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Tag: GIC

  • Annuity vs. GIC: What makes sense for retiring? – MoneySense

    Annuity vs. GIC: What makes sense for retiring? – MoneySense

    As you know, of course, annuities and GICs are not the same thing. An annuity provides a guaranteed income for life, or a set time period, and it can be purchased from insurance companies, agents and brokers. And a GIC is primarily a savings vehicle, which can be bought from banks, trust companies, credit unions and investment firms.

    In most cases, purchasing an annuity means exchanging your capital—a lump sum of money—for a lifetime payment that is similar to a pension. It’s a fixed, guaranteed income for life, with no more worries about interest rates, stock market crashes, running out of money, etc.

    On the other hand, purchasing an annuity means making a long-term commitment to an unknown future. And you will no longer have access to your original capital.

    Consider this example: If you want to buy a new car, you can’t go to the insurance company and ask for a little extra money. It’s not your money anymore.

    I’m guessing you’re thinking about GICs as an alternative because you’re aware of the longer-term risks associated with an annuity, and you may want to maintain control and flexibility over your money.

    A GIC can give you a guaranteed income over the length of the term and control of your capital; however, there is no guarantee on future interest rates or a lifetime income. You may also find it difficult to draw a monthly income from a GIC portfolio. This will prompt you to create a GIC ladder with different maturity dates so there is cash available when needed. The laddered approach may have an overall return that is less than the five-year return you are using to compare to an annuity.

    Think about the different ways you—and the world for that matter—may change in the next 25 years. Look at interest rates, inflation, your lifestyle and spending habits, and so on. Inflation is likely the biggest risk you’ll face when purchasing a life annuity.

    If you purchase a $100,000 annuity, what other financial resources do you now have? What will be coming to you in the future? What can you use to deal with any changes in your life? It’s important for you to know the answers to these questions.

    Allan Norman, MSc, CFP, CIM

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  • “Help! My RRSPs are all over the place” – MoneySense

    “Help! My RRSPs are all over the place” – MoneySense

    On the other hand, if you aren’t happy with any of these options, do some research, says Ulmer. “Talk to people who you think are financially savvy and ask them for referrals. Then consult with three different advisors to see what’s the best fit for you.”

    Approach the provider you want to transfer to—not from

    Thankfully, you don’t have to have a big meeting or emotional “break-up” conversation to initiate an RRSP transfer. Instead, contact the provider you want to transfer the funds to with the request to move over the specified accounts. They will need the names of the financial institutions where you have your other RRSPs and the account numbers to fill out the appropriate form (CRA T2033, Transfer Authorization for Registered Investments), which they will send to you to sign and return. Some providers even handle all of this online. “They’re in the business of increasing assets under management, so they want to make it easy to transfer your money to them,” says Trahair.

    Opt for “in kind” transfers, where possible

    The provider you’re going with will ask you if you want to move the assets over “in cash” (which means all your investment holdings will be sold before they are transferred) or “in kind” (which means all your investments go over exactly as is). Both Trahair and Ulmer say to transfer your investments in kind, so long as the receiving institution can hold those investments. (Some proprietary mutual funds, for example, may not be available to other providers.)

    There are a couple of reasons why experts prefer in-kind over in-cash transfers. First, the timing may not be in your favour. If, for example, you happen to liquidate your investments right after a downturn, that money could be out of the market for a few weeks before it gets transferred and reinvested and you could miss the market rebound. In other words, you could end up breaking the first rule of investing by selling low and buying high. Second, selling your investments could trigger “back-end” fees, as explained below.

    Be aware of possible deferred sales charges for “in cash” transfers

    Some investment funds incur deferred sales charges (DSC) if you sell them within a specified number of years (typically seven) from the date of purchase. Those fees can be quite hefty and really add up, so you’ll want to avoid them if at all possible. Find out if you have any DSC funds and, if so, what the redemption schedule is. If you’re beyond that period, you can sell your holdings with no strings attached. If not, you can sell up to 10% of the fund every year without paying the fee, says Trahair. 

    “An advisor should think to check for deferred sales charges when you transfer investments to them,” says Ulmer. Otherwise, it’s a red flag that they’re failing to protect clients from unnecessary fees.

    DSCs will be less of a concern in the future—Canadian regulators banned the sale of mutual funds with DSCs on June 1, 2022. However, the redemption schedules for any existing DSC mutual funds still apply.

