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What is an GIC?
A GIC or Guarenteed Investment Certificate is a security issued by a bank or trust company, offered to the public in denominations of $500 or more for durations of one to seven or eight years at an interest rate higher than the rate paid on savings accounts. if the depositor dies before the maturity date, the full amount of principal and accured interest usually is paid to the deceased estate or to teh designated beneficiary, if the certificate is a registered Retirement savings plan.)
Current Rates
What are Market Linked GIC's?
A Market Linked GIC offers the growth potential is a diversified equity portfolio while ensuring 100% principal protection at maturity. It's structure allows a fixed return that is eligable for CDIC (Canadian Deposit Insurance Corp) insurance.
Market Linked GICs offer the best of both worlds – the security of a GIC and the higher return potential associated with an equity investment. This combination gives you peace of mind as your investment is positioned for growth while your principal is 100% protected.
Laddering your GIC's
Laddering is a strategy of investing in long-term GICs but staggering the maturity date, so that not all of your money is locked in for the same length of time. Laddering means dividing your money equally into GICs with terms of one through five years. Every year, you'll roll your maturing money into a new five-year certificate. If interest rates climb, you'll have a chance to buy in. If rates fall, you've only got limited exposure.
How are GIC's taxed?
For all the simplicity and safety of GICs, investors often pay little attention to the risk that their low interest earning investments may not preserve purchasing power over time. Interest rates on GICs are currently at low levels and, considering the impact of taxes and inflation on their investments, the real rates of returns
Read more: Let’s look at an example: William has $300,000 in a non-registered annual pay GIC yielding four per cent, and has a marginal tax rate of about 43%. We will assume inflation is at 2.3%:
GIC Income $300,000 X 4% $12,000
Taxes at 43% ($5,160)
Net Return $6,840
A net return of $6,840 is approximately 2.3%. With inflation at 2.3% or higher the ‘real return’ will be negative. Investors with long-term objectives need to understand that the safety of GICs can actually erode the real purchasing power of their investments. In many cases, investors requiring income to provide for their day-to-day expenditures will be forced to encroach on capital as the real returns will be insufficient to meet their needs.
Clients dependent on GICs as their sole investment vehicles need to consider diversifying a component of their investments into alternative types of securities to provide inflation protection, generate tax-effective income and to build long-term wealth.
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