Monday, March 18, 2013

A Strategy for GIC Investors to Maintain Deposit Insurance

A common problem for GIC investors is to stay under the $100,000 limit for Canadian Deposit Insurance Corporation (CDIC) coverage in case a bank fails. This can involve the hassle of trying to maintain accounts at several different banks. I have a potential solution that also solves the side problem of having to fight with bank staff to get a decent interest rate.

The rules for what deposits are covered by CDIC can be tricky. Some writers just say that you’re covered up to $100,000 in each account, but this isn’t exactly right. For example, if you have two GICs in separate accounts both in your name in the same bank, they count together for the $100,000 limit.

Only banks that are CDIC members are covered. Further, as this CDIC web page explains, accounts that have the same owners at the same bank and holding the same type of deposits get lumped together for a total of $100,000 coverage. So, you can’t just set up several GIC accounts all in your own name at the same bank to get around the limit.

Knowing all this, many GIC investors have accounts at several banks. But dealing with several banks to negotiate GIC interest rates is a hassle that many investors would rather avoid.

One solution is to open an account at a discount brokerage that offers GICs from many different banks. As I write this, Investorline has access to GICs at 14 CDIC-covered banks. I assume other discount brokerages have similar offerings. On a 2-year cashable GIC, the Investorline list includes one bank offering 2%, two banks offering 1.95%, and another 1.9%. All these rates are better than the ones I last heard offered by a bank branch to a long-time customer.

Dealing with a discount brokerage isn’t for everyone, but if you’d rather poke away at your own computer in one account instead of going into the branches of multiple banks, this approach may be for you. A side benefit is that you’ll probably get better GIC interest rates.

10 comments:

  1. Hi Michael, Most of the major banks also provide multiple corporations to invest into to increase the CDIC coverage. For example Scotiabank has 4 different entities to invest under:

    The Bank of Nova Scotia
    Scotia Mortgage Corporation
    Montreal Trust Company of Canada
    National Trust Company

    so effectively you can get $400 000 in coverage per individual name.

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    1. @Anonymous: Do you know how easy it is for a retail GIC customer to walk into a bank branch and get GICs at all 4 entities? I haven't heard of anyone trying this, but it seems logical that the employees in a bank branch could help with this. Of course, you're still left with the problem of fighting with them to get a decent interest rate.

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  2. Hi Michael,

    I worked @ 2 of the Big 5 banks and it was very common to offer this as a solution to CDIC limits. I now work for a Credit Union so this isn't an issue anymore. You are right however that the rates at the Big 5 suck. The GIC client is not one they need or want in general terms (different funding sources used, older clients usually who don't borrow and have low cost banking fees).

    Cory P.

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    1. @Cory: The member of my extended family that I've helped the most with this problem has dealt with BNS and TD. Neither offered to spread around GICs to their member entities, but I suppose this family member didn't ask about CDIC limits either. Perhaps the experience differs from branch to branch or only customers who show concern are offered this solution.

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  3. It usually only comes up when someone is concerned about CDIC coverage, only a few advisors would bring it up on their own probably because they can't relate to the issue ;+)

    Here are the links at a few of the banks

    http://www.rbcroyalbank.com/products/depositregister/pdf/CDIC_Deposit_Register_E.pdf

    http://www.scotiabank.com/ca/en/0,,73,00.html

    http://www.tdcanadatrust.com/products-services/index.jsp

    https://www.cibc.com/ca/cibc-and-you/to-our-customers/dep-reg-info.html

    Couldn't locate for BMO. Most can cover through 3 or 4 corporations.

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    1. @Cory: Thanks for the information. For those who are intimidated by the idea of handling GICs in their own discount brokerage account, this is good information. Those who like the idea of handling their accounts from home instead of negotiating with branch staff can get access to higher interest rates.

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  4. One other point, discount brokerage accounts are covered up to 1M via CIPF insurance. So if you're invested in multiple GIC's, the DB account holding the GICS, are covered up to 1M if the brokerage goes under.

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    1. @Paul: Good Point. Even if you have more than a million dollars, the odds are very good that you won't suffer a loss as explained in this CIPF web page:

      http://www.cipf.ca/Public/CIPFCoverage/WhathappensifmyCIPFMemberisInsolvent/WhatifMyAccountHasAssetsExceeding1Million.aspx

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    2. Just for clarification, the 100k CDIC insurance would apply to the individual GICs, protecting you from the GIC provider from insolvency.

      The 1M CIPF coverage would protect you from the insolvency of the Discount Brokerage account where you hold the GICs. It doesn't change the 100k limit per GIC.

      One other point, CDIC only insures GICs with a maturity of 5 years or less. Anything longer than that isn't covered:

      http://www.cdic.ca/Coverage/TemDeposits/Pages/default.aspx

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  5. Another option that people often don't look into is credit unions. BC, Alberta, Saskatchewan, Manitoba have unlimited insurance. That means all deposits will be guaranteed. Also, New Brunswick, Nova Scotia, PEI, and Newfoundland have higher insurance up to $250,000. If you live in a province where you don't get to have these increased insurances, opening an account with the online credit unions from Manitoba (eg. Accelerate, Implicity, Hubert etc.) is a way to take advantage of this unlimited insurance coverage.

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