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.
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.
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.
The CSB can be withdrawn at any time at most of the big banks.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.
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.
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.