How Can A GIC Help Newcomers Meet Financial Goals in Canada?

This guide will explain what GICs are, how they work, and how to choose the right one for your needs as a newcomer to Canada.

Key Takeaways

• GICs are insured by the Canadian Deposit Insurance Corporation (CDIC) up to $100,000 per account.
• They offer predictable returns with fixed interest rates for the term of the GIC.
• GIC terms range from 30 days to 10 years, and the interest rates vary based on the type of GIC, the term length, and the financial institution.
• You can choose between fixed-rate, variable-rate, cashable, and non-cashable GICs.
• We hosted a webinar with our partner Scotiabank discussing how to build wealth as a newcomer. Watch it for detailed information about tax-advantaged accounts in Canada, including GICs.

What is a GIC?

A GIC is a type of investment offered by banks and financial institutions in Canada – often called a term deposit in other countries. When you buy a GIC, you deposit a set amount of money for a fixed period, called the term. In return, you get a guaranteed interest rate. When the term ends, you get your original investment back, plus the interest earned.

GICs are designed to offer safe, predictable returns, making them a good choice for people who prefer a steady, low-risk way to save, including those planning for long-term goals like retirement.

Types of GICs

There are different types of GICs, each with unique features:

• Fixed-Rate GICs: These offer a stable interest rate throughout the term, giving you predictability.
• Variable-Rate GICs: These rates change with the market, meaning they could go up or down.
• Cashable GICs: These let you withdraw your money early, but often with penalties or lower interest rates. This is useful if you need access to your funds sooner.
• Non-Cashable GICs: These offer higher interest rates but don’t allow early withdrawals without penalties, so they are better for people who can leave their money in place for the full term.

Choosing The Right GIC

The right type of GIC for you will depend on your goals. But, as a newcomer with likely a lot of financial goals, they can play an important role in your financial strategy. 

If you’re saving for something in the short-to-mid term (say 0-5 years), GICs are touted as a safer option than the stock market. The stock market typically offers higher returns than GICs, but it is also quite volatile – especially over a short timeframe. This means on a 5-year time horizon, you may not actually end up ahead by investing in the stock market vs putting the cash in a GIC. 

As a newcomer, you will likely be saving for a vehicle and/or a house or other goals that you want to hit within 5 years of landing in Canada. A cashable or non-cashable GIC can be part of your plan to do this. 

Helpfully, you can invest in GICs in your tax-advantaged accounts in Canada. So if you’re eligible for a TFSA, RRSP, or FHSA, you can open a GIC within those accounts and take advantage of those tax benefits.

When Might Newcomers Get a GIC in Canada?

GICs are a common choice for newcomers who want to grow their savings with low risk. Here are some situations where GICs might be a good fit:

• For International Students: GICs are often used as part of the Student Direct Stream (SDS) to meet the proof of funds requirement for a Canadian study permit. The money is released in installments to help cover living costs during your studies.
• Emergency Fund: A cashable GIC can be useful for an emergency fund. You can access your savings if needed without losing out on the interest. (Remember: It’s a good idea to build an emergency fund of 3-6 months.)
• For Short-Term Savings: Newcomers saving for goals like a down payment, vacation, or large purchase might use a GIC in a TFSA, FHSA, or RRSP. GICs offer stable returns and possible tax benefits within these accounts.
• Conservative Investment: GICs are a safe option for those who are unfamiliar with higher-risk investments like stocks and want to balance their portfolio with a stable choice. So, you may wish to take advantage of GICs in your early years in Canada while you learn more about the investment options. This essentially buys you time while you learn the ropes, so you don’t end up investing in something that’s unsafe or a scam. 

Advantages of GICs for Newcomers

GICs offer safety and security because they guarantee the return of your initial investment. This means that, regardless of market fluctuations, you won’t lose the money you put into the GIC. For newcomers who might not yet be familiar with the risks of other types of investments, such as stocks or mutual funds, this can provide peace of mind, as your savings are protected from market downturns.

Additionally, GICs come with predictable returns. When you invest in a GIC, you agree on a fixed interest rate, so you know exactly how much your investment will grow by the end of the term. This predictability makes it easier to plan your finances, especially if you’re saving for specific goals like a down payment, education, or an emergency fund.

If you hold your GIC in a registered account like a TFSA, RRSP, or FHSA, the interest earned can be either tax-free (in a TFSA) or tax-deferred (in an RRSP or FHSA). In a TFSA, any interest you earn on your GIC won’t be taxed, so you can withdraw your funds without worrying about losing some of it to taxes. In an RRSP or FHSA, the interest is tax-deferred, meaning you won’t pay taxes on the earnings until you withdraw the funds, typically in retirement when you may be in a lower tax bracket. This helps your money grow faster, as you aren’t losing any gains to taxes in the short term.

Disadvantages of GICs Newcomers Should Know

GICs might sound great up to this point – and they are a good tool for short term savings and balancing your risk within a broader portfolio. But they are not the answer for long-term savings for retirement – and they’re not suitable for every short term use either. Here are some disadvantages: 

• Low Returns: GICs usually offer lower returns compared to stocks or mutual funds.
• Limited Liquidity: If you withdraw your money early, you could face penalties or lose interest.
• Taxable Interest: If your GIC is in a non-registered account, any interest earned is taxable.
• Inflation Risk: The fixed interest rates may not keep up with inflation, reducing the buying power of your money.
• No Capital Growth: GICs don’t grow in value like stocks, so your returns are limited to the interest you earn.

Conclusion

GICs are a simple and safe way for you to build your savings in Canada to pave the way for a bright financial future. 

For more information to help you settle in Canada successfully, create a free Moving2Canada account.