Dale Jackson

Personal Finance Columnist, Payback Time

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Nothing taps into our deepest insecurities like a worldwide pandemic that threatens to crush the global economy. Social media brings out the best and worst from people trying to cope with the COVID-19 fallout, and that includes fuelling fears of banks collapsing and calls to hoard cash.

Governments and central banks are doing everything they can to avoid financial catastrophe by injecting trillions of dollars into the financial system, but for Canada, it’s more personal. This week’s $107-billion federal stimulus package ultimately backstops a system that ensures the savings we have in our banks are safe.    

At the core is the Canada Deposit Insurance Corporation. The CDIC is a crown corporation supported by the federal government that covers deposits of up to $100,000 at each member institution.  

While many investors aren’t familiar with the CDIC, good financial advisors make it a practice to limit individual client deposits to $100,000 at a variety of financial institutions so entire fixed income portfolios are protected.

Most Canadian financial institutions pay premiums to be insured with CDIC and members are listed on the CDIC website for anyone to see. Members include banks, federally-regulated credit unions, and trust companies. All the big Canadian banks are members along with non-financial businesses with finance arms like Canadian Tire Corporation.

If a CDIC member fails, eligible account holders will be contacted and the principal and interest will be reimbursed within days. Since its founding in 1967, the CDIC has handled 43 failures without a single dollar being lost.

A common CDIC misunderstanding revolves around what is covered and what is not covered. Savings and chequing accounts are covered along with guaranteed investment certificates (GICs), and other term deposits with original terms to maturity of five years or less. Coverage applies whether they are in registered accounts such as a registered retirement savings plan (RRSP), a tax-free savings account (TFSA), or outside a registered account.

Unfortunately, the investment vehicles that are covered under the CDIC are the same investments that have been yielding paltry sums for the past decade. As central banks continued to drive down interest rates in the wake of the last global crisis — the 2008 financial meltdown – GIC yields remained below 2.5 per cent, which is barely above inflation. Canadians saving for retirement had little choice but to put their money in riskier investments to meet their savings goals.

It’s those riskier investments that are not covered. The CDIC does not compensate losses from stocks, dividends, mutual funds, exchange-traded funds (ETFs), real estate investment trusts (REITs) and even bonds. Foreign currencies such as U.S. dollar accounts and cryptocurrencies are also not covered.

That’s cold comfort for investors looking at massive losses in their own portfolios but there is consolation for those who can get by on their cash or near cash savings, or secured lines of credit until markets can recover lost ground.

Some on social media have alluded to a government bailout that includes investments, but that’s unlikely to happen. Everyone should understand risk is inherent when it comes to investing.   

One dividend that always pays out and increases with time is knowledge. Those who bit the bullet and sacrificed returns for security are probably sleeping better at night. Investment advisors need to make clients understand that a portion of their retirement savings should always be in fixed income to ensure they have cash for at least the short-term when tragedy strikes.

Some of the blame should also go to the world’s central banks that chose to appease the greedy by keeping interest rates low to artificially fuel economic growth and equity markets. 

Perhaps – when all this has passed –  a day will come when savers are rewarded for saving.

Payback Time is a weekly column by personal finance columnist Dale Jackson about how to prepare your finances for retirement. Have a question you want answered? Email dalejackson.paybacktime@gmail.com.