    Ask about account closing fees

    Although there shouldn’t be any fees to transfer your RRSPs, you might need to pay $50 to $100 to close each old account. Make sure to ask the receiving institution if it will cover all or part of those fees. It may be willing to do so to gain your additional business.

    Tamar Satov

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  • How much money should I have saved by age 40? – MoneySense

    How much money should I have saved by age 40? – MoneySense

    All the while, you’ve got a serious case of FOMO every time you check social media—all those friends who are jetting off on lavish vacations, buying new cars and splurging on cottages. How are ordinary Canadians actually doing this? And how can you get ahead and save more?

    What’s the average savings for Canadians in their 30s? How much should they have saved?

    A lot of Canadians are managing to save, despite the above financial challenges and obligations. According to Statistics Canada’s 2019 figures (the most recent available), the average person under age 35 had saved $9,905 towards retirement (RRSPs only) and held $27,425 in non-pension financial assets. For Canadians aged 35 to 44, these numbers are $15,993 and $23,743, respectively.

    The table below shows the average savings for individuals and economic families, which Statistics Canada defines as “a group of two or more persons who live in the same dwelling and are related to each other by blood, marriage, common-law union, adoption or a foster relationship.” In 2019, the average household savings rate was 2.08%.

    Financial assets, non-pension No private pension assets, just RRSPs Private pension assets and RRSPs
    Individual under age 35 $27,425 $9,905 $25,263
    Economic family under age 35 $105,261 $140,662 $60,305
    Individual aged 35–44 $23,743 $15,993 $39,682
    Economic family aged 35–44 $131,017 $138,488 $399,771
    Source: Statistics Canada

    The pandemic had a positive effect on savings; the disposable income of the average Canadian rose by an additional $1,800 in 2020, according to the Bank of Canada. That meant most Canadians were able to save an average of $5,800 that year.

    Despite this pandemic silver lining, most Canadians aren’t saving enough for their age groups. When CIBC polled Canadians in 2019 on how much money they’d need in retirement, on average they guessed they would need $756,000. The actual amount you’ll need depends on many factors—to estimate your own number, check out CIBC’s retirement savings calculator.

    How to prioritize financial goals and obligations in your 30s

    With so much going on in your 30s, it can be very challenging to save when you have so much to pay for. After all, you may be carrying a lot of debt due to student loans, a car loan or a mortgage. In the third quarter of 2023, Canadians aged 26 to 35 owed an average of $17,159, and Canadians aged 36 to 45 owed $26,155, according to a report from Equifax.

    Maybe debt is less of a concern for you, but you’re saving for a big goal—like a down payment on a home—and you’re feeling the strain of a high interest rate and inflation. Perhaps you’d like to start a family, but you’re worried about the costs of raising a child. Or you’ve dabbled a bit in the stock market and want to make a few more investments.

    Whatever your situation, talking to a financial planner about your finances and your priorities can help you map out a customized financial plan that factors in your immediate goals—as well as long-term savings and retirement strategies. This might include focusing on paying off high-interest debt, putting aside money for a home, shopping around for life insurance and ensuring that you save each month.

    Anna Sharratt

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  • Making sense of the Bank of Canada interest rate decision on July 24, 2024 – MoneySense

    Making sense of the Bank of Canada interest rate decision on July 24, 2024 – MoneySense

    What is the Bank of Canada’s interest rate?

    This latest decrease brings the central bank’s rate—which sets the benchmark for Canada’s prime rate and variable-rate borrowing products—to 4.5%.

    Combined with last month’s decrease, the benchmark cost of borrowing in Canada is now down 0.5% and is at its lowest since May 2023.

    What does the rate cut mean? Will the interest rate cuts continue?

    In the immediate aftermath of today’s rate cut, Canada’s prime rate will decrease from 6.95% to 6.7%, with consumer lenders passing that discount onto their prime-based products, including variable mortgage rates and home equity lines of credit (HELOCs).

    While the outcome of today’s BoC announcement was expected—markets had priced in an 80% chance of a cut—the language in the central bank’s news release was surprisingly cheerful. The central bank usually keeps its cards close to its chest in terms of future cuts, but it wasn’t afraid to come across more dovish today, pointing to the progress made thus far on inflation.

    It noted its preferred Consumer Price Index (CPI) “core measures” (called the CPI trim and median) have both trended under 3% in the last few months. The BoC also suggested that inflation will settle around 2%—the target the central bank wants to see—by 2025.

