Know safety, no injury. No safety, know injury.
~ Author Unknown
This is another question that’s come up quite a bit lately and it’s pretty easy to answer. The safest place for your money is in a government guaranteed account. If you are Canadian, this means an insured account at a CDIC member institution.
OK, so it’s not quite that simple. There’s quite a bit that you should know about where and how the Canada Deposit Insurance Corporation protects your deposits. I’ll try to cover most of it here.
What’s Covered?
Note that the following list refers only to Canadian dollar accounts. If you have a U.S. dollar denominated account, it is not covered by the CDIC.
DepositTypes
- Savings and chequing accounts
- GICs or other term deposits, as long as the original term is 5 years or less
- Money orders, certified cheques, travelers’ cheques, and bank drafts issued by CDIC members
- Accounts that hold realty taxes on mortgaged properties
AccountTypes
- RRSPs: savings accounts, debentures issued by loan companies (not those issued by governments or corporations), and GICs with an original term of 5 years or less (in Canadian dollars at a CDIC member institution)
- RRIFs: same rules as for RRSPs
- TFSAs: same as for RRSPs and RRIFs
- Money held in trust for a beneficiary: savings or chequing accounts, GICs (5 years or less), money orders, travelers’ cheques, or bank drafts issued by CDIC members, or debentures issued by loan companies
CDIC Deposit Insurance Limits
Most Canadians are aware that the CDIC insures deposits up to $100 000. But that doesn’t mean the most you can ever have insured is $100 000. The following types of accounts are insured separately and you can have up to $100 000 insured in each of these for each CDIC member institution:
- Savings held in one name
- Savings held in more than one name
- Savings held in an RRSP
- Savings held in anRRIF
- Savings held in aTFSA
- Savings held for you in trust
- Accounts that hold realty taxes on mortgaged properties
So you can see that this can get a little more complicated than it looked at first. If you’re interested in where you stand with your own set of accounts, try out the great deposit insurance calculator on the CDIC website. It really helps you see how they decide what’s covered and what’s not. I’ve added it to the Calculators section on the right side of the site.
What’s Not Covered
Basically, anything not mentioned above is not covered. Deposits held in other currencies and those that go over the $100 000 limit for each account type and institution are not covered. Money in stocks, bonds, mutual funds, ETFs, money market funds, or T-Bills inside or outside registered accounts is not covered.
To be clear, losses due to market movements or the failure of a money market fund (unthinkable until recently) are not covered. The CIPF (Canadian Investor Protection Fund)insures against the failure of your brokerage up to a limit of $1 000 000, but this only covers losses due to the failure of the financial institution where your investments are located. It doesn’t cover losses on the investments themselves.
How Can You Use This Information?
The bottom line is that most of the investments that your broker or financial advisor sells you are not protected. It pays to periodically examine your risk level and decide whether it matches your risk tolerance. If you stayed in the markets all the way through the recent pummeling as well as the subsequent bounce, it might be a good time to rebalance.
Did you feel sick when the TSX fell by several hundred points at a time for days on end, or were you confident that your risk exposure was well-positioned given your time horizon? Did you wish you had just a little (or a lot) less equity exposure? If so, you can reduce your exposure now to a level that you think is more appropriate for you. What level is that? Really, only you can say. It depends on your time horizon, your ability to earn income, your personality, and a host of other factors.
Right now we have no equity or bond exposure, but that’s an extreme position. It’s based on our personal financial situation, which has been quite volatile lately, as well as my view that we have yet to fix the underlying causes of the financial crisis. That doesn’t mean a zero risk position is right for everyone. I only mention it to put it out there as a legitimate possibility. Don’t forget that most of these CDIC insured vehicles do not pay very much interest. Alas, that’s the price of safety.
What’s your safety margin right now? Are you feeling like getting back into the water, or are you still standing next to the life preserver?
