What it means
A Canada Savings Bond was a low-risk way for households to lend money to the federal government in return for interest. Because the Government of Canada stood behind it, the chance of losing the invested amount was very small.
That made it a common first investment for people who did not want to follow the stock market. Unlike most bonds, a CSB was not traded on a market, and its price did not rise and fall with interest rates.
The holder could redeem it at face value plus any interest earned, so the value was predictable from the day it was bought. Savers could usually choose between a regular interest bond, which paid interest out each year, and a compound interest bond, which left interest in the bond so that it earned interest on itself.
The rate on each series was set by the government at issue, and in later years the rate often moved up in step with the number of years the bond had been held. Savers therefore had a reason to leave the money alone.
Many Canadians bought them through payroll savings plans, where a small amount was deducted from each pay cheque. That made the product popular as a simple, habit-forming way to build an emergency fund.
Employers promoted the plans because they cost little to run and helped staff save. Interest earned was taxable in the year it was earned or credited, even when it stayed inside a compound bond.
A finance reader should therefore treat the figure on an old statement as taxable income and not only as a balance. Sales ended because the government decided the product was no longer needed in its funding plans.
If someone finds an old bond certificate, they should confirm its status and value with the issuer rather than assume it has stopped paying interest.
In practice
Real-world examples.
Example
A retired schoolteacher finds a stack of old bonds in a filing cabinet. She asks her accountant what they are worth, and he confirms the face value and the interest owing before the bonds are cashed. The interest is added to her taxable income.
Example
A small business owner builds an emergency reserve by buying a bond each autumn through his payroll plan. The bonds give him a safe place to hold $30,000 that he can reach quickly if cash flow tightens. He treats the interest as part of his personal income each year.
Example
An executor settling an estate lists all assets and finds several CSBs. She values each at face value plus accrued interest at the date of death, and reports the total to the estate's accountant. The figure is included in the estate return.
Formula
Calculation
Value of a compound interest bond = principal x (1 + annual rate) ^ years.
Suppose a saver holds a $10,000 compound interest bond at 2% for 3 years. The growth factor is 1.02 x 1.02 x 1.02 = 1.061208. The value is 10,000 x 1.061208 = $10,612.08, so total interest is $612.08. A regular interest bond at the same rate would pay 10,000 x 0.02 = $200 each year, or $600 over 3 years, so the compound version earns $12.08 more.Case study
Seen in the real world.
This fictional story is illustrative only. Maplewood Advisory is an invented planning firm, and one of its clients, a fictional carpenter named Daniel, has held bonds for twenty years.
Daniel is surprised to learn that interest on his compound bonds has been taxable every year even though he never received cash. His adviser explains the rule, prepares a summary of interest for each year, and helps him decide how to redeem the bonds. Daniel moves the money into a savings account that pays interest monthly and keeps an annual note of income for his tax return.
The adviser also uses the episode to explain a wider lesson to Daniel's family. A safe asset still has tax consequences, and a balance on a statement is not the same as cash in hand, so every product should be reviewed for its tax treatment before it is bought.
Watch out
Common mistakes.
- Thinking a CSB is a market-traded bond. It was redeemed at face value plus interest, not sold at a market price.
- Ignoring tax on compound interest. Interest was taxable even when it stayed in the bond and was not paid out.
- Assuming an old bond stops earning interest when it matures. Always confirm the terms with the issuer before assuming anything about old certificates, because the rules differed between series.
Questions
People also ask.
Can you still buy a Canada Savings Bond?
No, the government stopped selling them in 2017, though existing holders can usually redeem them by following the issuer's instructions.
Was a CSB safe?
It was backed by the Government of Canada, so the risk of losing the invested amount was very low, although inflation could still reduce the buying power of the money.
How is a CSB different from a GIC?
A GIC, or guaranteed investment certificate, is sold by banks and locks money in for a set term, whereas a CSB could be redeemed at face value after an initial waiting period.
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