    That translates to more cuts to come. The question now, though, is whether another quarter-point cut will come in September and/or December. And, of course, just how many more cuts will come in 2025. 

    Currently, analysts believe the BoC’s cutting cycle will bottom out at 3%, which would require another six quarter-point cuts. 

    Of course, the BoC maintains that future cuts will depend heavily on inflation, stating, “Monetary policy decisions will be guided by incoming information and our assessment of their implications for the inflation outlook.” That means the markets will be watching upcoming CPI reports like a hawk. 

    What does the BoC rate announcement mean to you?

    …if you’re a mortgage borrower

    Renewing or borrowing, this is good news for Canadian home owners.

    The impact on variable-rate mortgages

    If you’ve stuck it out this far with a variable mortgage rate, you’re being rewarded today. As a result of today’s rate cut, your mortgage rate and payment will lower in kind immediately, if you’re in an adjustable-rate mortgage. If you’ve got a variable mortgage rate with a fixed payment schedule, more of your payment will now go toward your principal mortgage balance, rather than servicing interest.

    Penelope Graham

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  • Making sense of the Bank of Canada interest rate decision on April 10, 2024 – MoneySense

    Making sense of the Bank of Canada interest rate decision on April 10, 2024 – MoneySense

    Sentiment around the interest rate decision 

    The rate hold was largely anticipated by markets and economists. Many hoped it to be the central bank’s last hold before pivoting to a cutting cycle (lowering the rate, finally). Optimism around this has grown following February’s inflation report, in which the Consumer Price Index (CPI) clocked in at 2.8%, which is within one percentage point of the BoC’s 2% target. 

    However, the BoC itself seems less enthusiastic about this prospect. 

    The tone and language used in the announcement by the BoC’s Governing Council (the team of economists setting the direction for Canadian interest rates) clearly stated that inflation risks remain too high for comfort. 

    Why is the BoC holding its rate?

    This is due to steep shelter and mortgage interest costs right now, which are the largest contributor to the CPI. However, the council did note that the core inflation metrics the BoC monitors (referred to as the median and trim) have improved slightly to 3%, with the three-month average moving lower. This is notable, and likely the clearest signal the central bank may be preparing to cut rates—but the BoC needs to see more of this trend before it’ll make a downward move.

    Is inflation still too high in Canada?

    “Based on the outlook, Governing Council decided to hold the policy rate at 5% and to continue to normalize the Bank’s balance sheet,” reads the BoC’s announcement. “While inflation is still too high and risks remain, CPI and core inflation have eased further in recent months. The Council will be looking for evidence that this downward momentum is sustained.”

    The BoC also updated its inflation forecast, expecting it to remain at 3% during the first half of 2024, fall below 2.5% in the last six months of the year, and finally dip under the 2% target in 2025.

    As this marks the BoC’s sixth consecutive hold, there hasn’t been a change to the prime rate since July 2023. That means the cost of borrowing has sat at a two-decade high for the last nine months—and that certainly has implications for all Canadians. Here’s how you may be impacted, whether you’re shopping for a mortgage, saving a nest egg, or making an investment decision.

    How the Bank of Canada’s interest rate affects you

    What the BoC’s rate hold means if you’re a mortgage borrower

    First and foremost: If you’re a variable mortgage holder, you are the most directly impacted by the BoC’s rate direction out of everyone on this list. This is because the pricing for variable products is based on a “prime plus or minus” method. For example, if your variable rate is “prime minus 0.50%,” your variable rate today would be 6.7% (7.2% – 0.50%).

    As a result of this most recent rate hold, today’s variable mortgage holders won’t see any change to their current mortgage payments; those with “adjustable” or “floating” rates will see the size of their monthly payments stay the same. Those with variable rates on a fixed payment schedule, meanwhile, won’t see any change to the amount of their payment that goes toward their principal loan. All variable-rate mortgage holders—and those with HELOCs, too—will continue to experience stability, though these Canadians may be frustrated that the BoC continues to be coy around future rate-cut timing.

    Penelope Graham

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  • Making sense of the Bank of Canada interest rate decision on March 6, 2024 – MoneySense

    Making sense of the Bank of Canada interest rate decision on March 6, 2024 – MoneySense

    As a result of the latest rate hold, the prime rate in Canada will remain at 7.2%. This might not seem like big news, but this is what lenders, from the Big Five Banks to other financial institutions, use to underpin their variable borrowing product pricing.

