Caution: CDIC covers cash deposits and not much else
The term “Registered Retirement Savings Plan” conjures up all sorts of visions of guarantees and “official” protection against loss. After all, it’s “registered,” isn’t it? Actually, investments held in your RRSP are no more or less protected or insured against bank defaults or swings in the market than any other kind of investment.
The “registration” part of the equation means only that the plan is registered with the government so that you will be eligible for certain tax benefits associated with contributions to RRSPs, and so the CRA can track your contribution limits and tax deductions. That’s it. On the other hand, certain assets held within your RRSP may indeed be individually covered by Canada Deposit Insurance or be otherwise guaranteed. To get an idea of what investments in your RRSP might be covered by certain types of insurance, you first need to know what qualifies as an RRSP investment.
Qualified RRSP investments
According to the Canada Revenue Agency the following are qualified RRSP investments.
Bonds. Federal, provincial, municipal government bonds are eligible. Bonds of publicly-traded companies are also qualified investments.
Exchange-listed securities. This encompasses common and preferred shares, exchange-traded funds, closed-end funds and other securities that are traded on designated stock exchanges in Canada or other countries. This also includes limited partnership units and royalty units. Canadian and U.S. stock exchanges are listed as designated exchanges. However, “over-the-counter” trading systems are not eligible.
Exchange-traded funds (ETFs). ETFs traded on designated stock exchanges are qualified RRSP investments.
Mutual funds. Canadian mutual funds are eligible – and there are thousands of these to choose from.
Options. Covered put and call options on qualified stocks are eligible as RRSP investments. Note, though, that I wouldn’t recommend options for everyone. These are specialized types of investment products, and can be quite risky if you don’t know exactly what you’re doing.
Money or cash deposits (including foreign currencies under certain circumstances).
GICs. Guaranteed Investment Certificates are, of course, qualified RRSP investments.
Other. Annuities, mortgages, certain shares of small business corporations and venture capital corporations can be put in an RRSP. You may also put money into investment grade gold and silver bullion, coins, and certificates. But again, I wouldn’t recommend rushing out and putting your RRSP retirement fund into precious metals or venture capital corporations, for example, without some pretty heavy-duty advice from a qualified adviser.
For more detail, check the CRA website.
What’s covered by deposit insurance?
Of these qualified assets, some may be eligible to be insured by the Canadian Deposit Insurance Corporation, a federal Crown corporation that protects deposits held at its member financial institutions. In case a CDIC member institution fails (it hasn’t happened for a long time, but it has happened), Canadian depositors are protected by insurance that covers eligible deposits up to $100,000 (principal and interest combined) per depositor. You don’t need to apply – your deposits are automatically covered.
Eligible deposits include cash held in savings and chequing accounts and term deposits (e.g., GICs) of up to five years’ maturity and not exceeding $100,000. 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. And 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.
Here’s the kicker, and where many people are a little hazy on the rules. CDIC insurance coverage does not extend to any other assets that may be held in your RRSP, 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.
The only other potential investment guarantees for assets held within an RRSP are those that have some type of internal insurance or guarantee specific to that product. For example, segregated funds and Principal Protected Notes may offer certain types of principal guarantees. But these have nothing to do with the RRSP or with any government agency like the CDIC.
© 2016 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.