Depositing your money in a bank account or as a guaranteed investment certificate (GIC), is probably the safest way to store cash while saving it for near-term spending. More comfortable than under your mattress. Less rodent-risk than in your walls or backyard. You can even earn some interest. However, that is still not totally risk-free. The bank or credit union lends your money out for profit. What happens if they go bankrupt? Or even rumors of trouble cause a bank run? Bank stability requires confidence in the bank’s security and stability. We have the Canada Deposit Insurance Corporation (CDIC) deposit insurance to help with that.
CDIC insurance applies to deposits and GICs issued by member banks and credit unions. The amount of coverage is also limited to $100K. That causes some people to consider using multiple banks and other strategies to fully insure larger amounts of money. However, that strategy introduces other risks. Take a deep dive into CDIC coverage and use that to consider your own strategy. I will also share my perspective.
Who’s Covered By CDIC Insurance?
Member Institutions
The major chartered Canadian Banks (CIBC, National, TD, RBC, BMO, Scotia) are all members. However, so are a wide range of credit unions and trust companies. The full list is here. Some regional credit unions will have deposit insurance provincially instead. For example, in Ontario there is FSRA deposit insurance and CUDIC in British Columbia.
The coverage is on a per-institution basis. For example, if you have $100K deposited at each of two different member banks, then the full $200K would be covered.
Different Depositors
CIDC deposit coverage is also additive for different account owners. For example, a single owner and an account with joint ownership each have $100K of coverage at the same bank. So, a household can potentially have several hundred thousand insured at the same bank for their regular bank accounts.
What’s Covered By CDIC Insurance?
Account Types vs Investment Products
A variety of account types and products are covered by CDIC insurance. Accounts are like the container in which you hold money or investments. Products are what are held inside the container. This is a common point of confusion because they are often sold as a bundle by banks. For example, an RRSP (account) bundled with their proprietary mutual funds (products). Some products can be held on their own. For example, a GIC.
Eligible Account Types
A wide variety of account types are eligible for CDIC coverage. Importantly, the $100K of coverage is per account type. So, you could have much more than $100K of coverage at one institution if you have a variety of different account types. I mentioned regular bank accounts (savings/chequing/HISA) already. They are lumped together as one account type.
Registered accounts have special rules for contributions, tax benefits, and can hold a variety of cash, cash equivalents, or more aggressive investment products. The amount of CDIC insurance can be additive between different account types as shown below.
Eligible Product or Financial Instrument Types
While the account type may qualify for CDIC coverage, it is important to know that only qualifying financial products or instruments held within that account are covered. For example, an RRSP account held at a member bank qualifies for CDIC coverage. However, only the cash, GICs, and term deposits held within it are covered. Stocks, bonds, ETFs, or mutual funds would not be covered.
This is a potentially important coverage gap. Proprietary mutual funds may not be covered unless they are held within the brokerage arm of the bank with CIPF coverage instead. Those funds usually have much higher fees that drag on performance, but this is another reason to avoid buying the bank’s bundle. Registered account contribution room is limited and extremely valuable if you can grow your money inside sheltered from tax. So, it is often best to use that space to invest in products with higher growth potential rather than mostly cash or GICs anyway.
In contrast, investments like mutual funds, ETFs, stocks, or bonds held at a brokerage, like Qtrade (what I use), Questrade, or the brokerage arm of whatever advisor you use will usually have CIPF insurance to cover the funds held. That is also a much larger amount ($1 million).
More on GIC CDIC Coverage
As I mentioned earlier, a GIC may be held on its own or in an investment account. When held on its own, the limit to CDIC coverage is determined by the owner. For example, if I have $75K in a savings account at a bank and a $50K GIC from that bank then only $100K of that is covered. If I have $75K in a joint savings account and $50K GIC in my individual name then $125K is covered.
When held by a brokerage, the GIC could be held in your name or it could be held “in trust” by the brokerage. Those are considered two different owners. So, there is potential to stack CDIC coverage within each account type. However, a GIC held in your name at a brokerage rather than “in trust” is not protected by CIPF.
Risks of Chasing CDIC Coverage
Questions about CDIC coverage usually come to me in the context of: “How do I make sure all of my cash is insured?” As you’ve probably figured out, even if you have hundreds of thousands of dollars in cash or GICs, you could stack coverage to have it all covered by CDIC insurance. You could stack by having joint & single owners, multiplied by several institutions. If holding cash or GIC in registered accounts at multiple institutions, that can also stack. However, this attempt to chase insurance has downsides.
Not Investing To Chase CDIC Coverage
First, don’t let CIDC coverage drive your savings and investing strategy. This may seem obvious to those who understand about investing. However, fear is powerful and people understand the safety of insurance and the simplicity of interest income. Concepts like long-term capital appreciation, compensated risk-taking, taxes, and inflation are more nebulous.
