It could be because I’ve been living in what I call a “personal finance bubble” for the past 7 years, digesting everything I can about personal finance in Canada, but I can’t help my disbelief at how many myths mistaken for facts still exist today.
For example, nod your head “Yes” if someone’s ever told you that you’d better keep some cash unbanked (like hidden in a wall or in a safe) because if your bank goes bankrupt, you’ll lose everything.
I’ve heard this way too many times, usually from people who should know better (I’m talking to you Baby Boomers). Although there’s nothing wrong with having some cash on hand for convenience, stashing stacks of cash in your walls because you don’t trust that your bank will keep your money safe is just downright ignorant.
I mean, besides all the interest income you’ll lose out on by not keeping your cash in a high-interest savings account, just think of all the ways you could lose your cash by storing it at home:
- It could be stolen
- It could be destroyed in a fire, earthquake or flood
- You may forget where you put it, or the combination to your safe
- You may forget you even hid it in the first place
- It may get damaged or disintegrate over the years
Moreover, you don’t need to worry about your bank going bankrupt because that’s why the the Canada Deposit Insurance Corporation (CDIC) exists! You see, CDIC Deposit Insurance protects Canadians and their money for free and automatically if you bank with a CDIC member financial institution.
In other words, there’s nothing to freak out about. But to help squash those fears and help you understand how CDIC Deposit Insurance works, here are 3 things you need to know.
1. Why CDIC Was Created
CDIC was created as an independent Crown corporation in 1967 as a call-to-action by Parliament after previous years of turmoil within the financial industry. What triggered CDIC’s creation was the failure of two financial companies one after the other. First, there was the foreclosure of the Atlantic Acceptance Corporation in 1965, then there was the failure of Prudential Finance in 1966.
During this time of crisis, the government realized they needed to step in and do something. So, CDIC was created to protect eligible deposits in member financial institutions in the case of a failure. In 2011 CDIC became Canada’s resolution authority, this means they have tools to support the resolution of all banks, big and small.
To learn more about the history of CDIC (which is actually pretty interesting), check out this free e-book — From Next Best to World Class: The People and Events That Have Shaped the Canada Deposit Insurance Corporation 1967-2017 by C. Ian Kyer.
2. Why People Still Think You Can Lose Money at Your Bank
Even though CDIC exists to protect us and our savings, you may still be wondering why people think you can still lose your savings if your bank goes under.
Before CDIC, if a bank failed, you were at risk of losing your money. This was a reality your grandparents may have experienced, then passed down that knowledge to your parents, then to you. For example, let’s talk about one of the biggest bank failures in Canadian history — the Home Bank of Canada collapse of 1923.
Remember that classic scene in It’s a Wonderful Life when there’s a bank run on Bailey Brothers’ Building and Loan, and George is forced to use his honeymoon money to keep it solvent? Well, that same hysteria happened in 1923 when the Home Bank of Canada shut its doors to customers all over the country due to financial mismanagement, bad investments and not being able to pay off its debts. In short, the bank collapsed and more than 60,000 customers lost all their savings held with them. For the full story on this, check out this historical recounting on Torontoist.
That bank failure was almost 100 years ago, but there have been many bank failures since then. Since 1970, there have been 43 bank failures, including:
- Fidelity Trust Company – 1983
- Western Capital Trust Company – 1985
- Bank of Credit and Commerce Canada – 1991
- Security Home Mortgage Corporation – 1996
For a full list of bank failures in Canada, visit this page on CDIC’s website.
But, since CDIC was created in 1967, guess how much money customers lost from their banks after they collapsed? Not a penny. You read that right. Since CDIC’s inception, they’ve protected more than 2 million people holding $26 billion in insured deposits at these failed institutions. Not one person lost a single dollar thanks to CDIC Deposit Insurance.
3. How CDIC Works
So, how does CDIC work and what important exceptions are there to be aware of?
Your Bank Needs to Be a Member
As I mentioned earlier, CDIC Deposit Insurance is free and automatic. But, your financial institution must be a member of CDIC. You see, CDIC Deposit Insurance is free for you, but not for your bank or federal credit union. As members, they need to pay for that insurance. But in the end, it’s in their best interest.
All you have to do to ensure you’re protected by CDIC Deposit Insurance is to check that you bank with a member of CDIC. An easy way to do this is to check the footer of your financial Institution’s website.
Another way to do it, especially if you’re looking at opening up an account at a new bank, is to check this list of CDIC members. If you don’t see your financial institution on the list, then you won’t be protected by CDIC Deposit Insurance.
CDIC Deposit Insurance Does Not Cover Investments
Lost some money in your investment portfolio because you held stock in a company that went bust? Well, that’s part of the risk of investing in stocks and not something CDIC can help you with.
CDIC was meant to protect your cash or term-deposit savings, not your investments. To be clear, here’s what CDIC Deposit Insurance protects:
- Savings accounts
- Chequing accounts
- Term deposits (like GICs) with original terms to maturity of 5 years or less
- Debentures issued to evidence deposits by CDIC member institutions (other than banks)
- Money orders and bank drafts issued by CDIC members
- Cheques certified by CDIC members
So, if you have a 7-year GIC, it won’t be covered. If you hold bonds, those won’t be covered. To get real specific, here’s what CDIC Deposit insurance does not cover:
- Mutual funds (including money market funds), stocks and bonds
- Term deposits (like GICs) with original terms to maturity greater than 5 years
- Foreign currency deposits (like U.S. dollars)
- Digital and cryptocurrencies
- Treasury bills and bankers’ acceptances
- Principal protected notes that are traded
- Debentures issued by banks, governments or corporations
- Deposits with receipts payable to bearer (rather than to a named person)
- Deposits held at financial institutions that are not CDIC members
You can Maximize your Protection
Even though I mentioned that since CDIC, not one person has lost a dollar from a member institution in a bank failure, that doesn’t mean all of your money is protected. There are limits around how they can protect. This is important to know because it may help you determine your personal banking strategy (i.e. not holding all of your cash at just one bank).
CDIC insures eligible deposits at its member institutions up to a maximum of $100,000 (principal and interest combined) per depositor per insured category per institution.
First things first, let’s break down the 7 different categories:
- Deposits held in one name
- Deposits held in more than one name
- Deposits held in an RRSP
- Deposits held in an RRIF
- Deposits held in a TFSA
- Deposits held in a trust
- Deposits held for paying taxes on mortgaged properties
Now that we know the different categories, it’s important to know that CDIC protects your deposits up to $100,000 in each category at the same institution. Except trusts, they are insured up to $100,000 per beneficiary.
In other words, if you had $100,000 in a personal savings account, and $100,000 in a joint savings account, both at the same bank, your entire $200,000 would be protected. But, anything above the $100,000 in that category won’t be protected, in which case it would be wise to move those deposits to another category or another financial institution so it is protected.
Here’s a great video that goes through this even more in case you’re a bit confused.
Calculate Your Coverage with the CDIC Deposit Insurance Estimator
With this information in mind, it can get a bit confusing trying to calculate how much you are actually covered for by CDIC deposit insurance.
Instead of trying to do it manually and assume your calculations are correct, I’d suggest using CDIC’s Deposit Insurance Estimator. It will show you what you are and aren’t covered for within minutes.
Got more questions about CDIC? Share them in the comments for me to answer!