    That the BoC would stick to the status quo was widely expected by market analysts and economists. A lower-than-expected January 2024 inflation reading of 2.9% took further pressure off the central bank, allowing it to continue its wait-and-see approach on rates. And, while the year-end gross domestic product (GDP) report came in hot, with a 1% uptick in the fourth quarter of 2023, overall lacklustre economic performance has made a firm case for ending the rate hike cycle. 

    However, the Bank provided no hints as to how long this holding pattern will last. In its announcement, while acknowledging that inflation has solidly declined from its June 2022 peak of 8.1%, the consumer price index (CPI) remains stubbornly above its 2% average with the core measures in the 3% to 3.5% range. (The core measures strip out the most volatile items, like housing and food costs.)

    In its announcement accompanying the rate decision, the BoC’s Governing Council—the panel of economists who set the nation’s monetary policy—made it clear that until sustainable progress is made with the CPI, the Bank of Canada interest rate won’t be going anywhere.

    “The Council is still concerned about risks to the outlook for inflation, particularly the persistence in underlying inflation,” states the Bank’s rate announcement release. “[The] Governing Council wants to see further and sustained easing in core inflation and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth and corporate pricing behaviour.” 

    This fifth consecutive hold means key interest rates haven’t changed since September 2023. While that’s led to welcome stability for some, others are feeling the stagnancy. Here’s what the latest rate direction means for Canadians, depending on their financial interests.

    What the BoC rate hold means for mortgage borrowers

    Canadians with variable-rate mortgage terms are the most impacted group affected by the Bank of Canada interest rate hold. Their mortgage payments are based on the prime rate in Canada, as an extension of the overnight lending rate. 

    How the Bank of Canada’s interest rate affects you

    These borrowers in Canada have been walloped by the rate hiking cycle that took place between March 2022 and July 2023. Those with adjustable-rate variable mortgages—which have payments that fluctuate alongside the Bank’s rate moves—had payments soar by as much as 70%, according to the Bank’s own research. Those Canadians with fixed payment schedules, meanwhile, have seen the portion of their payment that goes toward their principal whittle smaller with every rate increase, with some Canadian borrowers even entering negative amortization on their mortgages.

    For all variable-rate borrowers, today’s rate stability offers some welcome relief, though they’re likely disappointed that the BoC didn’t offer a timeline as to when the rate will eventually decrease. And, Canadians shopping for the best mortgage rate, including those looking to renew, are also likely frustrated by the lack of movement. While variable rates remain frozen at last summer’s levels, fixed mortgage rates have seen some slight easing in recent months due to lowering bond yields.

    Penelope Graham

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  • When are TFSAs and RRSPs actually taxable? – MoneySense

    When are TFSAs and RRSPs actually taxable? – MoneySense

    TFSA day trading: Do you pay tax?

    Tax-free savings accounts (TFSAs) are mostly tax-free. When you buy and sell an investment for a profit, that is generally tax-free inside a TFSA, regardless of the type of investment. 

    One exception could be if you are day trading in your TFSA. If you are engaging in frequent trading activity, there is a risk your profits could become taxable as business income. For most long-term, buy-and-hold investors, this is not an issue. There’s no specific guideline about what constitutes day trading in your TFSA, but factors like the frequency of trades or the holding periods, for example, could indicate you are using the account this way.

    Taxes on U.S. stocks in a TFSA

    U.S. stocks held in a TFSA are subject to 15% withholding tax on U.S. dividend income. Withholding tax would apply to other foreign stocks held in a TFSA, with rates starting at 15%, depending on the country. Only Canadian stocks are not subject to withholding tax on their dividends inside a TFSA. 

    Does this mean you should only hold Canadian stocks in your TFSA? Not necessarily. If your TFSA is your primary investment account, or a big part of your overall investments, you may need to hold non-Canadian stocks to have proper diversification. If it is a small part of your overall portfolio, you may be able to have a bias towards Canadian stocks in your TFSA, but that may or may not be the best investment strategy depending on the value and type of your other investment accounts. Canada is a small part of the global stock market and has little exposure to sectors like technology and health care, so foreign stocks help diversify and can increase risk-adjusted returns. 

    Can you avoid foreign withholding tax by holding Canadian mutual funds or exchange traded funds (ETFs) in your TFSA, Tawheeda? Unfortunately, no. They, too, are subject to withholding tax on foreign dividend income, so even though you will not see withholding tax on your TFSA statement, the mutual fund or ETF itself would have withholding tax before receiving dividends from foreign stocks. 

