Canada Savings Bonds still useful, advisor says

(September 9, 2004) Despite advice to the contrary, the federal government insists it will not scrap Canada Savings Bonds. While they may never make you rich, they still offer a couple of advantages for certain clients, according to one advisor.

Last week, federal Finance Minister Ralph Goodale said that the CSB program would be reviewed after a study by Cap Gemini Ernst & Young commissioned by the department of finance suggested that the savings bonds’ time may have passed.

In the report, the consultants pointed out that investors could earn similar rates of return by depositing their savings in a high-interest savings account at one of Canada’s virtual banks, such as President’s Choice Financial or ING Direct.

Not only were CSBs deemed poor investments for Canadians, they were also seen as an inefficient method of borrowing for the federal government. Despite the low interest rate paid on the bonds, the report said Ottawa had access to capital at even lower rates on the international open market.

But while the CSB may never make a client wealthy, they can still have a place in their financial lives, particularly for employees with savings bond payroll-deduction plans and senior clients uncomfortable with electronic banking, says an Ottawa-based advisor.

“When you look at the CSB you can’t really think of them as an investment vehicle because they don’t have a huge rate of return,” says Marc Lamontagne, a CFP and fee-for-service planner at Ryan Lamontagne Inc. “You have to think of them as a savings vehicle.”

He says many people still use the CSB as a short-term savings vehicle to fund their vacation or their Christmas shopping. Traditionally, Canadians like to think of themselves as a great nation of savers, but the facts just don’t support this anymore.

“Where the benefit is, is that a lot of people buy them through work, so you have that payroll deduction advantage,” says Lamontagne. “Not everybody has a group plan where the employer can deduct from the source for an RSP or a pension.”

CSBs allow Canadians to tuck away a little money for a rainy day. It may be easy to tell a client to set aside a certain amount from each paycheque, but there is always the temptation to spend. With CSBs — or any other payroll deduction plan for that matter — they never see the money so they don’t really miss it.

While Lamontagne sees the CSB as a helpful tool, he points out to clients there may be better choices.

“I think the virtual banks are a better course of action, because access is a lot easier but sometimes people like the fact that when they buy a CSB it’s a little bit harder to access,” he says. “They like the distance if they are saving for a particular purpose.”

There is also a comfort level associated with the bond, as some people are not willing to trust their savings to a bank with no walls. Some people are still unsure of deposit insurance coverage at these banks (they are in fact covered up to $60,000 per depositor, the same as the chartered banks).

“Senior clients who have larger amounts of money are concerned about Canada Deposit Insurance Coverage,” Lamontagne says. “With a CSB the coverage is unlimited because it is guaranteed by the government of Canada. Only in the case of the bankruptcy of Canada will you lose your money.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com