You think you’re doing everything right. You have a chequing and savings account, maybe even a retirement account set up. But what happens if your financial institution fails? What happens to your hard-earned money?
Not to worry. Most banks are covered by the Canadian Deposit Insurance Corporation (CDIC Canada). This means if your bank fails, you’ll still get your money back. But will you get it all back? How much is your coverage?
The CDIC insures bank deposits up to $100,000 per account.
Want to know more? Read on to find out which accounts the CDIC covers and what happens in the event of bank insolvency.
What Is CDIC Coverage?
Back in 1967, Parliament established the Canadian Deposit Insurance Corporation (CDIC) to stabilize the country’s financial industry. In the event of a banking insolvency or failure, the CDIC protects consumers against the loss of their deposits.
Deposits are insured up to $100,000 for the following categories:
- Chequing Accounts
- Savings Accounts
- Tax-Free Savings Accounts (TFSA)
- Foreign Currency Accounts
- Guaranteed Investment Certificates (GIC)
- Registered Retirement Savings Plans (RRSP)
- Deposits Held in Trust
If a consumer owns one of the above accounts, and it’s within a member Canadian bank, they are automatically eligible for CDIC coverage.
The coverage is for separate accounts, meaning if you have a chequing account at one bank and a savings account at another, each is insured up to $100,000.
What Does the CDIC Not Cover?
While many accounts fall under the coverage umbrella, others don’t. Here’s a list of the financial products that do not qualify for coverage.
- Mutual Funds
- Exchange-Traded Funds (ETFs)
- Cryptocurrency
- Treasury Bills
- Stocks
- Bonds
What Happens During a Bank Failure?
Although Canada’s banks are some of the safest in the world, failure can always happen. If the Canadian banks were to fail – what would happen?
The CDIC outlines its plan of action should this worst-case scenario happen. It includes protecting customers’ deposits and maintaining financial stability throughout the country.
If a bank fails, the CDIC has four main objectives to help provide resolution. They include:
- Protecting eligible deposits
- Maintaining the flow of critical financial services
- Protecting the economy
- Minimizing risks to taxpayers
To achieve a resolution, the CDIC may need to oversee the sale of the financial institution’s shares or assets. In addition, it is possible for restructuring or recapitalization to occur.
If those alternatives fail, complete closure of the financial institution and reimbursement of customer deposits might be the best option.
The CDIC figures out the best approach based on the size and complexity of the bank, as well as its franchise value.
The stats for bank failures are pretty reassuring. Since its beginning in 1967, the CDIC has handled 43 bank failures, affecting more than 2 million depositors. Of that, no one lost a single dollar.
Which Banks Are Covered?
The CDIC includes a list of member financial institutions covered on its website. All the big-name large banks have coverage. Banks like The Bank of Montreal (BMO), Royal Bank of Canada, and TD Canada Trust.
The CDIC also covers some regional banks as well as certain international ones with Canadian branches.
Deposits housed at a federal credit union are covered under CDIC guidelines. Provincial credit unions are not. However, many of these credit unions have coverage through provincial deposit insurers.
How to Maximize Coverage
While it is unlikely that a big-name bank will fail, it’s still a good idea to plan for the worst-case scenario and keep your money protected.
The two biggest ways to do that are to open multiple accounts within one financial institution and to diversify your money, and open accounts at various banks or finance companies. Here’s how each one works.
Multiple Accounts Within One Entity
By opening multiple accounts within one bank, you can maximize your CDIC coverage and have the convenient option of housing everything under one roof.
Remember that each account qualifies for coverage so you can have a high-interest savings account, a registered retirement savings plan (RRSP), and a tax-free savings account (TFSA) all at one bank. Each of these accounts is eligible for $100,000 CDIC coverage.
Accounts at Different Institutions
You’ve heard the term ‘don’t put all your eggs in one basket,’ and by keeping accounts at different financial institutions, that is precisely what you’re doing.
Instead of having three accounts at one bank, like in the example above, it might be easier to have a chequing and savings account at one institution and a high-interest savings account at another.
In this scenario, each account qualifies for insurance up to $100,000. Whichever way you decide, you must understand which accounts qualify for CDIC insurance and how you can maximize your coverage to guarantee the best results.
CIPF vs CDIC: What’s the Difference?
While you might be familiar with CDIC insurance, the Canadian Investor Protection Fund (CIPF) probably isn’t as well known.
So, first things first – what exactly is CIPF? It’s an insurance program offering coverage for your investments should the member firms become insolvent and fail. As long as you have an investment account with the member firm, you’re automatically covered.
The type of investments CIPF covers is:
- Securities including stocks, bonds, mutual funds, ETFs
- Cash balances
- Commodities
- Futures contracts
- Segregated insurance funds
Coverage limits are as follows:
- $1 million for general accounts (cash, margin, and TFSA accounts)
- $1 million for registered retirement accounts combined
- $1 million for registered education savings plans
Key Differences
The CDIC protects deposits at financial institutions, and the CIPF protects investments held on your behalf by brokerage firms in the event either become insolvent.
The CDIC is backed by the government, and members pay premiums for the insurance. If a bank fails, and the CDIC doesn’t have the money to cover the insured deposits, it falls on the taxpayers’ shoulders.
On the other hand, the CIPF isn’t government-backed. Instead, funds come from its members. In the event of insolvency, the CIPF will payout its insured, but if its funds run dry, there’s an insurance policy and lines of credit to help with payments.
The other key difference between the two is the value of what’s insured. The CDIC insures deposits, meaning if you have $10,000 in a savings account, you’ll receive $10,000 back should your bank fail.
However, the CIPF covers the property you own, not its value. If you own 1,000 shares of company stock worth $10,000, the CIPF will recover your 1,000 shares regardless of the value. If the shares aren’t recoverable, CIPF will pay the value of them at the time of insolvency.
Final Thoughts
Because the CDIC insures bank deposits up to $100,000, it gives consumers a certain peace of mind to know their hard-earned money is protected. If you’re looking to grow your money, check out these top high-interest savings accounts.
