What Is a GIC in Canada? How Guaranteed Investment Certificates Work

Whether you're new to Canada or just looking for ways to save money, you might wonder what to do with your income. In Canada, there are plenty of options to choose from. From savings vs chequing accounts to stocks and everything in between, it’s often easy to overlook some of the “safer” investments like guaranteed investment certificates, also known as GICs.

The investment product doesn’t come with a flashy headline or the potential for unlimited returns. However, it offers something savers value, and that’s certainty. With GICs, you know how much you’ll earn and when you’ll receive it. Traditional GICs also ensure your original investment stays protected. In a world full of market volatility and short-term instability, these traits can make all the difference.

What is a guaranteed investment certificate?

A guaranteed investment certificate, commonly known as a GIC, is a fixed-term investment. It keeps your initial savings safe while allowing you to earn interest over a set period of time. This is because when you purchase a GIC from one of the biggest banks in Canada, you are essentially lending them money. In return, they pay you interest while giving back your full principal at the end of the term.

In Canada, banks vs credit unions, and even trust companies offer GICs with a variety of terms. According to TD, “GIC terms, or the amount of time you agree to invest, range from 30 days to 10 years.”

How GICs work in Canada

When you buy a GIC, you make several choices in the beginning, including:

• Investment amount. This is how much money you want to put into the GIC. Often called your principal, or initial investment.
• Term length. How long are you willing to lock in your funds?
• Investment structure. For example, do you want a fixed-rate GIC with a guaranteed return? Or are you looking for a variable or market-linked GIC where the proceeds depend on specific conditions?

Once you set these terms, they generally stay in place for the entire investment period of the GIC. There are some exceptions, though. For example, you can purchase a redeemable GIC which allows an early redemption option. But, even then, you will likely lose access to some or all of the interest. For most GICs, you cannot access the funds early. There are no prematurity withdrawals. This is why GICs work best for money that you are confident you will not need during the term.

Interest payments also depend on the product. Some GICs pay the entire interest amount at maturity, while others pay annually or, even, monthly. Regardless of the payout timing, the return stays predictable. You’ll know exactly what you will earn and when. It’s this level of certainty that appeals to some investors.

Types of GICs available in Canada

Canadian financial institutions offer several GIC options. Here are how the main types compare.

Fixed-rate GICs: This traditional GIC will pay the same interest rate for the entire term. It means you lock in your return on day one. It’s simple and predictable.

Variable-rate GICs: The interest rate moves over time with a variable GIC. It usually tracks the bank’s prime rate or another benchmark. Your return here can change, but the principal investment remains protected.

Cashable (redeemable) GICs: These allow early withdrawals after a minimum holding period. The trade-off for this flexibility is a lower interest rate compared to non-redeemable GICs.

Market-linked GICs: GICs in this category see their returns depend on the performance of a market index, like the S&P/TSX or the S&P500. With this investment, the principal is protected, but the total returns can be as low as zero.

Registered GICs: When you hold a GIC inside a registered plan, like a TFSA, RRSP, or RRIF, it can change how interest is taxed.

GIC interest payments explained (annual vs simple interest)

In Canada, you can receive payments on your GIC with annual compounding or simple interest. The choice matters much more than the headline rate because it impacts how much you actually take home at the end of the term. Some GICs pay interest annually or monthly. While others compound, earning you money on your interest as well.

Let’s look at an example. Suppose you invest $10,000 in a 3-year GIC that pays 4% with annual compounding. Here is how those payments work.

Year 1: earn $400 in interest ($10,000 initial investment x 4% annual interest)

Balance at end of year 1: $10,400 ($10,000 initial investment + $400 in interest)

Year 2: earn $416 in interest ($10,400 at the beginning of year 2 x 4% annual interest)

Balance at end of year 2: $10,816 ($10,400 investment at the beginning of year 2 + $416 in interest)

Year 3: earn $432.64 in interest ($10,816 at the beginning of year 3 x 4% annual interest)

Balance at maturity (end of year 3): $11,248.64 ($10,816 investment at the beginning of year 3 + $432.64 in interest)

Total interest earned: $1,248.64 ($400 in year 1 + $416 in year 2 + $432.64 in year 3)

Now, let’s consider that same GIC, but with simple interest, where the interest is calculated on the initial amount only.

Year 1: earn $400 in interest ($10,000 initial investment x 4% annual interest)

Balance at end of year 1: $10,400 ($10,000 initial investment + $400 in interest in year 1)

Year 2: earn $400 in interest ($10,000 initial investment x 4% annual interest)

Balance at end of year 2: $10,800 ($10,000 initial investment + $400 in interest in year 1 + $400 in interest in year 2)

Year 3: earn $400 in interest ($10,000 initial investment x 4% annual interest)

Balance at maturity (end of year 3): $11,200 ($10,000 initial investment + $400 in interest in year 1 + $400 in interest in year 2 + $400 in interest in year 3)

Total interest earned: $1,200 ($400 in year 1 + $400 in year 2 + $400 in year 3)

As you can see, there is a difference between the two outcomes. With annual compounding, you earn an additional $48.64. This is because each year’s interest stays invested and grows alongside your original principal. With simple interest, you earn the same amount every year as the calculation is based off of the initial amount only. The results mean smaller payments. The difference becomes even more pronounced when you choose a longer term or a higher investment amount.

If you are investing in a GIC, be sure you understand how it pays. These little details matter more than you might think.  

Pros and cons of GICs

Important note: Other types of GICs have different features, resulting in additional pros and cons.

When to invest in a GIC

GICs make the most sense when your priority is certainty, not growth. It works well for short to medium-term goals where you need the money. For example, in situations like buying a home, returning to school or planning a wedding or home renovation. In these cases, the goal of the GIC is to act as a temporary place to park cash while you wait for better opportunities. With a traditional GIC, your savings remain unexposed to market risk.