Canada Savings Bond holders getting fleeced by Ottawa

About 800,000 working Canadians buy Canada Savings Bonds through their employer. The question is: why?

This November’s recruiting drive introduced a paltry annual yield of 0.5 per cent. When you factor in the official inflation rate of just over 1 per cent that means their initial investment is worth less when it comes to maturity in 3 years. When you consider price increases in basics like food and gasoline it’s an even bigger loss.

Cashing in on the CSB legacy

No doubt Ottawa is cashing in on the patriotic appeal of Canada Savings Bonds. They were first issued as Victory Bonds to help finance the First and Second World Wars. More recently patriotism had real benefits when the payout rate hit a record 19.5 per cent in 1981.

Fast forward to the post-global meltdown era, and the age of rock-bottom interest rates. Safety has become a priority for many and CSBs are backed by the Canadian government. It’s good to have a sure thing in the current market climate but there are other safe options with returns that outpace inflation. Guaranteed Investment Certificates (GICs) and high-interest savings accounts through registered banks and trust companies, for example, are also indirectly backed by the Canadian government through deposit insurance.

But forced savings and convenience are likely the biggest attraction for Canada Savings Bonds. Employers implement the payroll program on the investor’s behalf and they can automatically contribute as little as $2 a week. The Canadian government offers similar savings bonds starting at 1 per cent called Canada Premium Bonds. They have the same government backing but can only be purchased up to December 1st through financial institutions and dealers.

As a side note: most private financial institutions will set up automatic withdrawal programs for any savings vehicle.

How does Ottawa come up with 0.5%?

The bigger question is the rational that goes into determining 0.5 per cent as a fair rate of return for people who lend their hard-earned money to the government. Conversely, if you owe money to the government the Canada Revenue Agency charges 5 per cent compounded daily on taxes owing plus 1 per cent of the balance for each month it is late.

If the CRA owes you while you’re waiting for your return, or by error, you get nothing.
Canada Savings Bonds are sold through the Bank of Canada, which controls the benchmark interest rate to keep Canada’s economy growing. When contacted an official with the Bank of Canada said the rates for Canada Savings Bonds are set by the Ministry of Finance.

When asked why the yield on Canada Savings Bonds were half the yield on premium bonds, a Ministry of Finance official - who asked only to be identified as an “official” - suggested CSB holders pay for the convenience of automatic withdrawals. “Canada Savings Bond instruments offer the convenience of the payroll deduction service, which is not offered with Canada Premium Bonds.”

He also said 95 per cent of CSBs are redeemed within one year of purchase and they offer slightly better terms for early redemption.

How about the difference between CSB returns and returns offered by banks and trust companies in the private sector? “The interest rates on CSBs and CPBs are slightly lower than comparable retail products to reflect the special features of these Government of Canada retail products and to avoid outright competition with financial institutions.”

Perhaps this is information the 10,500 employers across Canada that still sponsor the Canada Savings Bond Payroll Savings Program should pass on to their employees.