You place a substantial amount of trust in financial institutions to take care of your money, whether you have a chequing account that has just enough cash to pay the bills or a Registered Retirement Savings Plan account that you are using to create a retirement nest egg.
What happens if a financial institution fails for any reason? As a Canadian investor, you should put your savings in a financial institution that is eligible for deposit insurance.
In Canada, there are three primary ways to safeguard your capital in case your bank or investment dealer fails:
- Canadian Deposit Insurance Corporation (CDIC)
- Provincial deposit insurers
- Canadian Investor Protection Fund (CIPF)
The deposit insurance provided by each of these can protect your savings if the financial institution fails. As an investor, you don’t need to apply or pay for deposit insurance. They automatically insure your eligible deposits. However, there are differences in how CDIC, CIPF, and provincial deposit insurance work.
I’ll give you a breakdown of these insurance coverages to help you understand how they work and why they can be essential for you.
Canada Deposit Insurance Corporation
The CDIC is owned by the Canadian government. It insures your funds for up to $100,000 per eligible deposit category per financial institution. Deposit categories include non-registered funds, TFSAs, RRSPs, RRIFs, and more. In other words, for a given financial institution, you have separate coverage of up to $100,000 for each deposit category.
Most Canadian banks are members of the CDIC. Within each deposit category, CDIC covers term deposits, money orders and drafts, savings and chequing accounts, and travellers cheques. The CDIC also recently added USD deposits to what is eligible for coverage.
The CDIC has additional tools to help you understand what its insurance does and does not cover.
Note that CDIC coverage does not insure your deposits when it is a loss due to theft or fraud.
Quebec AMF
The federal deposit insurance protection is the same for all CDIC member institutions throughout Canada except in the province of Quebec. Quebec has its own insurance plan under the administration of l’Autorité des marchés financiers (AMF).
If a financial institution is covered by both AMF and the CDIC, deposits made in Quebec are insured by AMF. If the deposit is made outside of Quebec, then it will be insured by the CDIC.
The maximum collective coverage from both agencies cannot exceed $100,000 per depositor for each insured category per institution.
Provincial deposit insurance
Each of the ten provinces in Canada has a provincial deposit insurer that protects provincial credit unions:
Alberta, BC, Manitoba, and Saskatchewan provide unlimited coverage. All of the other provincial insurers — with the exception of Quebec — provide more than $100K coverage.
There have been cases where coverage by a particular financial institution has changed, such as when Coast Capital Savings converted from a BC credit union to a national bank. In that case, they outlined transitional coverage.
7 of the financial institutions on our high interest savings comparison chart are Manitoba credit unions, so let’s dig a bit deeper into the relevant coverage. As per the Deposit Guarantee Corporation of Manitoba (DGCM), they provide a “100% guarantee of all deposits in Manitoba credit unions regardless of where the depositor resides. Deposits guaranteed include chequing/savings accounts, term deposits/GICs including TFSAs, RRSPs, RRIFs, RESPs. The guarantee does not cover non-deposit instruments, examples of which include common shares, surplus shares, preferred shares, mutual funds and self-administered RRSPs that are not deposits (e.g. equity shares, mutual funds).”
Some key elements of how the DGCM operates include:
- Credit unions are expected to maintain capital and liquidity levels above legislated minimum standards.
- The DGCM maintains a Guarantee Fund, funded by quarterly premiums paid by Manitoba credit unions.
- The current target size of the Guarantee Fund is 1.05% to 1.30% of deposits and is based on a statistical model with over 400,000 scenarios.
- If for some reason there is insufficient money in the Guarantee Fund if a credit union were to fail, other remedies are available in The Credit Unions and Caisses Populaires Act of Manitoba, including the ability to raise additional funds from all Manitoba credit unions, arrange mergers between credit unions, and approach the Manitoba government for financial assistance.
Canadian Investor Protection Fund
The CIPF protects the investments held by financial institutions like banks, companies that sell investment products, and investment dealers.
