Canada Savings Bonds (CSBs) Explained

Often you look for guaranteed or low-risk investments to hold in your portfolio. Although returns aren’t the best, bonds are a great way to earn a guaranteed return on your investment. This solution is the peace of mind some of us need.

The Federal government issued Canada Savings Bonds (CSB). Since the Canadian central bank backed them up, these were a unique financial vehicle that hedged against inflation and other economic uncertainty. Offered at a 19.5% annual interest rate in 1981, they are no longer available. Canadians held them in registered accounts such as Registered Retirement Income Fund (RRIF) and Registered Retirement Savings Plan (RRSP).

What were Canada Savings Bonds and Canada Premium Bonds?

Canada Savings Bonds were issued between 1968 to 1988. They were replaced by the Canada Premium Bond, available from 1989 to 2004. Both are government securities that pay interest at a fixed rate. The Canada Savings Bond paid an annual yield of 6%, while the Canada Premium Bond paid a variable rate between 4% and 5%.

The Canada Savings Bond had a maturity period of 10 years, whereas the Canada Premium Bond matured after seven (7) years. Initially offered with 10-year terms to maturity, financial institutions guaranteed that interest rates wouldn’t change for the first year. After that, the Minister of Finance would set the rate for future years based on market conditions. 

How did CSBs work?

Canada savings bonds are government-issued bonds that provide a low but guaranteed yield over a long period; CSBs 10 years, and CPBs 7 years. You could purchase these bonds through banks, brokers, mutual funds, insurance companies, or other institutions. You would have to deposit with the issuing institution to buy them. As priif of your deposit, you received a bond certificate. This certificate would show the amount of money deposited and the date they deposited it.

Frequently, people bought CSBs as part of a Payroll Savings Program to save for retirement. The program deducted the amount of your pay and placed in a CSB series that would generate a guaranteed yield. Then based on your contributions, you could redeem the bond at maturity.

From 2012 onwards, the government changed CSBs and made them exclusively available to employees enrolled in the payroll program. Meanwhile, CPBs continued to be available through financial institutions and investment dealers.

Both CSBs and CPBs were offered at specific times of the year. They were first offered with 10-year terms to maturity, an interest rate guaranteed for the first year. Then the government shortened the 10-year term to three years to maturity in 2012 to make savings bonds comparable to similar retail products.

Two CSB bond series

CSBs were non-transferable and issued in two bond series:

• Regular Interest “R” Bonds – this series accrued monthly interest and was payable annually into the holder’s bank account. Its minimum denomination was $300.
• Compound Interest “C” Bonds– a series where interest had an annual compounding, paid to the holder when they redeem these bonds. These bonds have a $100 minimum denomination. 

Anyone who held CSBs within a RRSP or a RRIF could redeem them. Whether R or C bonds, the interest was deposited in the respective RRSP or RRIF accounts. When you want to redeem your bond, you would go to the issuing institution and ask if there is a redemption fee. You would have to pay this fee before receiving your cashback. If you didn’t want to redeem the bond, you could choose to leave it in the account until maturity. At maturity, you would receive your cashback plus interest earned.

Can you still buy Canada Savings Bonds?

No, they are no longer available. However, you can redeem your outstanding Canada Savings Bonds. Contact the issuing institution to see what options are available to you. Unfortunately, they have also stopped earning interest as they last came to maturity in December 2021.

How to redeem Canada Savings Bonds

As the program has ended, all outstanding CSBs and CPBs have reached maturity and have not been earning interest since November 2021. If you have a CSB that was not part of the payroll program, you can still redeem them. Here is the process of how to redeem Canada Savings Bonds if you still have them;

• Please bring it to your bank branch when you own a certificated or physical bond. You will be need to sign the bond’s back portion upon presentation. They will then pay the face value and any accumulated interest either in cash or through a deposit into your bank account.
• If the certificate gets lost, follow the government’s process to redeem lost bonds, including completing and signing an indemnity bond form, plus payment of surety fees.
• If you have a CSB within RRIFs or RRSPs, visit your financial advisor or bank to discuss where you should transfer your funds. You can also contact the Canada Savings Bonds customer service center to withdraw.
• As of December 2021, all Canada Savings Bonds and Canada Premium Bonds have reached maturity and stopped earning interest. So find your bond certificates and cash them wherever you bank or invest.

