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GICs and Deposit Insurance: A Primer

The first word in a GIC is “guaranteed”. In other words, the financial institution that issues it promises to pay you back your principal, plus interest. It’s a legal liability for them, and it’s written into the contract when you buy a GIC. But what if the unthinkable happens and the financial institution goes under?

The good news is that there is second line of protection for your money: the government. The vast majority of GICs are backed by what’s known as deposit insurance. Deposit insurance kicks in if the financial institution cannot meet its obligations to you, and you would otherwise not get your money back.

Why does deposit insurance exist? 

To understand the rationale behind it, imagine that it did not exist (and there was a time when it did not). If a financial institution was perceived to be in trouble, savers would quickly withdraw their money, sending the institution into a financial panic. A working banking system requires confidence that people’s deposits are safe. So deposit insurance provides comfort that money won’t disappear if the financial institution does go under.

You may be thinking, “But I’ve not been paying my deposit insurance premiums! Am I covered?” Yes, unlike most kinds of insurance that you are covered by, with deposit insurance is automatic. It’s actually the banks and credit unions that pay into it to ensure its ongoing funding. (It’s their insurance, not yours!)

So who are your savings covered by, and how much is the coverage?

There are two different kinds of deposit insurance in Canada. The first, and most well know, is offered by the Canada Deposit Insurance Corporation (CDIC). CDIC is responsible for insuring the deposits of federally-regulated financial institutions (all the big banks + many other smaller lenders). Without knowing what it was, you might have seen a red CDIC sticker in the window of your bank; that’s there to show that deposits made there are backed by the federal government.

As listed on the CDIC website, deposits at member institutions are insured up to a maximum of $100,000 for each of the following:

  • savings held in one name
  • joint deposits (savings held in more than one name)
  • savings held in trust for another person
  • savings held in Registered Retirement Savings Plans (RRSPs)
  • savings held in Registered Retirement Income Funds (RRIFs)
  • savings held in Tax-Free Savings Accounts (TFSAs)
  • money held for paying realty taxes on mortgaged property

In other words, if you have $100,000 in a savings account and $100,000 in a TFSA GIC at a bank that goes bust, you will be covered for $200,000. But if you have a $120,000 GIC in a TFSA you will only be covered up to $100,000.

*Note that riskier investments, such as equity-linked GICs, are not at all insured.

If you don’t do your banking at a CDIC member institution, you should be covered by the Credit Union Deposit Insurance Corporation (CUDIC). Each province has its own CUDIC and the coverage does vary. For example, the BC CDUIC provides unlimited coverage (no maximum amount) of insurable deposits, whereas the PEI CDUIC only insures deposits up to $125,000.

How do you know if your financial institution is covered? We have a chart that breaks it down here. Or you can check out the website of either the CDIC or your provincial credit union insurance corporation. And remember: it’s better to be safe than sorry. There have been instances where smaller banks have claimed to be insured when in fact that they were not.


Flickr: Got Credit