The institution needs to be a CIPF member for your funds to be insured. Here is a breakdown of CIPF coverage limits:
- Up to $1 million for general accounts combined like cash accounts, margin accounts, Tax-Free Savings Accounts
- Up to $1 million for all registered retirement accounts combined like RRSPs, Registered Retirement Income Funds (RRIFs) and Locked-In Retirement Accounts (LIRAs)
- Up to $1 million for all Registered Education Savings Plans (RESPs) combined where the client is a subscriber of the plan.
One of the main things to note is that cash deposits are covered by the CIPF, but the value of other investments are not. Suppose you held 100 shares in Company A through an investment firm (Company B). If the investment firm were to fail, the CIPF would ensure that you still hold the 100 shares in Company A, but without any guarantee of the value of those shares.
Wealthsimple Cash: when you have CIPF coverage but not CDIC coverage
The launch of Wealthsimple Cash highlighted a potentially confusing situation: Wealthsimple Cash advertises features similar to a normal bank account (albeit with hybrid chequing and savings account features) but does not have CDIC or provincial deposit insurance; it has CIPF insurance. The money held in your Wealthsimple Cash account is deposited in trust (through Wealthsimple’s subsidiary ShareOwner Investments Inc.) with one or more of the big six Canadian banks, otherwise known as “domestic systemically important banks”.
Suppose you had $1,000,000 deposited in your Wealthsimple Cash account:
- If one of the big six banks where your money is deposited goes bankrupt, you are not guaranteed to get your money back, because this deposit is not eligible for CDIC coverage.
- If Wealthsimple goes bankrupt, you are guaranteed to get your money back.
- If ShareOwner Investments Inc. goes bankrupt, you are guaranteed to get your money back.
In other words, with Wealthsimple Cash, you technically have higher insurance coverage through the CIPF than through the CDIC, but you are not covered if one of the big six banks fails. It is significantly more likely for Wealthsimple or its subsidiary to fail than for a big six bank to fail, but it is worth noting the details of what is not covered.
So should you care about the difference between CDIC, CIPF, or provincial deposit insurance?
Between CDIC and provincial coverage for credit unions, I don’t see much difference in terms of the effective safety of your deposits. Provincial coverage outside of Quebec is actually higher than with the CDIC, so that might factor into your decision of which institution to go with. The CDIC provides a more explicit government backing, although as per the details provided by the DCGM (Manitoba), provincial insurance is extremely robust.
In many cases, the CIPF provides coverage for a different type of investment than your standard savings account or GIC, but there are examples such as Wealthsimple Cash that blur the line.
Deposit insurance strategies to extend your coverage
Generally, whether you are looking at a financial institution with CDIC, provincial deposit insurance, or CIPF coverage, you can spread your risk and extend your coverage by depositing your funds for all account types in multiple financial institutions.
Some savers use a strategy to effectively extend their CDIC coverage by splitting their deposits between related companies. For example: Peoples Trust is covered by the CDIC for up to $100,000 in each of the eligible deposit categories, and Peoples Bank has separate and equal coverage. Peoples Trust and Peoples Bank are both owned by Peoples Group, and have similar interest rates for their savings accounts.
If you have maxed out your CDIC coverage on one account and need more coverage but at the same interest rate, you could open an equivalent account with the other bank. Another advantage is consistency in the brand and service experience, if a customer likes dealing with Peoples companies in general.
However, it might be wiser to spread out the risk and deposits to another completely separate bank. If Peoples Group or one of its subsidiaries were ever in danger of bankruptcy, then the related companies would have an increased risk of bankruptcy as well. It would be quite a hassle to go through two separate CDIC insurance claims at the same time, and your money would be tied up during that period.
Conclusion
As a Canadian, your deposit insurance options are diverse. If you play your cards right, 100% of your deposits could be covered by some form of deposit insurance. Even though Canadian banks are among the safest in the world, you never know what can happen in the future!
Author Bio – Christopher Liew is the creator of Wealthawesome.com, where he shares money tips and guides for his readers. He’s a CFA Charterholder who has been featured on Yahoo Finance, MSN Money, and The Motley Fool. Read about how he quit his 6-figure job to travel the world.
