2 Types of Canada Savings Bonds

Canada savings bonds are investment instruments that the government of Canada sells to the public between October and December of every year. They function similarly to the U.S. Treasury Bonds and they serve a similar purpose--to raise money for the Canadian government without raising taxes. As with the U.S. Treasury Bonds, the investors get the security of knowing that they will be repaid regardless of what happens to the economy. Because the Canadian economy is doing better than the US economy, the Canadian savings bonds aren't as highly sought as their U.S counterparts, but they are still an important part of every Canadian investor's portfolio.

Understanding Canada Savings Bonds

The Canadian savings bonds are issued by the Bank of Canada, a crown corporation owned by the Canadian government. While it's head is appointed by the Canadian government, and the bank's earnings go directly into the Canadian treasury, it is not directly controlled by any branch of the Canadian government, and it is treated as a private institution for accounting purposes. As the result, it has more leeway to spend money than its United States counterpart.

Because of this, Canadian savings bonds combine the best features of government-issued bonds and private bonds. The fact that they are backed by the Canadian government makes them secure, while the more private-style management gives them flexibility their U.S. counterparts lack.

How Canada Savings Bonds Work

Bank of Canada sells the Canada savings bonds between October 1 and December 1. Investors can buy them at most banks, credit unions, full-service investment dealers, discount brokerage companies and trust companies throughout Canada. They can also be ordered online or by phone. Their value is set ahead of time, but investors have different values they can choose from. The cheapest Canada savings bonds sell for as little as $100 (Canadian). Once the investors buy them, they can either hold on to to them until they mature, sell them to other investors or redeem them before they mature. The interest will accumulate for as long as the investors hold on to it, and it will go towards the bonds' final value.

Types of Canadian Savings Bonds

Throughout history, there have been many different types of Canadian bonds. Today, only two remain--Canada Savings Bonds and Canada Premium Bonds.

1. Canada savings bonds mature ten years after they are purchased. However, investors have the right to redeem them at any point before that period ends. If they redeem it three months after purchase, they will only get the value of the bond back. If they redeem it after a longer period, they will get the original value plus whatever interest accumulated prior to that point. The interest payments are set by the Bank of Canada during the first year and adjusted according to the changes in the market for the remaining nine.

2. Canada premium bonds also mature ten years after they are purchased, but in their case, the investors can only redeem them at the end of each year. The interest rate is set by Bank of Canada for the first three years, and it automatically increases each year. The interest rates are set according to market conditions for the remaining seven years.

Canadian Savings Bonds and Retirement Savings Plans

Investors can use both types of Canadian savings bonds to finance their retirement plans. They can choose to put the bonds in either a Canada retirement savings plan or a Canada retirement income fund. The former uses the compounded interest to generate retirement savings, while the latter used the bonds themselves. Either way, the taxes on the resulting income are deferred until the money is withdrawn. The money must be withdrawn before December 31 on the year investor turns 71.

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