Maximizing CDIC coverage
In 2005, conservative investors who appreciated the good old GIC had something to really celebrate. After 22 years, Canada Deposit Insurance Corporation (CDIC) raised the insured limit from $60,000 to $100,000. A large part of the reason for the change was due to the work of David Newman, president of Fiscal Agents in Oakville Ontario. In 2004, they started a petition asking GIC investors to lobby for a change to increase CDIC coverage. All the hard work finally paid off when the increase to $100,000 was announced in the 2005 Federal Budget.
What does CDIC cover?
Understanding your basic coverage is the start to a truly peace of mind investment strategy for GIC investors.
To be eligible for insurance, deposits must be in Canadian currency and payable in Canada. Term deposits must be repayable no later than five years from the date of deposit. CDIC covers savings and chequing accounts, term deposits, money orders and drafts, and travelers cheques. CDIC does not cover foreign currency, treasury bills or investments in stocks, bonds or mutual funds.
The next step if looking at more detailed strategies to maximize your CDIC coverage.
Tips to maximize CDIC coverage
- Multiple accounts. Lets say you have $700,000 invested in one institution. On the surface, most people would say this would not be insured even with the increase in CDIC limits. However, you can have a number of different accounts within the single institution and still be covered. Here’s an extreme example of a couple Jake and Jennifer:
- $100,000 – Jake’s personal non-RRSP GIC
- $100,000 – Jennifer’s personal non-RRSP GIC
- $100,000 – Jake and Jennifer’s joint non-RRSP GIC
- $100,000 – Jake’s RRSP GIC
- $100,000 – Jennifer’s RRSP GIC
- $100,000 – Jake’s RRIF GIC
- $100,000 – Jennifer’s RRIF GIC
In this example, although Jake and Jennifer have $700,000 within the same bank, the entire amount would be covered because each of these accounts would be covered separately for $100,000.
CDIC has a great Deposit Insurance Calculator on their website (www.cdic.ca) if you want to see if you are covered under multiple accounts.
- Multiple entities within a financial institution. Another solution would be to look at multiple entities within the same institution. Many banks have a number of different entities within the same firm. For example, with Scotia Bank you can place deposits with Scotia Bank, Scotia Trust, Scotia Mortgage, National Trust and Montreal Trust. In essence, Jake and Jennifer could invest up to $500,000 under the Scotia Bank umbrella and still be insured. If they also opened up multiple accounts, they could have literally millions of dollars invested in guaranteed investments and still be insured under these two strategies alone.
- Diversify by institution. There’s an old rule to investing that suggests you should never keep all your eggs in one basket. Although many GIC investors tend to work with one or two financial institutions for GICs out of convenience, astute GIC investors will tend to diversify by financial institution. Spread your GICs to different institutions for another layer of security.
- GIC laddering. In very simple terms, GIC laddering is a systematic, disciplined approach to investing in GICs without having to guess how long to invest each GIC. One example of a GIC ladder is the 5-year ladder. Say you have $100,000. The easy way is to divide the investment into 5 equal amounts of $20,000. The first $20,000 would be invested for 1 year, the second $20,000 for 2 years, and so on up to 5 years. After the initial set up, any maturing GICs would automatically be invested for five years. When investing larger sums of money greater than $100,000, each term could be put with a different institution to ensure that everything is covered under CDIC.
- Use a deposit broker. As you can see, CDIC coverage may look simple on the surface but it can be much more complicated with more money. Deposit brokers are specialist when it comes to GIC investing. Deposit brokers can help you shop among many different institutions to help you maximize your CDIC coverage. For a list of deposit brokers in Canada, you can visit the Federation of Canadian Independent Deposit Brokers (www.fcidb.com).
My two cents
As much as I appreciate guaranteed investing, true peace of mind comes in knowing that the company backing the guarantee is either stable, secure or insured. Understanding deposit insurance is essential for GIC investors. It simply gives that extra bit of comfort!