Alternatives to Canada Savings Bonds

Now that CSBs are no longer available, you may be searching for a similar investment. We have listed below some derivatives which offer similar risk tolerance and yield. You can purchase these at any online broker in Canada.

Money-market exchange-traded Fund

A money-market exchange traded fund (ETF) is typically invested in cash, cash equivalents, cash deposits, commercial papers (short-term unsecured debt), and other high-quality and safe debt instruments. This ETF essentially boils down to two things:

• Money-market assets are highly safe investments and can help preserve capital in a shaky market.
• They don’t often offer very high returns.

These ETFs are available through online brokers, saving accounts, and guaranteed investment accounts (GICs).

Bond ETFs

Bond ETFs are equity investments that focus on investing in bonds as the underlying investment. The ETF could also invest in other bonds’ ETFs. Bonds represent a fixed-income investor vehicle. It’s a guaranteed certificate from an entity (government, corporation, municipality, etc.) to pay you interest for a specific time for a certain amount of money. In short, you are loaning them money with fixed parameters that generate you a return. There is a secondary market for bonds that is priced according to interest rates.

Bonds don’t lose money when you keep them to maturity – they pay their guaranteed coupon rate and the face value at maturity. This may not be the case if you sell them too early or if there is considerable inflation over the bond’s lifetime. The dilemma investors have to assess is if their money is better with a GIC or a bond. People can buy ETFs through online brokers, saving accounts, and GICs. Most similar to CSBs, we recommended checking out Canadian Government Bond ETFs.

Guaranteed Investment Certificates (GICs)

GICs are similar to regular savings accounts, but they have extra features. For example, they guarantee a minimum return of 2%. They are insured against loss of principal. Some of the essential pieces of information are as follows:

• What’s more, you can withdraw your money anytime without penalty.
• However, GICs aren’t always suitable for everyone. For example, they are not recommended for people who quickly need access to their money.
• For those looking to diversify their portfolio, GICs are a great option. 

Mutual funds

Mutual funds are similar to stocks because many people own them. However, unlike ETFs, they’re managed by professionals who actively invest the funds.

Treasury Bills

Treasury Bills are long-term securities. They are issued by the United States Treasury Department. There are three types of treasury bills:

1. 3-month bill – maturing in three (3) months
2. 6-month bill – maturing at six (6) months
3. 12-month bill – maturing after one (1) year 

You should consider buying a treasury bill if you expect to hold it for an extended time. However, you should avoid purchasing a treasury bill if you plan to sell before maturity.

A note on bond values & interest rates

Interest rates fluctuate over time. When interest rates rise, so do the prices of bonds. When interest rates fall, so does the cost of bonds. This means that over time the value of bonds will increase or decrease depending on interest rates.

High-interest savings accounts

A high-interest savings account is the most liquid option available. You’ll earn a higher interest rate than any other type of bank deposit. This event makes these accounts attractive for people who want to save for something big like homeownership.

But, be careful about what kind of savings account you choose. High-yield savings accounts tend to charge fees. Some banks may even limit how much you can withdraw from your monthly budget. These restrictions make it hard to use your savings to buy anything else. High-interest savings accounts are still good for someone looking to build wealth slowly. 

Once a great way to save your cash with a guaranteed return, Canada Savings Bonds are now unavailable, but the many alternative investments we listed above can accomplish the same goals; low-risk to no-risk investments with a modest yield. This is something everyone can use in their portfolio! A safe investment that gives you a guaranteed return.