Last updated: October 15 2008
On October 7, the Department of Finance announced the interest rates for Canada Savings Bonds that are available for sale until November 1. The announcement included the following rate table:
Canada Savings BondSeries 114
Canada Premium BondSeries 64
Interest rates for year beginning
Annual interest rate
Average annual rate of return if held to November 1 of the following year
Average annual compound rate of return if held to November 1 of the following year
Nov. 1, 2008
Nov. 1, 2009
Nov. 1, 2010
The rates for Series 114 will be extended to existing CSB bonds series 46-52, 54, 60, 66, 72, 78, 84, 90, 96, 102, and 108. The rates for CPB series 64 will be extended to existing CPB bonds series 3, 15, 34, and 46.
With the equity markets in melt-down mode, many investors are looking for a safer place to park their money. With the current inflation rate hovering around 3.5% and interest on Canada Savings Bonds being taxable annually on a bond-year basis, let's take a look at how a typical taxpayer with a marginal tax rate of 40% might fare by investing in one of the new Canada Premium Bonds over the next three years (where rates have been set).
1. Each year the taxpayer will have to pay the tax on the accrued interest (November to October) in spite of the fact that the interest has yet to be received and is therefore not available to pay the tax bill.
2. The average interest rate (stated as 2.5%) is reduced by income taxes to approximately 1.5%.
3. After 3 years, in current dollars, the $100,000 investment will have grown to $106,576.80 (after taxes). However, if inflation continues at 3.5% per year, that $106,576.80 will be worth only $96,126.17 in today's dollars. The value of the investment therefore is reduced by approximately 2% in real dollars each year.