Unlocking Opportunity: The GIC Roll-Over Moment

Introduction

Guaranteed Investment Certificates (GICs) have long been a cornerstone of cautious investing in Canada. Synonymous with safety and reliability, they’re a go-to option for many who value certainty above all else. But is it time to rethink their role in your portfolio?

In this article, we’ll explore the history of GICs, their enduring appeal, and why now—amid stabilizing interest rates—might be the perfect moment to diversify beyond them.

The History of GICs

Let’s start with a bit of history.

GICs have been a financial staple in Canada for over 60 years. They rose to prominence in the 1960s and 1970s when banks began offering guaranteed returns to attract savers. For a generation shaped by the Great Depression and World War II, this guarantee was deeply appealing.

Their popularity peaked during the high-interest-rate era of the late 1970s and early 1980s, when GICs offered double-digit returns—some as high as 18%! At the time, they were a no-brainer for anyone looking to grow their money safely.

But GICs represented more than just numbers; they symbolized trust. Backed by financial institutions and insured by the Canada Deposit Insurance Corporation (CDIC) for up to $100,000 per issuer, they became almost synonymous with financial security. Even today, they remain a favorite for those seeking stability, particularly during uncertain times.

Why Do We Trust the Guarantees?

There’s a reason the word “guaranteed” holds so much power: it promises peace of mind. GICs provide a sense of control in an unpredictable financial world. With GICs, you know:

• Exactly what you’ll earn.
• Your principal is protected.
• You’re shielded from market volatility.

This reliability is especially comforting in turbulent economic periods, like the rate hikes of 2022 and 2023, which drove billions of dollars into GICs.

But here’s the trade-off: that safety often comes at the cost of potential higher returns elsewhere.

The State of GICs Today

Fast forward to 2024, and we’re in a very different interest rate environment. After soaring in 2022 and 2023, rates are stabilizing—and in some cases, dropping. For GIC holders, this means the golden era of high returns is winding down.

Consider this:

• GICs that paid 5% last year might now renew at 3.9% or less.
• Inflation can quietly erode those “guaranteed” returns.
• Other investments, such as bonds, dividend-paying stocks, or alternatives, are increasingly offering better yields and growth potential.

GICs aren’t inherently bad—they’re just one piece of a larger financial puzzle. As they mature, it’s an excellent time to reassess how your money is working for you.

Case Studies: Transitioning Beyond GICs

Here are two examples of how clients successfully reimagined their portfolios as their GICs matured:

Case 1: A retired couple in their 60s had $1,000,000 maturing from GICs and wanted to maintain their income levels without accepting lower rates. We transitioned their funds into a portfolio primarily composed of dividend-paying stocks, complemented by investment-grade bonds yielding nearly 5%. Not only are they enjoying steady income, but they also have the potential for long-term capital growth.

Case 2: A young professional with $200,000 in GICs sought better returns but was cautious about risk. We built a balanced portfolio of equities, fixed income, and alternatives. Her portfolio is now outperforming her previous GIC returns by 3% annually, while still aligning with her risk tolerance.

Tax Efficiency: A Critical Factor

When transitioning away from GICs, tax efficiency should play a key role in your strategy. GIC interest is fully taxable as regular income, often pushing investors into higher tax brackets. In contrast, other investment options can offer significant tax advantages:

1. Corporate Bonds Trading at a Discount: These bonds can provide a mix of interest income and capital gains. The latter is taxed at only 50% of your marginal tax rate, making them far more tax-efficient than GIC interest.
2. Canadian Dividends: Dividend-paying stocks benefit from the dividend tax credit, making them a tax-preferred option for non-registered accounts. This is especially true for Canadian companies with a history of growing dividends, which can also offer long-term capital appreciation.
3. Corporate Class Mutual Funds: For those with significant non-registered investments, corporate class mutual funds may be the most tax-efficient option. These funds are structured to minimize taxable distributions, allowing your investments to grow more efficiently over time.

By considering these alternatives, you can achieve better after-tax returns without compromising on stability or income.

The Takeaway

As your GICs mature, it’s worth asking: are you making the most of this roll-over moment? Or is your money sitting idle when it could be working harder for you?

Take the time to review your portfolio and explore options that balance safety with growth and tax efficiency. If you’re unsure where to begin, let’s discuss your goals and build a strategy that works for you.

For more insights like this, check out the Wealth Connection podcast on Spotify. It’s the perfect place to dive deeper into strategies for smarter investing and achieving your financial goals.