Gift cards are a nice, convenient gift, but what happens if the store declares bankruptcy in Canada? The answer: you’ve got a problem.

Last week Global TV News ran a story about the bankruptcy of Tabi, a large women’s clothing retailer with 78 stores across Canada. All stores are being liquidated, and the liquidator is not allowing customers to spend their gift cards.

Have you ever wondered why almost every store, including grocery stores, have a gift card program? Obviously they want to encourage you to shop at their store, but that’s only part of the story. They have gift cards because they are very profitable, for two reasons:

First, statistics show that if a gift card is not redeemed within the first few weeks, it’s likely that it will not be redeemed at all. Gift cards can be easily forgotten or lost. That’s great for the store, because they sell a $50 gift card and in many cases don’t have to provide any product. That’s a 100% profit for the store.

Second, even if the gift card is used, it’s common for the gift card not to be used in full. If you have a $100 gift card and buy something for $95, what are the chances that you will go back to the store later to redeem the final $5? It’s unlikely, and in that case the store increased their profits by 5%, so again, stores love gift cards.

What can you learn from this story?

A gift card is not something you want to keep for a “rainy day”. If you get a gift card as a gift, spend it. It won’t increase in value, and there is always the chance that the store will go bankrupt, so the sooner you spend it, the better. Tabi was in business for 30 years, so if they can go bankrupt, anyone can.

The prudent approach is to use the gift card for something you were going to buy anyway. If it’s for clothing, decide what clothing you will need to purchase in the next few months, and purchase it now. You can use the gift card for luxuries, but by buying what you need you save your money.

Finally, think twice before giving a gift card as a gift. Is it likely that the recipient will use it, or is it to a store they don’t shop at so it might not be used? If in doubt, give gift cards that are redeemable at many different locations, and at stores that sell a wide variety of goods, so they are most likely to be used.

If in doubt, and you can’t think of a gift, give cash. Bankruptcy in Ontario, or anywhere in Canada can happen. Losing a $50 gift card is easy; it’s much less likely that someone will forget about a fifty dollar bill. Gift cards are convenient, but spend them quickly.