Contributing to an RRSP to Pay Less Tax: 4 Real-Life Cases
What are Canada Savings Bonds?
Victory Bonds were used to fund the war effort and eventually gave way to Canadian Savings Bonds. Since this program grows money risk-free, it was popular for many years.
With this product, buyers lent money to the Canadian government at a fixed interest rate, which has varied quite a bit over time. Currently, the minimum rate is 0.5%. Low bond yields, which are lower than the inflation rate, undermined their popularity.
The costs of maintaining the program also became too high for the federal government. That’s why it was discontinued.
What types of bonds are there?
There are two categories of savings bonds:
Canada Savings Bond (CSB). These could only be acquired via a payroll savings program. An employee could therefore contribute to the bond using automatic withdrawals from their pay.
Canada Premium Bond (CPB). These could be acquired by an investor from their financial institution or brokers.
It was possible to get both types of bonds with regular interest. This means that interest is paid by cheque or automatic transfer on each anniversary of the date of issue. Others have compounded interest. In this case, the interest is reinvested. That way, interest accrues until you cash in your bonds or until they reach maturity.
What can you do with your savings bonds?
You can save your bonds until they reach maturity and then cash them in. You simply have to bring your bond to your financial institution. With the payroll savings program, your bonds will be paid to you by cheque or automatic transfer at maturity. It is therefore important for the owner of a CSB to verify that the mailing address and banking information provided are correct.
However, you are not obligated to wait. Certificated bonds—which are bonds that were issued with a physical certificate—are redeemable at any time at financial institutions. You can also redeem them via an automated telephone service or the Canada Savings Bonds online service.
What will you receive?
- Immature bond: You will receive its value as well as the interest accumulated up until the previous month. Any interest accumulated during the current month will be lost
- Mature bond: The value of the bond and all the interest accumulated.
As with any interest paid into a non-registered investment account, the interest you earn is taxable and will have to be declared on your tax return. The tax rate varies depending on your income.
Where to invest now?
The dwindling popularity of Canada Savings Bonds can also be explained by the arrival of new, more attractive financial products on the market, such as different mutual funds and exchange-traded funds.
Guaranteed Investment Certificates (GICs) are another way to grow your money. With a GIC, you entrust an amount of money to your bank for a predetermined amount of time. At the end of the term, in addition to your initial investment, you will receive the interest earned on this amount. GICs offer higher interest rates while still being secure. There are also market-related GICs.
Some mutual funds have a more interesting growth perspective: your savings are invested in the markets and the returns can fluctuate. However, even with funds deemed secure, your capital is not guaranteed.
Are you unsure about which products to choose? Your advisor will be able to guide you towards the best investment products based on your investor profile.