Canada Savings Bonds that have already been purchased have stopped earning interest, but can still be redeemed. As of December 2021, they had all matured and were no longer earning interest, so a good portion of them had already been redeemed. Here’s a look at what some investors are using as investment alternatives.
Best Alternatives to Canada Savings Bonds
The Canada Savings Bond Program was an excellent way for investors to get a guaranteed return on their investment. This low-risk investment was purchased by many and was a great way to diversify a portfolio. Just because they aren’t around anymore, though, doesn’t mean that there aren’t still some great low-risk options. Here’s a look at a few.
Guaranteed Investment Certificates
Guaranteed Investment Certificates, also known as GICs, are a form of financial product issued as a low-risk investment that you can get through any bank or financial institution, including credit unions. With GICs, you invest a specific amount of money for a set term with a set interest rate. At the end of the term, you’ll get your principal investment as well as the accumulated interest amount, which is why most investors look for the best GIC rates.
The draw of GICs is the guaranteed rate of return. As long as you don’t break the term and leave your investment locked for the required period of time, you’ll get your guaranteed return. Since the funds are insured by the CDIC (Canada Deposit Insurance Corporation), your investment is protected, which is something investors like.
When the term is over, the funds will be deposited into your bank account via cheque or direct deposit as long as you supply your banking information. You can choose to reinvest when your term is over, though, before it gets deposited into your bank account.
Types of GICs
There are different types of GICs. There are cashable, market-linked, and term GICs. There are also GICs with fixed interest rates and variable interest rates. Cashable GICs are also known as redeemable GICs. With these, you’re able to redeem your funds before the end of the term, even though you’ll likely incur a penalty.
Market-linked GICs are GICs that are linked directly to the stock market. The returns are not guaranteed unless you get a market-linked GIC with a guaranteed minimum. If you don’t, then you could end up losing your initial investment.
When it comes to interest rates on GICs, you could get a fixed rate or a variable rate. A fixed rate means you earn the same rate for the entire term. With variable-rate GICs, the rate of your return is based on the Bank of Canada’s prime rate.
Lastly, the most common type of GIC is the term GIC. These GICs are set for a specific term, usually 1, 3 or 5 years. The length of the bond’s term you choose will determine your interest rate. The longer the term, the higher the interest rate. These types of GICs also tend to have higher interest rates than other GICs, while still maintaining guaranteed returns.
Treasury Bills
Treasury Bills are debt securities issued only by provincial and federal governments. Unlike GICs, Treasury Bills are short-term investments ranging from a month to a year. They can only be purchased from security brokers or financial institutions.
When purchasing a T-Bill, the usual minimum investment is $1,000. That said, many financial institutions require a minimum of several thousand dollars. The average purchase amounts for T-Bills are $1,000, $5,000, $10,000, $25,000, $50,000, $100,000, and even $ 1,000,000.
The thing to consider with T-Bills is that they’re categorized as government bonds (not corporate bonds), making them the closest alternative to Canada Savings Bonds. However, no interest has been earned on T-Bills. What you earn on them depends on the price you purchase the T-Bill for, relative to the resale or redemption price. So, if you purchase a $1,000 T-Bill at a discount, you’ll get the difference when you redeem it.
High Interest Savings Accounts
High-Interest Savings Accounts, also referred to as HISAs, are similar to traditional savings accounts except that you earn more interest. With these accounts, you can only transfer funds in or out of your account; you can’t spend them. Any transactions other than transferring to or from your chequing account will incur a fee. However, you don’t have to worry about any monthly fees with this bank account.
When it comes to HISA, you must be aware that you will be required to pay income taxes on any interest earned. This is the same for most accounts unless they’re tax-free or registered tax-deferred accounts. Either way, though, you’re still able to earn with these accounts. You don’t just earn regular interest, though; you earn compound interest, even though the interest rates are lower than GICs.
Mutual Funds and ETFs
While not all mutual funds and ETFs are a good replacement for Canada Savings Bonds, some can replicate their earning potential. These low-risk investments have higher risk than a traditional Canada Savings Bond, but they make a good alternative. The three that are currently considered great alternatives are:
- BMO Short Provincial Bond Index ETF (TSX: ZPS)
- iShares Canadian Government Bond Index ETF (TSX :SGB)
- Canadian Short-Term Government Bond Index ETF (TS X:VSG)
You can purchase these through a financial advisor or a discount broker.
GICs Vs Bonds
Both Guaranteed Investment Certificates and Bonds with a good credit rating are great ways to add to your investment portfolio. That said, there are some differences between the two. The first is that GIC earnings are subject to tax since they’re investment income. Bonds, on the other hand, are considered to be capital gains, which means that you pay the capital gains tax instead.
Another difference is that bonds can be redeemed at any time. GICs are under terms, so redeeming them early can end up costing you money. However, if you don’t need to redeem them early, you can actually end up making more off your investment.
When investors use GICs, they often will reinvest when the term is up or invest in multiple laddered GICs. However, how much you earn depends on the interest rate, which can change at any time. While this can be a way to earn even more, it can also be a way to lose.
That said, when you weigh all of the pros and cons, many would consider bonds to be better. They have a slightly lower risk, and you’re able to access the funds whenever you want. However, for those with money they don’t intend to spend, GICs may be a better investment.
Why Were Canada Savings Bonds Discontinued?
In Canada, savings bonds were derived from the war bond program that started in 1915. These bonds were then called Victory Bonds ( also referred to as victory loans and Canada war loans), and in 1945 (the same year World War 2 ended), Canada Savings Bonds were created. These were popular in the years that followed and were how many Canadian residents began to dabble in investing. Many employees also used payroll deductions to purchase Canada Savings Bonds.
