Rob Carrick: Don’t make this GIC buying mistake – it could limit your CDIC protection

For better or worse, pretty much everyone knows that Canada Deposit Insurance Corp. protects eligible deposits for up to $100,000.

There’s a case to be made that $100,000 is too low, but we’ll leave that alone for now. Instead, let’s focus on how that $100,000 ceiling can be misinterpreted in a way that can limit the amount of CDIC coverage you’d get if your bank failed.

CDIC is very clear that the $100,000 limit applies to principal and interest together. So if you invest $100,000 in a bank that fails, there is no guarantee that you get the interest you’re owed. The way around this is to reduce the principal of your investment to allow room for interest to be covered as well.

I asked deposit broker Mary Rygiel of Conservative Investors’ Services how she would approach things if a client wanted to invest $100,000 in a GIC at 5 per cent, which is available from deposit brokers and many banks for terms of one through five years. Here’s how she would treat investments for each of those terms:

• One year: Invest $95,200 in the GIC issuer with the best rate and the rest in the company with the second-best rate
• Two years: $90,500 in the issuer with the best rate, and the rest elsewhere
• Three years: $85,500 at the best rate, and the rest elsewhere
• Four years: $81,500 at the best rate, and the rest elsewhere
• Five years: $78,000 at the best rate, and the rest elsewhere

The general rule here is to not invest $100,000 in a GIC and expect full coverage in the unlikely event that your bank fails. Leave room for interest.

Something else to note with CDIC protection is the term “eligible accounts.” As you’ll find out if you try the CIDC coverage calculator, you could have $100,000 in coverage in multiple eligible accounts per member bank or trust company. Eligible accounts include a savings account or GIC in an account in your name, a joint account, a tax-free savings account, a registered retirement savings plan, a registered retirement income fund, a registered education savings plan and a registered disability savings plan. In other words, you get $100,000 coverage for each category.

CDIC members include the big banks and some alternative banks with competitive GIC rates, including EQ Bank, Oaken Financial, Motive Financial, motusbank and Peoples Trust. Other alternative banks are owned by credit unions, which have provincial deposit insurance plans with higher limits or unlimited coverage.