How Are Your Assets Protected Beyond $100,000?

Deposit insurance is familiar to many, yet it is often misunderstood. Here is a brief review of the kind of coverage available to protect your assets as they grow.

September 14, 2018

Anyone who invests in the market soon learns about risk from either a mutual fund representative or a financial security advisor.

But, there are different kinds of risk; some are covered by government programs or self-regulatory bodies, while others are not.

A chart noting the various types of risk and if there is a means to be reimbursed if you experience a loss. For the following risks, there is no means to be reimbursed: market risk, liquidity risk, currency risk, interest rate risk, foreign investment risk. However, failure of a financial institution does allow you to be reimbursed to certain limits.

As we can see, while risk is inherent to investing, governments and the industry itself have created ways to protect investors against the failure of their financial institutions.

Canada Deposit Insurance

Deposit insurance is the first of these ways to protect savers. It is managed by the Canada Deposit Insurance Corporation and, for institutions under Quebec jurisdiction, by the Autorité des marchés financiers. People commonly associate this with $100,000 of coverage, but deposit insurance could cover a household for much more than that, since the $100,000 limit applies to each deposit category, per person and per institution.

Indeed, some types of accounts, such as RRSPs, TFSAs, RRIFs and joint accounts each have their own $100,000 coverage. The following example shows how a couple’s deposits could be covered for several hundred thousand dollars.

A graphic of a spreadsheet showing the assets of a fictitious couple, Paul and Dominique and their two children. Paul has a savings account with $22,000, a GIC in his RRSP valued at $100,000 and $20,000 in mutual funds. It totals $142,000, but only $122,000 is covered by the Canadian Deposit Insurance Corporation because the mutual funds are securities not cash deposits. Dominique has $10,000 in a chequing account, and $50,000 in a savings account in her TFSA. The total of $60,000 is covered. Each of their two children have $130,000 in an “in trust” cash savings account. It totals $260,000 but only $200,000 is covered because the limit is $100,000 per person per institution. In total, this household has $582,000 in assets, and $482,000 is covered by the Canadian Deposit Insurance Corporation – far beyond the “100,000 level” we often hear about.

For Deposits Only

However, there is an important distinction to be made: as the name indicates, this type of insurance applies only to cash deposits. Furthermore, such deposits must be in Canadian dollars and have original maturity terms of five years or less. That excludes many financial instruments, such as:

stocks
bonds
treasury bills and bankers’ acceptances
mutual funds
segregated funds
exchange-traded funds (ETFs)
life insurance policies

Ask Your Advisor

For these other financial instruments noted above, various protection funds have been established by self-regulatory bodies in the industry. However, it could be a good idea to speak to your mutual fund representative or financial security advisor, because such funds may not apply to your type of investment, your financial institution, or the province in which the institution is registered.

The following are some of the protection funds we’re talking about:

Canadian Investor Protection Fund (CIPF)
Established by the Investment Industry Regulatory Organization of Canada (IIROC); coverage could be up to $1 million
Investor Protection Corporation
Established by the Mutual Fund Dealers Association of Canada (MFDA); coverage could be up to $1 million
Assuris
A not-for-profit organization that protects Canadian policyholders if their life insurance company should fail; coverage could be up to $100,000
Canadian Securities Administrators
The various securities regulators in Canada may offer compensation in cases where insolvency is not the problem, but there has been fraud on the part of an investment firm or representative.

It can be reassuring for depositors and investors to know that these mechanisms are in place. Even more reassuring is that the likelihood of having to use them is extremely low: Canada’s financial system is considered one of the most reliable in the world, and its main banks and cooperative institutions all rank among the 50 most solid financial enterprises globally, and among the 10 safest in North America.

Should you have any questions on the subject, don’t hesitate to ask your mutual fund representative or financial security advisor.

Sources

The following sources were used in preparing this article:

Assuris, “Are You Protected by Assuris?”
Autorité des marchés financiers, “Deposit Insurance,” “Your deposits are protected. That’s a guarantee!”
Canada Deposit Insurance Corporation, “About us,” “What’s Covered?”
Canadian Consumer Protection for Financial Institution Failures, “You are protected!”
Canadian Investor Protection Fund, “What does CIPF cover?”
Canadian Securities Administrators, Understanding mutual funds; “Getting Your Money Back.”
Get Smarter About Money, “Risks of mutual funds,” February 22, 2018.
Global Finance, “World’s Safest Banks 2016: Global Top 50.”
MFDA, Investor Protection Corporation.