Rigorous federal and provincial regulations have built Canadians a banking system that’s solid as a Bay St. sidewalk, most financial experts would contend.
Still, banks, trust companies and credit unions across the country gird their clients with complex deposit insurance plans that would help protect them should an unlikely failure occur.
Parking large amounts of money in banks and credit unions is more attractive now that interest rates on five-year GICs hover near 5%. So educating clients on whether or not that money is insured is important.
Eugene Chan, an investment coach with Meridian Credit Union in Toronto, said many customers are coming into his branches to ask specifically about deposit insurance options.
“I think it’s important for everyone to understand what’s covered and what’s not,” Chan said. “It should be one of the things advisors discuss with their clients.”
While Canadian banks are among the soundest in the world, nothing is ever certain, said Steve Nyvik, senior portfolio manager and financial planner with Lycos Asset Management Inc. in Vancouver.
And in a nod to the enduring risk of bank collapses, this year’s Nobel Prize in economics was awarded to a trio of American economists for decades-old work they did on financial panic and bank runs.
At a basic level, Canadian banks, trust companies and other federally regulated institutions insure deposit products — savings and chequing accounts, GICs and other term deposits, money orders and bank drafts, certified cheques and foreign currency — through the Canada Deposit Insurance Corp. (CDIC).
The CDIC insures deposit products held in eight account categories: single-name accounts, joint accounts, RRSPs, RRIFs, TFSAs, RESPs, RDSPs and deposits held in trust. The insurance covers up to $100,000 held in deposit products in each account – principal and interest combined.
For most credit unions, insurance coverage is through a provincial body and goes up to $250,000 for deposit products held in non-registered accounts. For deposit products held in registered accounts offered by a credit union anywhere in Canada, coverage is unlimited.
“You could have a billion dollars – it’s covered,” said Dave Schurman, chief strategy officer with Stoney Creek, Ont.-based FirstOntario Credit Union.
In Ontario, the Financial Services Regulatory Authority of Ontario has both regulatory and insurance duties over credit unions. Similar bodies exist in most other provinces, though they may offer differing coverage.
For example, in Manitoba, Saskatchewan, Alberta and British Columbia, coverage is unlimited on any type of qualified credit union account, while in Prince Edward Island, there’s a top payout of $125,000 on savings and chequing deposits.
The notable difference in the payouts offered at the banks and credit unions is due to the premiums each is willing to pay to their insurance bodies, Schurman said.
Mutual funds, stocks, bonds, ETFs and cryptocurrencies are not covered by deposit insurance, no matter which type of account they’re held in, Schurman said.
If mutual funds made up $60,000 of a $100,000 RRSP held at a Canadian bank, and the rest was held in a savings account, only $40,000 would be covered by CDIC, he said. However, $160,000 was held in an RRSP, with $100,000 in a savings account, all of that savings account would be insured.
However, the Canadian Investor Protection Fund offers $1 million in coverage on many types of investment vehicles held at dozens of the country’s top financial companies. (The coverage applies if a member of the fund goes insolvent, not if the investment loses money.)
CDIC spokesperson Brad Evenson said the agency’s $100,000 limits on interest and principal in any one of its eight covered account types can increase exponentially by spreading money between accounts, banks or family members.
“What everybody gets wrong is they say, ‘Well, there’s a $100,000 limit’,” Evenson said. “But if you had $100,000 in your own [bank account], that’s completely covered by CDIC. If you have a joint deposit [also], that’s covered to $100,000. If you have a TFSA [with a deposit product in it] that’s covered to $100,000. So you have $300,000 right there,” Evenson said.
CDIC coverage can expand accordingly if investors spread their money over each of the corporation’s eight, separately insured account types at a single bank. And that coverage can be further multiplied by investing in the same eight categories at different CIDC-covered banks.
Nyvik said it can make sense to split your investments up to maximize insurance in such fashion.
“It’s unlikely if you spread the money around a little bit that you should have any of your wealth exposed,” Nyvik said. “If you’re [invested in] all GICs, there are a number of big banks and trust companies, [so] there is no reason to stick your neck out unless you’re getting paid for the risk.”
But Schurman said the stability of Canada’s financial industry makes maximizing returns more sensible than boosting coverage.
“Financial institutions in Canada are among the safest in the world. So I don’t think Canadians really have much to worry about whether it’s a credit union or a bank,” he said. “So assuming that my money’s safe, then look at rates.”