    TFSA withdrawals are always tax-free. However, if you overcontribute to your TFSA, in excess of your TFSA limit, you may be subject to a monthly penalty tax, plus interest. A similar penalty applies if you overcontribute to your registered retirement savings plan (RRSP).

    When do you pay tax on an RRSP?

    When you buy and sell for a profit in your RRSP, the proceeds are not generally subject to tax. RRSPs are generally only taxable when you make withdrawals. Unlike your TFSA, business income treatment does not generally apply to day trading in your RRSP. One exception could be if you are trading non-qualified investments in your RRSP, which would be uncommon. Qualified RRSP investments include things like cash, guaranteed investment certifications (GICs), bonds, qualifying mortgages, stocks, mutual funds, ETFs, warrants and options, annuity contracts, gold and silver, and certain small business investments.

    How are dividends taxed in an RRSP?

    U.S. dividends may or may not have withholding tax in your RRSP, Tawheeda. If you own U.S. stocks directly in your RRSP, there will be no withholding tax. If you own U.S. stocks through a U.S. ETF, you will not have withholding tax, either. However, if you own U.S. stocks indirectly through a mutual fund or an ETF listed on a Canadian stock exchange, that mutual fund or ETF will be subject to U.S. withholding tax on any dividends before it receives them, even though you will not notice any withholding tax on the dividends or distributions you personally receive from the fund. You see, a Canadian mutual fund or ETF is itself considered a non-resident of the U.S., subject to 15% withholding tax. The account the fund is held in does not matter. The withholding tax will still apply.  

    Jason Heath, CFP

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  • Are GICs worth it for Canadian retirees? – MoneySense

    Are GICs worth it for Canadian retirees? – MoneySense

    In other words, during the near-zero interest rates that prevailed until recently, investors wanting real inflation-adjusted returns had almost no choice but to embrace stocks. (Read more about TINA and other investing acronyms).  

    GICs have a place in locking in some real-returns, especially if inflation tracks down further. But Raina says investing in bonds offer opportunities to lock in healthy coupon returns, with the prospect of higher capital appreciation opportunities if interest rates fall further, since bonds currently trade at a discount. The risk is the unknown: when interest rates will start falling. Based on what the Bank of Canada (BoC) announced in the fall, Raina feels that could be some time in 2024. (On Dec. 6, the BoC announced it was holding its target for the overnight rate at 5%, with the bank rate at 5.25% and deposit rate at 5%.)

    CFA Anita Bruinsma, of Clarity Personal Finance, is more enthusiastic about GICs for retirees in Canada. “I love GICs right now,” she says. “It’s a great time to use GICs.” For clients who need a portion of their money within the next three years, she says, “GICs are the best place for that money as long as they know they won’t need the money before maturity.”

    Other advisors may argue bond funds could have good returns in the coming years, if rates decline. However, “I would never make a bet either way,” Bruinsma says, “I think retirees looking for a balanced portfolio should still use bond ETFs and not entirely replace the bond component with GICs. However, I do think that allocating a portion of the bond slice to GICs would be a good idea, especially for more nervous/conservative people.” For Bruinsma’s clients with a medium-term time horizon, she recommends laddering GICs so they can be reinvested every year at whatever rates then prevail. 

    GICs vs HISAs

    An alternative is the HISA ETFs. (HISA is the high-interest savings accounts Small referred to above). HISA ETFs are paying a slightly lower yield than GICs and also do not guarantee the yield. “I also like this product but GICs win for the ability to lock in the rate,” says Bruinsma.

    When investing in a GIC may not make sense

    Another consideration is that GICs are relatively illiquid if you lock in your money for three, four or five years or any other term. “If you are uncertain if you will need those funds in the near future, you can look at a high interest savings account ETF like Horizon’s CASH,” says Matthew Ardrey, wealth advisor with Toronto-based TriDelta Financial. “This ETF is currently yielding 5.40% gross—less a 0.11% MER.”

    Apart from inflation, taxation is another reason for not being too overweight in GICs, especially in taxable portfolios. Even though GIC yields are now roughly similar to “bond-equivalent” dividend stocks (typically found in Canadian bank stocks, utilities and telcos), the latter are taxed less than interest income in non-registered accounts because of the dividend tax credit. In Ontario, dividend income is taxed at 39.34% versus 53.53% for interest income at the top rate in Ontario, according to Ardrey. This is why, personally, I still prefer locating GICs in TFSAs and registered retirement plans (RRSPs). 

