What Canada Deposit Insurance covers…and what it doesn’t
Are your savings safe? Given the recent run on deposits experienced by troubled Home Capital Group Inc., many people with large amounts of cash stashed in savings accounts, term deposits, and guaranteed investment certificates (GICs) at other Canadian financial institutions have become concerned about the security of their deposits. What’s covered by deposit insurance if your financial institution gets into trouble?
Home Capital Group Inc., Canada’s largest non-bank alternative mortgage lender, last week raised the possibility that it could no longer continue as a “going concern,” given the continuing withdrawal of deposits and the plunge in its share price.
Investor and depositor confidence in the lender has been badly shaken since an announcement by the Ontario Securities Commission back on April 19 alleging that the company and three of its directors had misled shareholders over information the OSC alleges the company falsified in its broker channel in 2014-15. The company says the allegations are without merit, and none of the allegations has been proven at an OSC hearing or in court.
After recently securing an emergency high-interest $2 billion line of credit from a consortium of lenders, the company is currently in active talks to sell part or all of its business to pay down the debt.
But what about deposits with other financial institutions? How safe is your money with mortgage companies, credit unions, and Canadian banks?
The fact is, Canadian banks have a reputation for being among the most prudent in the world – for example, they largely avoided the subprime mortgage crisis that very nearly brought down the banking systems in the U.S. and Europe. Smaller Canadian financial institutions are also typically financially sound, and failures have been few and far between.
It’s rare that confidence is shaken by the allegations of a regulatory agency, particularly when the company itself has been in good financial condition, with a strong balance sheet and solid earnings, as was the case with Home Capital.
Too big to fail?
That’s not to say absolutely that a deposit-taking institution, large or small, won’t ever get into trouble, but it’s been highly unlikely in Canada. The Office of the Superintendent of Financial Institutions has in fact deemed Canada’s six big banks as “systemically important” to the Canadian financial system (i.e., too big to fail), and has required them to bolster their common equity tier one capital to, in effect, “keep more money in the bank” as a cushion against hard times. In addition, the banks and financial institutions generally are subject to even more oversight and reporting requirements.
Over and above that, Canadian depositors are protected by the Canadian Deposit Insurance Corporation against the failure of a member institution. This insurance covers eligible deposits at CDIC member institutions up to $100,000 (principal and interest combined) per depositor. You don’t need to apply – your deposits are automatically covered.
Which deposits are protected?
Eligible deposits include savings and chequing accounts, term deposits (e.g., GICs up to five years’ maturity), debentures issued to evidence deposits by CDIC member institutions (other than banks), money orders and bank drafts issued by CDIC members, and cheques certified by CDIC members.
Note that U.S. and foreign currency deposits, corporate and government bonds, notes and debentures, Treasury bills, Banker’s Acceptances, Principal Protected Notes, and mortgages, stocks, and mutual funds are not covered.
In addition, you can increase coverage, because the CDIC insures eligible deposits separately – savings in one name, joint savings, savings in trust, RRSPs, RRIFs, and TFSAs are all covered separately.
Where many people are a little hazy on the rules is in understanding that CDIC insurance coverage does not extend to any other assets that may be held in your RRSP or other registered accounts, including stocks, options, ETFs, mutual funds, U.S. and foreign currency deposits, corporate and government bonds, notes and debentures, Treasury bills, Banker’s Acceptances, certain index-linked and traded principal protected notes, and mortgages. None of these is covered by CDIC insurance. Only eligible deposits are covered.
If you have eligible deposits at different institutions, you’re covered up to the maximum at each institution. And, of course, in the case of married couples, if each spouse holds eligible deposits in their own name, each is also covered up to the $100,000 maximum per institution – something that may be of interest to high net worth individuals.
There’s a lot more to CDIC coverage than meets the eye. To find out more, visit the CDIC website, which includes a coverage calculator and a wealth of examples and illustrations. And, as always, if you have doubts about what’s covered – and whether your deposits are protected – talk to us. We’ll help ensure you get maximum coverage within your overall financial plan.
© 2017 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice. Securities mentioned are not guaranteed and carry risk of loss.