Using cash deposits or GICs is appropriate for money needed in the next few years. It ensures it is there when you need it. CDIC insurance adds to that security. However, in the long-term, the interest on GICs or savings is not much more than inflation. In recent decades, it has often been less than inflation- especially when you deduct tax paid on the interest.
Trailing inflation means losing buying power. If your horizon is longer than the next few years, invest for the long-term using more aggressive investment options. An all-in-one asset allocation ETF is a great way to do that. Plus, investing with a CIPF member brokerage has a million dollars of coverage without contorting yourself.
Effort & Complexity
The biggest risk from trying to cover a large sum of money with CDIC insurance comes from complexity. Having money spread amongst multiple banks means more effort to keep track of it.
You may forget about money in one location or have a harder time looking at your overall financial position. Many people think that will never be them. However, I have seen it happen to even organized people. One couple I know had a binder with their accounts listed in it. Ultimately, it became outdated and they missed several accounts and GICs. Fortunately, they were contacted when the accounts were becoming dormant.
A complex web of accounts becomes particularly challenging if the person who keeps track of it all develops a cognitive impairment or dies. That leaves their partner or family to try and put it all together. Multiple accounts can also come with more fees and costs. Those are usually minor. However, even minor costs are a waste for coverage that is extremely unlikely to be used.
The costs and hassle becomes greater if a couple uses individual plus joint accounts to spread money around for CDIC coverage. A joint account with rights of succession passes seamlessly to a surviving partner (except in Quebec).
Some individual registered accounts can be passed directly to a named beneficiary or successor holder. Otherwise, it becomes part of the deceased estate. Individually owned bank accounts become part of the estate. When this happens, it gets caught in probate. That may cause delays in accessing funds and add significant fees depending on the province. For example, in Ontario that could be up to 1.5% for probate plus executor costs.
My Perspective on Balancing Strategies
Consider a balanced approach for your situation. There are several variables that I use: the probability of loss, the risk of complexity, how much effort you are willing to put into it, and whether that effort detracts from other more important tasks. I wrote this post because people commonly ask about how to maximize their CDIC coverage with multiple accounts. However, we do not worry about it. I will explain why.
Our Current Approach
We currently don’t let CDIC insurance influence what we do. The risk of a bank failure is not zero. It is not hard to find examples of bank trouble. Silicon Valley Bank and Credit Suisse are recent examples. However, the Canadian banking landscape is pretty stringently regulated. More so than the US regional bank system. GICs and deposits at smaller credit unions or banks have some risk and I would respect the CDIC or regional insurance limits if I used one.
However, the odds of a major chartered Canadian bank boing belly-up are minuscule. Plus, if that did happen, would there really be financial safety from CDIC? It would take a large systemic shock for that to happen and it would likely affect multiple banks. The government & CDIC would probably be put in a precarious financial position to cover that level of catastrophe.
So, while not a risk of zero, this is not something that keeps me up at night. Nor would it motivate me to put in extra effort to spread my cash around for CDIC coverage purposes. Our financial lives are complex enough. We have a corporation and a joint personal bank account to manage our business and personal cash flows. We also have $CAD and $USD accounts because we like to spend on both sides of the border. Our efforts are much better put towards planning cashflow, and income-splitting strategies.
We also don’t have hundreds of thousands of dollars sitting around as cash. Instead, we just hold enough to cover our costs and some emergency buffer. The rest, we keep invested at a brokerage (Qtrade). Not only do we boost performance by saving on fees through DIY investing, but we also have CIPF coverage for our investment accounts. That is much more than CIDC coverage for bank deposits. So, none of this is even an issue for us at present.
Our Future Approach
Perhaps we’ll hold more cash when we are older. For example, we may use a GIC ladder to mitigate our sequence of return risk in early retirement. We could easily get our GICs at a different bank for each year of our ladder. However, that would require tracking which one is maturing at which bank. I am not sure if it is worth the effort or not. We’ll see.
Regardless, we would not likely continue that late into retirement. Our sequence risk would be low by then and our risk of cognitive impairment or errors will also be higher. We don’t want to leave our kids with a financial Easter egg hunt. They’ll have enough on their plates dealing with their crotchety old parents. Of course, we may also have hired a financial advisor at that point to avoid those errors and act as a neutral third party for the tail end of passing on our generational wealth. They’d be paid to deal with us and track our money. If we don’t use an advisor, we’d need to keep it simple.
As you mention, there is provincial coverage of some credit unions, instead of CDIC coverage. It used to be said that the coverage of Manitoba credit unions did not have the backing of the Manitoba government. This was unlike the coverage of credit unions outside Manitoba, where the provincial governments did back up their own provincial credit unions. I haven’t kept up on this, and the situation may have changed.
I’ve always worried about CIPF coverage. Is that, like CIDC, per account? Worth having multiply investment accounts at different institutions as opposed to one online brokerage? Thank you for you insights.