    When GICs are right for retirees

    Ardrey says GICs can be a valuable diversifier when it’s difficult to find strong returns in both the stock and bond markets. “This is especially true for income investors who would often have more of a focus on dividend stocks.” Using iShares ETFs as market proxies, Ardrey cites the return of XDV as -0.54% YTD and XBB is 1.52% year to date (YTD). “Beside those numbers a 5%-plus return looks very attractive.”

    Jonathan Chevreau

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  • Will GIC rates keep going up in 2024? – MoneySense

    Will GIC rates keep going up in 2024? – MoneySense

    As a result of these rate hikes, the interest rates available on guaranteed investment certificates (GICs) have risen as well—leading to renewed interest from savers and investors. In fact, over the past 12 months, the average one-year Canadian GIC rate has shot up from 2% to 4.90%. As a result of this move-up in rates, even market-linked GICs—which offer a lower guaranteed interest rate because of higher potential gains linked to the stock market—are offering a minimum guaranteed rate over 2%, as of mid-December 2023.

    How high will GIC interest rates go?

    The interest rates you pay on various types of debt, like a mortgage or a line of credit, depends mainly on the benchmark rate set by the BoC. This, in turn, depends on the prevailing rate of inflation. Simply put, the higher inflation is in Canada, the higher the BoC’s benchmark rate, and the higher the interest rate you pay on your loans. On the bright side, a high-rate environment also offers high GIC interest rates—a boon for Canadian investors.

    When you buy a GIC, you lend money to a bank or other GIC issuer in exchange for a guaranteed amount of interest at the end of an agreed-upon period (such as one, two or five years). 

    We can’t predict future interest rates, but for now, here are some interest rates you can get on long-term non-redeemable GICs at Scotiabank as of mid-December 2023.

    Term Interest rate
    1-year 5%
    2-year 4.3%
    3-year 4.1%
    4-year 4.45%
    5-year 4.35%
    Rates are provided for information purposes only and are subject to change at any time.

    It’s notoriously tricky to pinpoint precisely where interest rates will go, but we can expect that GIC rates will remain relatively high as long as inflation persists in Canada. While inflation is down from the scary heights of 8% in June 2022, it’s still above the BoC’s target rate of 2%. So, rates may remain flat until we see significant cooling in the Canadian economy. This means that while GIC rates may not spike further, the current rates could persist for a while.

    GIC vs. high-interest savings account (HISA)

    Just as the rates for GICs are up, so are those offered on high-interest savings accounts (HISAs). As a result, Canadians are exploring HISAs and drawing comparisons between these and GICs to determine the better investment. While a HISA may be more flexible than a GIC, if you’re looking for higher guaranteed rates of return, GICs could be the way to go. For example, as of early December 2023, money held in a Scotiabank HISA for 360 days will offer you 2.55% to 2.65%.

      HISA Cashable GIC Non-redeemable GIC
    Term 360 days 1 year 1 year
    Interest rate 2.55% to 2.65% 2.85% 5%
    Rates are provided for information purposes only and are subject to change at any time.

    Choosing a GIC

    If you’re considering investing in a GIC, here are the various types on offer:

    • Non-redeemable GICs: You buy a GIC for a set period (called the “term”), with a fixed and guaranteed annual interest rate. At the end of the term, you get your principal back, along with the interest earned. These GICs cannot be cashed in prematurely.
    • Cashable GICs: Unlike non-redeemable GICs, cashable GICs can be cashed in prematurely—before the term of the GIC is complete. You must hold this GIC for at least 30 days, and you can keep the interest earned up to the date you redeem it.
    • Personable redeemable GICs: At Scotiabank, these GICs are currently available for a two-year term. They offer a higher rate of interest than a cashable GIC, and they can be redeemed early, either partially or fully.
    • Market-linked GICs: Market-linked GICs offer investors the safety of traditional GICs and the potential to earn higher returns linked to the stock market. Like a conventional GIC, your principal is protected, and you get a minimum guaranteed interest rate (though it is typically lower than for other GIC types). Additionally, the GIC is linked to a major U.S. or Canadian stock market index—such as the S&P 500 or the S&P/TSX 60. For example, if the index rises 8%, you will get 8% on your GIC instead of the minimum guaranteed rate of about 2.4%.

