What Is A GIC (Guaranteed Investment Certificate)?

What Is A GIC (Guaranteed Investment Certificate)?

First Published: September 13, 2009 ADawnJournal.com

GICs are investment product (like mutual funds, bonds) that guarantees you to protect your principle (the amount you put in) with a guaranteed income for a particular period of time.

How Do GICs Work?

When you buy GICs, you are lending your money to the financial institution at a fixed or a variable interest rate, or based on a pre-determined formula (or arrangements) for a certain period of time. In return, at the end of the term, financial institution is giving you back the money you originally invested (called principle or capital) plus the interest you earned.

How Many Types Of GICs Are There?

Financial institutions will try to confuse you by giving many fancy names for their GICs. However, there are mainly two types of GICs. The first type pays fixed interest rate, and the second type pays variable interest rate. The second type can be linked to an index, a stock market, or a prime interest rate to pay you variable interest rate. Now let’s look at some other common terms institutions use:

Cashable GICs – You can cash it any times based on the terms provided by financial institutions. This may also be known as Redeemable GICs.

Non-Redeemable GICs – You won’t be able to redeem it until your GIC matures.

Index-Linked GICs – GICs that are linked to stock markets. This may also be known as Market-Linked GICs.

Where Can I Buy GIC?

Various financial institutions sell GICs such as banks, credit unions, discount brokerages, and other financial institutions. Also, your financial advisors are able to sell GICs through the institutions they are affiliated with.

Advantages of GICs

Here are the main advantages of GICs:

Principle Protection: Depending on what you buy, money invested in GICs can be safe and secure. At the end of the term, you will get back your capital you original invested. However, if you have security in your mind, it is recommended that you talk to a qualified financial professional.

Safe Parking: If you are not sure where to invest your money for the long term, you can park your money in short-term GICS while you can search for other options.

Higher Interest: GIC pays higher interest than traditional savings account.

CDIC Protection: Some GICs offered by CDIC insured institutions are protected for up to $100,000. Talk to your financial institutions to investigate this further.

Easy and Simple: GICs are easy to understand and simple to manage. You don’t need to have an MBA to invest your money in GICS.

Disadvantages of GICs

Here are the main disadvantages of GICs:

Liquidity: GICs aren’t very liquid (easy to withdraw) when you need your money
right away. A high interest savings account offers better liquidity than
GICs in most cases. With a GIC, your money is tied up for a specific period of time, i.e.,
one to three years.

Interest Income: If held in a non-registered account, interest earned on a GIC is
is taxed at a higher rate, for example, taxed at your full marginal tax rate.

Don’t Forget Inflation: Let’s say your GIC is giving you 2% interest. And consider that the annual inflation rate is 3%. If you keep $100 in your GIC for one year, you should have $102 in your hands after one year, right? Well, yes, technically, but that $102 is less than you started with. Due to inflation, you need $103 to buy same goods you would have bought with $100 a year ago. So actually, you lost money-$1, to be exact. Yes, real rates of return GICs can be negative or lower than what you actually see.

Final Word

I am not a fan of GICs. In Invest Now: A Canadian’s Guide to Investing I have discussed how to invest without being a financial guru in non-GIC products such as mutual funds. If the idea of losing money makes you lose sleep and you absolutely can’t take the slightest risks, may be GICS are an option for you. Talk to a qualified financial professional – before making any decisions.

TFSA - No Need To Rush

TFSA or RRSP

First Published: December 10, 2008 ADawnJournal.com

Recently, an ADJ reader sent the following email:

Hi Dawn,
Been reading your blog for some time now and getting more and more interested in learning to handle my own finance.
I would like to know more details about the new Tax Free savings account and your take on this new thing and how we can use it best.
Thanks for your time!

Ms. ADJ Reader (Withholding name for privacy)

Today’s article is specially written for Ms. ADJ Reader and many other ADJ readers who are waiting eagerly to read ADJ article on TFSA.

What Is a Tax Free Savings Account?

