Canada Savings Bonds were part of the Canadian personal finance and investing landscape for more than 70 years between 1945 and 2017 as instruments to support the post-war recovery, allowing Canadians to invest in safe and secure securities that earn a steady interest coupon for the first year of investment.
After the first year elapsed, the interest rates would reset based on market rates for the remaining years of the bond’s maturity.
These bonds were redeemable at any point in time.
Introduced after World War II, Canada Savings Bonds supported the Canadian government in raising funding for capital projects, while enabling Canadians to channel their savings into a virtually risk-free asset.
The initiative has been discontinued as of December 2021.
Why are Canada Savings Bonds Discontinued?
While Canada Savings Bonds were great tools to mobilize savings from citizens during periods of reconstruction in the past, the post-war era has led to deeper integration of global capital markets and Canada’s sterling sovereign reputation has allowed the Treasury to borrow funds at significantly more attractive rates than what the government was paying on Canada Savings Bonds.
Based on extensive studies of external funding costs, several government studies concluded that the costs of running the Canada Savings Bond program exceeded the benefits and the federal budget in March 2017 scrapped the program altogether.
However, the government continued to honour all outstanding bonds and made coupon/principal payments to bondholders until maturity.
How to Redeem Canada Savings Bonds?
Canada Savings Bonds have matured and bondholders looking to redeem their holdings should present their bond certificates to their bank or investment dealer to receive their principal and accrued interest.
In cases where these bonds are held within a Retirement Savings Plan (RSP) or Registered Investment Fund (RIF), these accounts would have received the accrued interest, along with the principal outstanding in due course as the bonds matured.
Any unwithdrawn funds in these accounts would have stopped earning interest depending on the bonds held.
The investor needs to instruct their financial institutions or investment dealer to transfer their holdings to another registered investment vehicle.
Did You Know?
Canada Savings Bonds were introduced to replicate the success of the Victory Bonds issued in 1917 after World War I.
3 Alternatives to Canada Savings Bonds
Generally, savings accounts aren’t known to offer stellar interest rates when compared to bonds/GICs as they offer flexibility to withdraw funds. However, a high-interest savings account allows investors to get the best of both worlds as they can marry a high-interest rate with the flexibility of withdrawing funds when necessary.
One of the most attractive features of high-interest savings accounts is their simplicity.
Most investors appreciate the ease of managing these investments and the predictability these investments bring to their portfolios.
- Higher rates are either teaser rates for a short term or the account has a monthly fee and/or transaction charges making the deposit less attractive.
- Usually, these products are either teaser rates for a short term or the account has a monthly fee and/or transaction charges making the deposit less attractive
A GIC is a low-risk deposit investment that earns interest, similar to depositing money in a savings account, with the return of your principal guaranteed.
- The principal amount invested is guaranteed by your financial institution and a second layer of protection via the CDIC is also available for up to $100,000.
- Investors with short-term investment objectives like purchasing a house within the next year can deposit their funds into a 1-year GIC without adding substantial market risk.
A GIC is simply a termed deposit with a certain rate of return.
While some GICs can be broken early by paying early withdrawal fees, certain types of GICs are locked in and unredeemable until the term ends.
Money market ETFs are great tools to spread out the risk of holding funds with a single financial institution and diversify into different investments to pick up greater carry than a GIC/savings account.
- Professional money managers are responsible for managing money market funds and can access debt market instruments that ordinary investors might not be able to access themselves.
- Money market funds are less risky as they seek a diversified exposure to different issuers of short-term debt, thereby reducing unsystematic risk from the portfolio.
- Money market funds are a great product for what they do but hiring such professional expertise usually has higher management expense ratios and they make these investments less attractive as a result.
Frequently Asked Questions
- Are Canada Savings Bonds still available?
Canada Savings Bonds were retired after the March 2017 budget and bonds that existed have matured as of December 2021. However, the Government encourages savings and capital formation by allowing tax deductions/tax-free investing through the Registered Retirement Savings Plan (RRSP) or by investing using the Tax-Free Savings Account (TFSA).
- Can you lose money investing in bonds?
Bonds do not lose money based on market fluctuations. It is important to keep in mind a couple of essential risks – interest rate and inflation risk. If the underlying interest rates increase, the investor essentially has locked in a guaranteed rate and will not benefit from this bump in short-term rates. Secondly, if inflation picks up, the investor will lose on account of a decline in the purchasing power as the fixed return won’t keep up with the underlying inflation. These are ways in which a guaranteed income product can lose money.