    Market-linked GICs: pros and cons

    Before you buy a market-linked GIC, here are some points to consider:

    Aditya Nain

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  • What is a cashable GIC? – MoneySense

    What is a cashable GIC? – MoneySense

    How cashable GICs work

    Traditionally, GICs offer Canadian investors three core benefits:

    • Principal protection to ensure your money remains safely invested
    • A guaranteed interest rate to ensure you get a fixed return on your investment
    • Canada Deposit Insurance Corporation (CDIC) coverage of up to $100,000 per depositor (in the event of bank insolvency), subject to CDIC rules and regulations

    In addition to these three core benefits, a cashable GIC offers investors the option of getting their money back even before the term of the GIC has ended, if they so choose. For example, as of Dec. 14, 2023, you could buy a one-year cashable GIC from Scotiabank at an interest rate of 2.85%. If you need your money back sooner than anticipated, you can redeem the GIC. There is no interest penalty for cashing out early—so you will get the interest earned to date—but you must hold the GIC for at least 30 days before you can do so. Cashable or redeemable GICs offer investors great flexibility but note that banks typically offer higher rates for non-redeemable GICs—currently even 5% for a one-year GIC, as shown in the table below.

    1-year non-redeemable
    GIC
    (paid annually)    		 1-year non-redeemable
    GIC
    (paid semi-annually)    		 1-year cashable GIC
    (paid at maturity)
    Interest rate 5% 4.92% 2.85%
    Redeemable early No No Yes
    Eligible for registered accounts Yes Yes Yes
    CDIC-eligible Yes Yes Yes
    Rates are provided for information purposes only and are subject to change at any time.

    Are cashable GICs a good investment?

    Here are some reasons why cashable GICs may be a good investment:

    • They’re eligible for non-registered and registered investment accounts, including registered education savings plans (RESPs), registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs), registered disability savings plans (RDSPs), first home savings accounts (FHSAs) and tax-free savings accounts (TFSA).
    • They can be used for tax planning—for example, by buying a GIC in an RRSP account to get a tax deduction, or by holding a GIC in an FHSA to get a deduction and tax-free growth—as long the money is eventually used towards buying a first home.
    • They are flexible—giving investors the option of fully or partially redeeming their investment, depending on the type of product chosen.
    • These GICs have a low minimum investment amount of $500 and no investment fees—making them accessible to smaller and newer investors.
    • Cashable GICs are eligible for CDIC protection, up to $100,000 per depositor, at CDIC member institutions.

    Given these benefits, a cashable GIC may be suitable for an investor who wants to combine the benefits of traditional GICs—like principal protection and a guaranteed interest rate—with the flexibility of cashing out anytime. (Note, however, that if you redeem within 30 days of the GIC’s issuance, you will forfeit the accumulated interest.)

    If you’re saving up to buy a car or a home, for example, GICs are a safe and reliable way to grow your money and access it when you need it.

    Can I transfer my GIC?

    Canadians are accustomed to transferring their investments from one institution to another if needed—say, from one bank to another. However, unlike mutual funds, exchange-traded funds (ETFs) and stocks, GICs typically cannot be transferred. This is because a GIC is a contract between you and the institution, and each institution offers its own GIC interest rates, terms and conditions. So, if you’re buying a GIC, be prepared to hold it at the financial institution where you bought it. If you have a cashable GIC and you need to move your investments to another institution, you could cash in the GIC and reinvest the cash in a GIC at the new institution.

    How to buy Scotiabank cashable GICs

    If the ability to access your cash early is what you need, here are two options available through Scotiabank:

    Cashable GIC Personal redeemable GIC
    Minimum investment amount $500 $500
    Term 1 year 2 years
    Annual interest rate 2.85% 4.75%
    Partially or fully redeemable Fully or partially Fully or partially
    Investment fees No No
    Principal protection Yes Yes
    Guaranteed interest rate Yes Yes
    Eligible for registered accounts Yes Yes
    CDIC-eligible Yes Yes
    Rates are provided for information purposes only and are subject to change at any time.

    How do you buy a cashable GIC?

    Cashable GICs are typically available wherever you buy your other GICs. For example, you can purchase Scotiabank GICs, including cashable/redeemable GICs, through a Scotiabank advisor. Book an appointment with an advisor online or by phone. Read more about Scotiabank GICs.

    Aditya Nain

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  • What is a market-linked GIC? – MoneySense

    What is a market-linked GIC? – MoneySense

    If you like the safety of GICs but also want exposure to the stock market, there’s a type of investment for that: market-linked GICs. These investments guarantee the return of your principal along with a minimum interest rate, while also providing limited exposure to stock market movements.

