For those not wanting to take investment risks with their money, parking their cash in high-interest savings accounts or guaranteed investment certificates is a popular option. But finding a good rate can be difficult, especially if you choose one of the big banks.
However, there are smaller financial institutions that have higher rates and are insured by the Canada Deposit Insurance Corporation (CDIC) or provincial deposit insurers.
The rates these smaller institutions offer on high-interest savings accounts and GICs are much higher than those of the big banks. For example, Meridian Credit Union offers a high-interest savings account with a rate of 1.4%. By comparison, the rate on the TD High Interest Savings Account is 0.5% as long as the balance is $5,000 or more. If not, no interest will be paid whatsoever.What credit unions offer
In some regions, credit unions must compete for deposits against very large financial institutions with better name recognition, says Rob Martin, deputy director, policy with the Canadian Credit Union Association (CCUA). "Offering higher rates helps credit unions attract deposits in these markets."
While credit unions aim to make profits, it's not their sole motivation, he adds. They're financial co-operatives that are member-owned, the customers are shareholders, and member service is a priority. "This can result in lower user fees and higher rates on products."
Credit unions tend to be regionally focused within certain regions. For instance, Vancity primarily serves the Lower Mainland, Fraser Valley and Greater Victoria areas of British Columbia. But by offering online services, credit unions have been able to attract members outside of their region.
Most credit unions are open bond, meaning anyone can join. Yet some closed bond credit unions -- meant for a defined employee group or members of a particular industry -- do exist. For example, the Safeway Credit Union is for employees of grocery retailer Safeway and their families. For individuals in the creative arts industry and their immediate family members, there's the Creative Arts Savings & Credit Union.
To join, you need to purchase membership shares (which are redeemable) although the cost is minimal. Some may charge as little as $1 while others may charge between $15 and $25. Being a member has its benefits, as there's the opportunity to earn dividends or patronage returns. Dividends are usually paid on a fixed per share basis. Patronage returns are paid based on the amount of business a member does with the credit union. According to Martin, credit unions outside of Quebec paid $160 million out of pre-tax income to their members in 2015.
Alternative lenders
There are also other financial institutions that usually offer better rates than both banks and credit unions. Oaken Financial offers a high-interest savings account with a rate of 1.75% while EQ Bank has a market-leading rate of 2.3%.
Oaken Financial is the consumer deposit brand of Home Trust, which is owned by Home Capital Group -- the alternative mortgage lender that nearly collapsed this year. And EQ Bank is owned by Equitable Bank, the ninth-largest Schedule I bank in Canada.
They can offer higher rates because they need to raise capital to fund their mortgage businesses. For example, Oaken and Equitable have five-year GIC rates of 3.25% and 2.36%, respectively. Among the Big Five banks, TD and RBC offer the best five-year rate -- just 1.6%.
To purchase an Oaken GIC, you need to open an account with the institution. Equitable's GICs can be bought either through the bank, financial advisors, deposit brokers (who may also offer investment planning and retirement advice) or discount brokerages.
Both Equitable and Home Trust are members of the CDIC, which protects deposits at member financial institutions in the event of failure. Home Capital's recent woes highlight the importance of deposit insurance. CDIC will reimburse insured deposits up to $100,000 -- principal and interest combined -- for each of the seven insurance categories (deposits held in one name, more than one name, a RRIF, an RRSP, a TFSA, a trust and for paying taxes on mortgaged properties). Foreign-currency GICs or deposits with terms of five or more years aren't protected.
The last failure was in June 1996 when Calgary-based Security Home Mortgage Corporation, which used depositors' money to fund mortgages, went bankrupt. Payments of insurable deposits were made through National Bank. Depositors who held uninsured products or eligible deposits that exceeded the $100,000 limit had to deal with the liquidator appointed by the courts.
In the event of a failure, access to your account will no longer be available. But CDIC will aim to reimburse savings, chequing, joint and mortgage tax accounts within three business days. For deposits in trusts, the organization will inform broker-trustees about the process to reimburse insured deposits. Within seven business days of receiving wire/transfer payment information, CDIC will remit payment to broker-trustees.
For registered deposits, CDIC will hold them for several days while it works with the Canada Revenue Agency to ensure they remain tax-sheltered. CDIC will then contact these depositors to inform them of next steps.
The bottom line
While the big banks may offer a larger line-up of products and services, they don't offer the higher rates their smaller competitors do. The competition may not have the same kind of brand recognition as the banks, but the rates are better and deposits are protected by the CDIC or provincial deposit insurers.
