End of an Era: Budget Kills Canada Savings Bonds

The CSB is officially obsolete, killed by the March 22, 2017 federal budget. What effect does this have on investors? Some new planning strategies are in order for planners and clients alike.  But first a little history...

Since 1946, the Canada Savings Bond has been a safe and easily accessible investment option for Canadians, albeit one that has been declining in popularity over the years. It has finally become too expensive for the government to administer, compared to other more cost-effective wholesale funding options.

Current one-year yields on Canada Savings Bonds are at 0.70%, making alternative safe investments far more attractive to many investors. For example, current one-year GIC rates range up to just over 2%, while some banks are offering fully redeemable high-interest savings accounts, without any locking-in provisions, in the 0.80% to 0.90% range, and often with special short-term introductory rates in excess of 2.0% to new account holders.

Returns on such guaranteed investments have been at historical lows for many years now and Budget 2017 continues to project slow growth for the next several years. For the period from 2016 to 2021, GDP growth is projected to be just 1.7% while inflation is projected to be 1.9%. Conversely, three-month Treasury Bill yields are projected to be at just 1.2%, underlining the fact that we are losing ground as consumers year after year compared to rising costs as projected by the Consumer Price Index.

What effect does this have on investors?

In order to maintain purchasing power year after year, investors must attain enough growth in their portfolios to offset increases in both taxation and inflation. Assuming a combined federal and provincial tax rate of 50%, an investor would have to earn 3.8% interest to have a net yield of 0% growth, just to maintain purchasing power.

Investors who are willing to take on additional risk can also turn to higher yielding corporate bonds, mutual fund investments and low-fee trading accounts to try and outperform guaranteed rates in the current economic climate. There is also more favourable taxation available on alternative investments in the form of dividends and capital gains, which could help to ease some of the erosion of growth due to taxation.

In the current low-growth environment facing consumers, these alternative investments provide the greatest potential for outperforming the budget’s projections, especially since Budget 2017 has not changed the tax rates on dividends or capital gains, thereby maintaining the attractiveness of these types of investments.

The key here is to understand that if an investor does not achieve a net yield of 0% growth at a minimum, it means the systematic erosion of purchasing power year after year. While on paper it may appear that investment account values are growing, the numbers after tax and after inflation must be considered in order to maintain purchasing power and to reduce the effects on the erosion of wealth.

Daniel Sonkodi BA, CFP, EPC, MFA, is an Ottawa-based Certified Financial Planner and Master Financial Advisor at ONELIFE Wealth Management and a Cluster Manager for Knowledge Bureau’s MFA-Retirement and Estate Services Specialist designation program.

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