Want to know why our grandparents hid money in their mattress? Because prior to 1967 any money saved was at risk. If a bank failed, those savings were gone. Wiped out. A big, fat zero. For them, it felt safer to tuck the bills into a hidey-hole and hope for the best.
But the feds realized this wasn’t a great strategy if they wanted to grow the nation’s economy. As a result, they created a Crown corporation: the Canadian Deposit Insurance Corporation (CDIC), with a mandate to protect all eligible deposits made by Canadians. (See more on this below under “What CDIC does.”)
Still, the line between what’s a saving and what’s an investment can become blurred—just ask the thousands of disappointed Urbancorp buyers, who watched virtually all their money disappear when the real estate developer declared bankruptcy earlier this year.
While these same buyers are currently fighting to get official representation at the company’s bankruptcy hearing, the question that’s left unanswered is whether a real estate purchase is an investment, a form of saving, or a human right?
What CDIC does
As a crown corporation, the CDIC contributes to the stability of the Canadian financial system by covering the potential loss of savings that are deposited at member institutions. The coverage limit is $100,000 but this limit can be applied to each insured category at each CDIC member financial institution. (List of members can be found here.)
What’s covered under the CDIC program are: Canadian money held in savings and chequing accounts; term deposits, such as GICS, with original terms to maturity of five years or less; specific debentures, which are short-term debts; money orders or bank drafts and certified cheques. That means if you CIBC and RBC were to fail (highly unlikely, but let’s just play this through) and you had $100,000 in a savings account at each bank, CDIC would reimburse you the full $200,000 that you lost.
Investors should worry
What’s not covered under CDIC insurance are the vast majority of investment products, including mutual funds, stocks and bonds, as well as term deposits with maturity dates greater than five years, foreign currency accounts, treasury bills, and deposits made at financial institutions that are not CDIC members (among others).
Some insurance for home buyers
Unlike other investments, the deposits made by new home buyers may be protected, depending on whether or not there is a New Home Warranty program in place in the province. (In Ontario, Quebec and B.C. this warranty is mandatory. In other provinces, a builder or buyer must elect to buy into the program.)
In Ontario, for instance, Tarion will protect up to $20,000 that’s used as a deposit for a new build condo purchase and up to $40,000 for a new home purchase.
Problem is, the deposits on these new-build purchases quickly escalates well past these insurance limits. For example, if a buyer were to buy a $350,000 new-build condo, they’d have to pay $5,000 as soon as they signed the purchase contract. Another $12,500 would need to be paid within 10 to 15 days—bringing your total invested deposit up to 5% within two weeks. Then, at the 30 day, 90 day and 180 day mark, the buyer would have to pay out additional sums of $17,500. By the end of six months the total deposit on that new build condo is now $70,000—more than three times what the buyer would be compensated for should the builder fail and the money disappear.
Should the feds rethink their strategy?
According to the CDIC website, the rationale for providing the deposit insurance was to create stability and confidence within a pillar of Canada’s financial system. It worked. People started to save money at their bank. This generated money that could be loaned out to businesses. This created jobs and wealth, which created more money to be saved and invested. Simplistic synopsis, yes, but it helps provide context as to why CDIC insurance was so important four decades ago.
These days, however, the chance of a bank failure is relatively slim unless, of course, something catastrophic happens to another Canadian financial pillar, like insurance or real estate. Banks are heavily invested in real estate. So a shock to this industry would certainly be a shock to the banking system. More importantly, however, it begs the question: Should the feds reconsider where to apply that much needed financial confidence that deposit insurance provides?
Until then, protect your money as a new home buyer
The gears of the government and the law grind slowly, so I don’t expect an answer to this question anytime soon (although, I certainly think an answer is needed). Until then, there are strategies that buyers can use to protect their invested savings when buying new-build real estate.
Get comfortable with “in trust”
For all deposit money up to the maximum insured amounts—$20,000 for condos and $40,000 for homes—consider writing the words “in trust” on the certified cheques you give to the builder.
Under the Condominium Act, all deposits to the builder should be held in trust (usually by the builder’s lawyer). Yet, as Urbancorp shows, this doesn’t always happen. To protect yourself, ask your builder who, exactly, should appear on your deposit cheque. You want the name of a law firm or another trustee, along with the term “in trust,” on the cheque. While there are some exceptions to this—some builders get a “prescribed security” from Tarion that exempts them from having to hold deposit money in trust—consider any pushback from a builder as a big, red warning flag.
Ask for insurance
If you’ve entered into a sales agreement where your deposit will exceed the insurable limits, then ask for a copy of the builder’s “excess deposit insurance.” You want to confirm that all funds above the Tarion caps are protected. You should also ask for confirmation that the builder and the project are registered under Tarion, or an equivalent new home warranty program.
Get it lawyered
The best protection for a new-build purchase is to get a lawyer who specializes in this type of purchase to review the contract before it becomes binding. Many builders will now provide a period of three days to two weeks, where you can get a lawyer to review the contract and flag any concerns. Yes, you’ll have to pay a few hundred (or a thousand) for this service, but it’s peanuts compared to losing $70,000 or even $700,000 because a builder defaults.