DIY investors get stuck on CDIC protection for their GICs

DIY investors get stuck on CDIC protection for their GICs

Misreading the rules of deposit insurance can deny some online investors full protection of the money they put into their secured investment certificates.

One of the advantages of buying SECs from an online broker is that you have a selection from many third-party issuers, including large banks and alternative banks. It is very possible that you will end up building a five year GIC ladder in your account with two different issuers for periods ranging from one year to five years.

Test question: If the five different GIC issuers are members of Canada Deposit Insurance Corp. What is the maximum amount of coverage you will get?

Answer: $100,000 in principal and combined interest for each of the five GICs.

Some recent reader inquiries about deposit insurance indicate there’s some confusion about how the $100,000 limit applies if you’re dealing with multiple GIC issuers within the same investment account, whether that’s an unregistered account, a tax-exempt savings account, or a registered retirement account.

You do not have to limit the total amount invested in all of your GICs from different issuers to $100,000 in principal interest. Each GIC in your account, provided it is from a different bank, gets its own limit of $100,000. “The GIC from Bank A in your TFSA will be covered separately from the GIC from Bank B that is also in your TFSA, for a total coverage of $200,000,” CDIC said in an email response to a question.

If you have ever used an online broker to buy GICs, you will know that a particular bank sometimes shows the highest prices for several different terms. In this case, you may need to accept a lower rate and go with a competitor for some terms to ensure that every GIC in your account is fully covered.

For example, HomeEquity Bank had the best three-, four-, and five-year rates on an online brokerage platform recently. You can choose HomeEquity for three years, then search for the next best rates for four and five years.

Right now, rates are competitive enough that there isn’t much of a gap between banks offering high rates. For example, HomeEquity Bank offered 4.73 percent for four years on the broker’s online GIC application page, with General Bank of Canada at 4.65 percent and Versabank at 4.6 percent. HomeEquity, Versbank, and General Bank are CDIC members.

– Rob Carrick, personal finance columnist

See also:

Rob Carrick: Why take on stock market risk if you can reach your goals with low-risk bonds and bonds?

Ian McGugan: What they won’t tell you about GICs

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