In the early 2000s, the Canadian government found the program less attractive than it once was. This is partly because there are more federal funding programs the government uses, so this program isn’t the only source of debt management as it used to be. Not long after this, the program began to cost more in federal budget than it generated, so the government announced that the program would end. However, the many Canadians who still have savings bonds can redeem them.
Interest Rates on Canada Savings Bonds
The interest rates for Canada Savings Bonds varied by year and with the prime interest rate. While not all rates are listed, in 2009 they ranged from 0.40% to 1.00%. They were different every year before and after. However, they didn’t get too much higher than 1.00%, so you would earn a low rate that would add up the longer you held the bond. Interest accrued annually on the bond’s anniversary date.
How Do You Redeem Canada Savings Bonds?
Even though Canada Savings Bonds have been discontinued, you can still redeem them, and it’s actually pretty simple. The first thing you need to do is locate your physical bond certificate. If you can’t find it, you’ll have to go through the lost bond process.
Once you find the bond, you want to review it and verify that it contains the important information you need. This includes:
- The certificate number
- The series number
- The maturity date
- The par value (face value)
- The interest type
- Name of the registered owner
One thing you need to obtain is the signatures of all registered owners, so you need to be sure you know who they are. You can then take the bond certificate to any financial institution. The bank will ask the registered owners to sign the back of the bond. You’ll then receive the amount that you’re entitled to from the bond.
Unclaimed Canada Savings Bonds
Unclaimed Canada Savings Bonds are processed through the Bank of Canada Unclaimed Property Office. This is where you can find information on redeeming your bonds, reporting a lost bond, and even other resources for those who still own CSBs.
Since there’s no program to track down and pay anyone who still owns a CSB,, as there is for dormant accounts, it’s up to the registered owner to redeem the bond. In fact, many people have bonds in their name that they’re not even aware of. You can find out if you own one through the Unclaimed Property Office of the Bank of Canada. They’ll then work you through the process of redeeming your bond.
Can You Still Buy Canada Savings Bonds?
Since the Canada Savings Bonds were discontinued in 2021, you’re no longer able to purchase them. If you want to purchase a government bond, though, there are still plenty of other options.
How Much a $100 Canada Savings Bond is Worth Today
The value of a $100 Canada Savings Bond today depends on how long you’ve held it and when you purchased it. With that said, here’s an example. If you purchased the $100 bond in 1964, after 30 years, it would be worth $164.12. This will slightly change the longer you hold the bond. The best way to determine this is to check the bond itself.
Redeeming a Deceased Owner’s Bonds
In Canada, you can redeem Canada Savings Bonds (CSBs) as a coupon payment for a deceased person as long as you can provide proof of death. You must also be able to provide legal estate documentation from the estate executor or an affidavit of loss for transfer of ownership, like probate or other documents, if the total value of unclaimed balances exceeds $20,000. The bonds must also have matured and stopped earning interest.
What are Provincial Savings Bonds?
As with Canada Savings Bonds, many provinces in Canada no longer offer bonds. These include:
- Ontario Savings Bonds
- Manitoba Builder Bonds/Hydro Bonds
- Saskatchewan Savings Bonds
Even though these bonds are no longer available, you’re still able to cash in any unredeemed certificates that have matured. That said, Épargne Placements Québec still offers savings bonds in Quebec. These are offered only at certain times of the year and are fully backed by the Quebec government.
What are Real Return Bonds?
Real Return Bonds are different from strip bonds and marketable bonds; however, yield to maturity still matters. These fixed-income investments are government securities designed to provide inflation protection for your investment. They have principal adjustments tied to the Consumer Price Index and semi-annual interest payments.
There are cash ETFs and Money Market Funds, like the BMO Real Return Bond Index ETF and the iShares Canadian Real Return Bond Index ETF, that make good alternatives. However, it’s important to understand that there is a high duration risk with these, and there is no guaranteed principal as there would be with a Bond.
That said, though, these accounts do offer more purchasing power, and they can be invested into a tax-sheltered account for non-taxable interest. Many even have RRSP eligibility. Some of the other accounts you can get include:
- TFSA
- FHSA
- Canada RSPs
Unlike regular interest bonds, these accounts offer competitive interest rates and can be used in a payroll savings program or payroll savings plan instead of the CSB Payroll Savings Programs. There’s usually a minimum balance requirement, but the funds aren’t covered by insurance even if they they fall within the Canada Deposit Insurance limit. That said, CIPF will cover up to $1,000,000 per catergory.
How Bond Interest is Reported on a T5 Slip
Any bond interest paid from Canadian sources is reported in Box 13 of your T5 Statement of Investment Income. Any amounts from foreign bondholders are then reported in the foreign income section instead. Any amounts from Box 13 then are going to go on Line 12100 of your T5.
What Do You Do if a Bond Certificate is Lost?
If a bond certificate is lost, the best thing to do is contact the issuing financial institution or registrar to report it missing and request a stop transfer or an adverse claim notice. You will need to file a formal indemnity form or purchase a lost document surety bond to protect the issuer before you receive the redemption value.
Government of Canada Marketable Bonds
Marketable bonds through the Government of Canada are sold in a public bond auction to primary dealers and most financial institutions. These are then made available to both individual and retail investors. You may have heard these also referred to as Canada market issue bonds. The standard compound interest bonds were discontinued in 2017. Other bonds, like Canada War Savings Certificates, are also discontinued and no longer earn interest.
Strip Bonds and Building a Bond Ladder
When you’re building your investor profile, strip bonds are one way to build your profile, as well as emergency savings. You buy them at a steep discount and then earn money when they pay out their full face value upon maturity. When looking to increase your funds by building a bond ladder, you purchase bonds with staggered maturities so your cash flow becomes more regular. A bond calculator can help you determine how much you will earn.