TFSA is an account type where you can make contributions, grow your money (means you can earn interest or income), and take out money without paying any taxes.

Doesn’t It Sound Like an RRSP (Registered Retired Savings Plan)?

Kind of. However there are some major differences. Let’s look them one by one.

 

RRSP

TFSA

When you put money in an RRSP, you get tax slips to reduce your taxable income

contributions in a TFSA do not reduce your taxable income

When you take out money from an RRSP, you pay taxes on withdrawals and your withdrawal will be added to your income (it simply means you taxable income will be higher)

TFSA withdrawals are tax free

RRSP account has age limit (must be terminated by 71);

TFSA has no age limit

Once you put in money, your contribution room is used up. You will not be able to regain your contribution room back by taking out money

Amount withdrawn will create equal contribution room

Some TFSA Features

·   Canadians aged 18 and older can save up to $5000 a year.

·   Annual contribution limit will be indexed and will increase gradually.

·   Contributions will not be tax deductible but income and gains will not be taxed.

·   No taxes to pay when you withdraw money out of TFSA.

·   Income earned or withdrawals will not affect eligibility for Federal benefits such as Old Age Security, Canada Child Tax Credit, Guaranteed Income Supplement.

·   No taxes to pay when you withdraw money out of TFSA.

·   Unused room can be carried forward indefinitely.

·   TFSA account can hold same products like RRSP, such as GICs, stocks, mutual funds, and many more.

·   Upon death, your TFSA can be transferred to your spouse without tax implications.

·   Excess contributions will incur a monthly penalty tax of 1% – just like an RRSP.

TFSA Ideas

You have to be creative here. There are so many ways you can use a TFSA account. Here are some I can think of off the top of my head:

·   If you don’t have room in your RRSP account, use TFSA.

·   If you don’t have room in your RESP account, use TFSA.

·   Use TFSA for short-term savings.

·   Use TFSA for long-term savings.

·   Use TFSA to keep your emergency funds.

My Take

You should use TFSA to its full limits; however, I don’t see there is any need to rush. You will see bank ads and some personal finance blogs making it sound like you should jump into it right now – otherwise, you will miss the boat. This is simply not not the case. TFSA is not going anywhere and there is no need to rush. Take your time to draft your investment planning and strategies and then make full use of TFSA.

CI Financial's Unsolicited, Hostile Bid

CI Financial announced yesterday an unsolicited hostile offer to acquire all of DundeeWealth Inc for $20.25 per Dundee share. This offer follows the news last week that Dundee Wealth had reached a deal with Scotia Bank to sell Dundee Bank for $260 million and 18% of Dundee Wealth for $348 million (27.3 million shares at $12.76 each). Scotia’s offer represents a 5% premium to Dundee’s share while CI’s offer represents a 52% premium.

Not all CI’s bids were successful in the past. Let’s look at both successful and unsuccessful bids.

Successful Bids

CI bought the followings in the past:

1999 - BPI Financial Corporation

2002 - Spectrum Investment Management Limited

Clarica Diversico Ltd.

2003 - Assante Corporation

Synergy Asset Management Inc.

Skylon Capital Corp.

2004 - IQON Financial Management Inc.

Synera Financial Services Inc.

2007 - Rockwater Capital Corporation

Unsuccessful Bids

2000 - Mackenzie Financial Corporation

2005 - Clarington Corp.

Amvescap PLC(AIM/TRIMARK)

The major shareholder of Dundee Wealth is Dundee Corporation. Dundee Corporation owns 55% of the outstanding shares. Ned Goodman and his family created and still operate and control Dundee. It is unlikely that they would give up full control of Dundee Wealth (to CI) but they seem to be comfortable giving up 18% control to Scotia. I will be surprised if this bid turns out to be a successful bid for CI. Whether this bid becomes successful or not, one thing readers can be assured of is that this will not be the last bid attempted by CI Financial as CI has a history of making hostile (and friendly) bids for financial companies.

First Published: Sep 26, 2007