    How market-linked GICs work

    Unlike a traditional GIC, a market-linked GIC is tied to a particular stock market index—like the Canadian S&P/TSX 60 or the American S&P 500. This gives investors an opportunity to benefit from market gains to a limited extent. We say “limited” because even if the S&P 500 index gains 50% over a three-year period, a GIC linked to that index may limit your gains to, say, 35%.

    Any gain isn’t guaranteed, as no one can predict what the markets will do, but the potential upside is there—and your principal is protected regardless of what the stock market does.

    Of course, you can invest in the stock market by buying individual shares, mutual funds and exchange-traded funds (ETFs). Unlike these, however, a market-linked GIC ensures that you won’t lose any of your principal if there’s a market downturn. Market-linked GICs offer:

    • A guaranteed minimum rate of interest
    • Canada Deposit Insurance Corporation (CDIC) coverage of the GIC’s principal and interest, up to $100,000, in case of a bank failure, if the GIC issuer is a CDIC member institution

    Additionally, there is no fee to invest in a market-linked GIC or other types of GICs.

    How do market-linked GICs and ETFs compare?

    Consider this comparison of a traditional Scotiabank three-year non-redeemable GIC with Scotiabank’s US Tracker Index ETF (SITU) and Scotiabank’s three-year market-linked GIC—both tied to the S&P 500 index. (GIC rates current as of Nov. 20, 2023.)

    Term Minimum guaranteed interest rate Maximum full-term return Principal guarantee Linked index Fee
    Traditional GIC 3 years 4.1% Not applicable Yes None None
    Market-linked GIC 3 years 2.44% Limited to 35% Yes S&P 500 None
    Scotiabank ETF (SITU) None None Matches the index without limit No S&P 500 0.08%

    Are market-linked GICs a good investment?

    Market-linked GICs have several things going for them:

    • They’re eligible for both non-registered and registered investment accounts, including the registered education savings plan (RESP), registered retirement savings plan (RRSP), registered retirement income fund (RRIF), tax-free savings account (TFSA) and registered disability savings plan (RDSP).
    • They have a low minimum investment amount—as low as $500, in the case of Scotiabank’s GICs.
    • Market-linked GICs are eligible for CDIC protection, up to $100,000 per depositor, at CDIC member institutions.

    Are market-linked GICs right for you?

    Like all investments, a market-linked GIC could be a good investment if it aligns with your financial situation, financial goals, risk profile and investment time horizon. Typically, these GICs could suit Canadian investors who:

    Aditya Nain

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  • What to expect for GICs in 2024 – MoneySense

    What to expect for GICs in 2024 – MoneySense

    The point? If a GIC investor is looking to lock in a good long-term interest rate, they may want to consider some bond exposure as well to diversify. If rates do in fact fall, bonds could do very well.

    Regardless, for a conservative investor, earning a return in the 6% range from a GIC is pretty enticing.

    Tax paid on GIC returns in 2024

    If you’re buying a GIC or bond in a tax-sheltered account, the tax implications do not matter. Interest income in a registered retirement savings plan (RRSP) or tax-free savings account (TFSA) is tax-free, although RRSP withdrawals are eventually taxable.

    If you are considering a GIC in a taxable account like a personal non-registered account or a corporate investment account, tax is a factor.

    If an Ontario investor with $100,000 of income earns a dollar of interest income, they pay a marginal tax rate on that dollar of about 31%. So, buying a 6% GIC leaves only about 4.1% after tax.

    If that same investor bought Canadian stocks and earned a 6% return with 2% from dividends and 4% from capital gains, selling after a year, the tax would be less. The tax rate on the dividend income would be about 9% and on the capital gain would be about 16%. The after-tax return would be about 5.2%, over 1% higher than the GIC investor earning the same 6%.

    Depending on the dollar value of the GIC or stock, the income could push the investor into a higher tax bracket than the marginal rates referenced above, but the outcome would be similar, with stocks being more tax efficient. The tax savings for stocks over GICs would also apply in other provinces.

    As a result, a stock investor could earn a lower rate of return than a GIC investor in a taxable account and still keep more of their after-tax return. Stocks generally return more than GICs or bonds over the long run, despite the year to year volatility. This is an important consideration for a GIC investor when tax is considered. After all, it is your after-tax return that really matters.

    Jason Heath, CFP

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