How Canada Savings Bonds and Canada Premium Bonds Work
A reader emailed me asking about my thoughts on Canada Savings Bonds. Basically, she has been withdrawing a portion of her paycheck every two weeks to purchase some CSB’s, but really doesn’t know how they work. Most of the details can be obtained from the official CSB website, but I will dissect the info and summarize the main points.
So lets get down to the basics.
What is a Canada Savings Bond (CSB) or a Canada Premium Bond (CPB)?
The Canadian government offers both CSB’s and CPB’s once a year and can be purchased within a certain date range (Oct -> April). These bonds are very similar to a GIC where they provide a guarantee on the capital invested with various options on redeeming. The difference between the CSB and CPB is in their rates and when you can redeem them. Of course, the greater the redemption restrictions, the higher the interest rate.
Here is the official definition of a CSB:
A Canada Savings Bond (CSB) is a safe and secure investment product issued and fully backed by the Government of Canada, available to all Canadians to achieve personal financial goals. Canada Savings Bonds can be redeemed at any time during the year.While the Canada Savings Bond has a ten-year term to maturity, interest rates are often announced for a shorter period and remain in effect for that announced period. At the end of the period, new rates will be announced by the Minister of Finance based on the prevailing market conditions.
CPB:
The Canada Premium Bond (CPB), introduced in 1998 by the Government of Canada, offers the same general features as Canada Savings Bonds, but has a higher rate of interest at the time of issue than a CSB on sale at the same time, and can be redeemed each year on the anniversary of the issue date and during the 30 days thereafter.While the Canada Premium Bond has a ten-year term to maturity, interest rates are often announced for a shorter period and remain in effect for that announced period. At the end of the period, new rates will be announced by the Minister of Finance based on the prevailing market conditions.
Rates
As mentioned above, the rates are determined by “prevailing market conditions”. With 2009 being a very low rate condition, investors purchasing CSB/CPB’s this year will see very low interest rates.
You can see the current rates here in this PDF.
Withdrawals
The CSB can be withdrawn at any time at most of the big banks. However, if you withdraw within 3 months of issue, then you only get the face value back. After that point, you’ll get face value plus accrued interest.
The CPB works a bit differently where you can only redeem them 1 year (plus 30 days) after issue date. However as mentioned above, the restrictions result in a higher interest rate.
Taxation
As with any bond, any distribution is treated as interest, thus fully taxed as income at your marginal tax rate. Taxation wise, it would make the most sense to hold a CSB/CPB in a tax deferred account like an RRSP.
Final Thoughts
Although it can be convenient to deposit a portion of your paycheck to purchase CSBs, I don’t see any real advantage of this product over a conventional GIC or high interest rate savings account. In fact, a high interest savings account has the same/or higher interest (currently), but with much greater ease accessing the money should you need it while earning interest from day 1.
10 Comments, Comment or Ping
1. Ray
As with GIC, CSB’s are often used by those who like safety and security. It is also much easier to purchase CSB over corporate bonds. You can find strong AAA corporate bonds with much better terms than CSB. CSB can be great short term saving vehicles, but not the best option for long term planning, such as retirement.
Aug 25th, 2009 @ 9:15 am
2. Jewel of Toronto
Thanks for the post Frugal Trader! Much appreciated.
Aug 25th, 2009 @ 9:26 am
3. Traciatim
My company has a CSB purchase plan and I’ve never been able to understand what would entice anyone to participate. Every year I look at the CSB vs Ing Direct and always ING savings accounts did better (GIC’s are even better than the savings account). I haev a funny feeling that people are being suckered into buying CSBs by the payroll deduction program out of ease.
What are teh advantages to the employer to have employees purchase CSBs? The only thing I can think of is that the employer is seeing a benefit from enrollment.
Aug 25th, 2009 @ 9:33 am
4. investnoob
Traciatim, do some employers match contributions or something of that nature? I can see that being an enticement. But, I agree, I can’t see why people make this purchases, unless its an emotional decision whereby they think if its “out of sight, its out of mind.”
Aug 25th, 2009 @ 10:45 am
5. MikeG
I know some people like to by CSBs as gifts for children. I guess to help them learn about saving and investing? I personally will always choose the dividend stocks over CSBs cause of the tax preference and growth potential. And if I’m saving for something in the short-run then a high-interest savings account is good enough.
Aug 25th, 2009 @ 12:52 pm
6. Traciatim
Not in my company they don’t, but my company does offer a match to an RRSP/DPSP program which is pretty generous. I participated ion this program in order to save for a down payment on a house, and now am actually using it to start a retirement account.
Anyway, the last I checked I think the CSB program was around 1.25% or something. At the time I looked (which may have been last year) it was under inflation if I’m remembering correctly. That’s kind of pointless to participate in.
Aug 25th, 2009 @ 12:59 pm
7. Mechanonuke
CSBs may be more enticing to wealthier individuals seeking safety, above and beyond the safety offered by high interest savings accounts which have deposit insurance only to a certain dollar value.
For the average middle class person ING may be better but for high net worth persons (i.e. Multi milionaires.) CSBs could be ‘better’ from a safety point of view.
Aug 25th, 2009 @ 2:12 pm
8. phi
Regardless of if it’s in Canada or the US, bonds are more of a defensive play. I remember when people were purchasing US treasury bonds with 0 returns just to play it safe.
Aug 25th, 2009 @ 10:02 pm
9. Matt
Claymore offers 1-5 year laddered bond etf’s with only .15% MER in both corporate and government bonds. I am a fan because a) they are highly liquid and b) they currently are offering 4.6% yield for CBO and 4.1% for CLF. Obviously these would be held in a registered account and not ideal for day traders.
Aug 25th, 2009 @ 10:28 pm
10. used tires
Would be great if you could explain what the numbers mean, and how to read that chart, I am still learning this stuff so it was a bit overwhelming for me looking at those interest rate charts, hehe. Not sure how to interprate them is what I mean.
Till then,
Jean
Sep 7th, 2009 @ 1:57 am
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