $100,000. Canada Deposit Insurance Corporation (CDIC) insures bank deposits for maturities up to 5-year terms, whereas Assuris will guarantee deposits for maturities up to 10-year terms. Therefore you have the option to lock in a rate for a much longer period of time with an insurance company.

Insurance company GICs include the ability to name a beneficiary, the person who will inherit your funds in the event of death. A bank GIC is automatically paid to your estate upon death. No other option is offered through banks. Bank GICs must pass through probate whereas insurance GICs with a named beneficiary will bypass probate and avoid probate fees, a saving of up to 1.5% in Ontario. Also, with a named beneficiary the proceeds are paid instantly without delay associated with the probate process.

Insurance company GICs allow for an additional tax break for those over age 65. Interest earned is deemed to be annuity income and eligible for the pension tax credit and pension splitting opportunities. Bank GICs do not allow for pension tax credits or income splitting.

Insurance company GICs with certain named beneficiaries offer protection against creditors. This option makes sense for self-employed individuals where bankruptcy is a possibility. However, do not expect creditor protection by shifting your assets to an insurance company in contemplation of bankruptcy. Courts are unlikely to uphold creditor protection in these circumstances. Bank GICs do not provide creditor protection and they are often the very entity that will go after the assets in the event of a bankruptcy, so it will most likely never become an option with banks.

It is evident that there are features and benefits worth considering before you decide where to park your money. Insurance company GICs are a life insurance product and are treated totally differently than those offered through the banks.

This is a monthly article on financial planning. Call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., of FundEX Investments with your topics of interest at 798-2421 or E-mail at rick@invested-interest.ca.