What Are Canadian Saving Bonds and How Do They Work?

Canadian Savings Bonds (CSBs) were once a popular government-backed investment, providing a secure way for individuals to save while earning interest. The program was discontinued in 2017 due to declining demand and the availability of more competitive financial products. While no new bonds are issued, many Canadians still hold existing CSBs and may need guidance on how they function.

Eligibility Criteria

Before the program ended, CSBs were available to Canadian citizens, permanent residents, and legal entities meeting residency requirements. They were commonly offered through payroll deduction plans, making them accessible to a broad segment of the workforce. Businesses, trusts, and organizations could also invest in them.

Ownership remained with employees who acquired CSBs through workplace savings programs, even if they changed jobs. Bonds were registered in the individual’s name, ensuring only the rightful owner could redeem them.

When purchased for minors, CSBs were registered in the child’s name, with a parent or guardian acting as custodian. Upon reaching the age of majority, control transferred to the child. This made them a common gift for long-term savings or education.

Interest Calculation

CSBs earned interest in two ways. Regular Interest Bonds (RIBs) paid interest annually, depositing earnings into the bondholder’s designated account. Compound Interest Bonds (CIBs) reinvested interest until redemption or maturity, resulting in higher returns.

Interest rates were not fixed for the bond’s duration. The Canadian government set rates annually on November 1, meaning returns fluctuated based on economic conditions. While CSB rates were generally lower than other fixed-income investments, government backing provided security some investors valued.

For CIBs, interest was calculated on the principal plus any previously earned interest. For example, a $1,000 bond earning 2.5% in the first year would grow to $1,025. If the rate increased to 3% the following year, interest would be calculated on $1,025 rather than the original $1,000, allowing earnings to compound.

Redeeming and Payout Methods

Redemption methods depend on how the bonds were purchased. Bonds bought through financial institutions or investment firms can typically be cashed out at the same bank or brokerage. Those acquired through employer-sponsored payroll savings plans require contacting the plan administrator or the Bank of Canada. Since CSBs are no longer issued, all outstanding bonds are either redeemable immediately or have already matured.

The Bank of Canada processes redemptions, particularly for older or misplaced bonds. If a physical certificate is available, presenting it at a financial institution is usually sufficient. Electronic holdings require submitting a redemption request through the financial entity managing the account. Updating personal information with the Bank of Canada ensures a smooth payout if banking details have changed.

If a bondholder has passed away, their estate can claim the funds by providing proof of death and necessary legal documentation. Requirements vary by province, and estates with multiple heirs may need additional approvals before distribution.

Tax Reporting Requirements

Interest earned on CSBs is taxable and must be reported to the Canada Revenue Agency (CRA) in the year it is earned, regardless of when the bondholder receives the funds.

For RIBs, interest is paid annually and reported each year on a T5 slip issued by the financial institution or the Bank of Canada. These payments must be included in that year’s income tax return.

For CIBs, interest accrues over time and is only paid upon redemption. However, tax obligations are not deferred. The CRA requires bondholders to report accrued interest annually, even if they do not receive the funds until redemption. If a T5 slip is not issued, investors must track and declare accrued interest in their tax filings. Failure to report this income can result in penalties and interest charges.

Lost or Unclaimed Bonds

Many Canadians have lost track of their CSBs, particularly if issued in paper form. Since CSBs were often purchased for long-term savings, bondholders may forget about them or misplace certificates. Fortunately, unclaimed bonds do not expire, and the Bank of Canada maintains records of outstanding bonds.

To recover a lost bond, the bondholder or their legal representative must submit a request to the Bank of Canada with identifying details such as the bondholder’s full name, address at the time of purchase, and any known bond information. If the bond was registered, the Bank of Canada can verify ownership and issue a replacement or process a redemption.

If the original owner has passed away, heirs must provide proof of entitlement, such as a will or estate documents, before claiming the funds.

Transferring Ownership

Ownership of CSBs could not be freely transferred between individuals, as they were registered in the original purchaser’s name. However, certain circumstances allowed for a change in ownership, such as inheritance, divorce settlements, or legal name changes. The Bank of Canada facilitates these transfers to ensure the rightful party receives control of the bond.

For inherited bonds, the estate executor must submit legal documentation, including a death certificate and probate records, to request a transfer. If multiple beneficiaries are involved, the estate may need to liquidate the bonds and distribute the proceeds rather than transferring ownership directly.

In cases of divorce or separation, a court order or legal agreement specifying the transfer is required. Name changes due to marriage or other legal reasons can also be updated by providing supporting documents, such as a marriage certificate or government-issued identification.