Avoid GIC surprises

Derek Shevkenek - Jul 12, 2017

When you buy Guaranteed Investment Certificates (GICs) you are lending money to a financial institution or credit union. They guarantee to pay you a rate of interest, and to return your original deposit at the end of a term. They are considered low risk, low return investments.

In the May 31/17 CTVNews.ca story, “B.C. Investor fears $1 million at risk in GIC”, using money from a condo sale, Robert Binder purchased a Home Trust Company GIC through his advisor. Home Trust (a subsidiary of Home Capital Group) is under severe financial strain. Robert was shocked to discover only $100,000 of his GIC is guaranteed by the Canadian Deposit Insurance Corporation (CDIC) – a federal Crown corporation.
For full disclosure, you should know that some of my own clients also hold Home Trust GICs. However, long before this issue arose, our firm (and some others) had restricted Home Trust GIC purchases to the $100,000 CDIC guarantee limit. Why? One reason is that, relatively speaking, the credit rating of Home Capital Group was not as strong as other Canadian financial institutions.

In a 2011 column, I pointed out that if your GICs are with a Saskatchewan credit union, the provincially mandated Credit Union Deposit Guarantee Corporation (CUDGC) guarantees all qualified deposits without limit. In that column I also noted that 64% of credit unions were rated “low” risk, with 34% rated “moderate” risk as reported in the CUDGC 2010 Annual Report.
However, more recently the CUDGC 2016 Annual Report shows a reversal in risk ratings, with 24% of Credit Unions rated “low” risk, while 74% are rated “moderate” risk.
Bottom line, the strength of guarantee in any GIC is ultimately based on the credit-worthiness of the GIC issuer. And failing that, applicable CDIC or CUDGC deposit insurance.
Inquiry welcome at www.dereks.ca. Opinions are those of Derek Shevkenek and may not reflect those of BMO Nesbitt Burns Inc. The information and opinions contained herein have been compiled from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. BMO Nesbitt Burns Inc. is a Member - Canadian Investor Protection Fund. Member of the Investment Industry Regulatory Organization of Canada.