All the Big Six banks and several other financial players have something to offer investors who want to park money safely in an investment savings account. These products seem interchangeable, but they’re not.
Two banks stand out lately for offering top rates, and for adjusting those rates higher with a reasonable level of promptness. Bank of Nova Scotia’s Scotiabank Investment Savings Account had an interest rate of 4.75 per cent at the start of this week for balances up to $99,999 and 4.9 per cent for higher amounts, while Bank of Montreal’s BMO High Interest Savings Account offered 4.85 per cent. Both the BMO and Scotia accounts have consistently offered the best rates in recent months.
Investment savings accounts are a way for financial companies to package savings accounts eligible for coverage through Canada Deposit Insurance Corp. into a product that can be used in all types of investment accounts to park cash. You buy and sell these savings accounts just like mutual funds, which means you need a fund code. The code for the Scotia savings account mentioned just above is DYN6000, and the code for the BMO account is BMT104.
Other players in the investment savings account category offer between 4.3 and 4.65 per cent as of Monday morning. With many of these accounts, you get less of a return and slower reaction to rate changes by the Bank of Canada.
The Bank of Canada raised its overnight rate on July 12 by 0.25 of a percentage point. It took almost a week for this change to be reflected in returns for investment savings accounts, but Scotia and BMO were among the first to move. That’s a pattern I’ve seen a few times lately.
The rates quoted above are for Series A investment savings accounts. It never hurts to see if your broker will sell you the Series F version, which offers a higher return. The Series F version of the Scotiabank Investment Savings Account (DYN6004) pays 5 per cent, and you can buy it through Scotia iTrade.
If you have U.S. dollars in your investment account, consider parking them in a U.S.-dollar investment savings account. The rates are comparable to Canadian-dollar accounts.
The exchange-traded fund version of the investment savings account pays around 5.25 per cent these days, but the usual brokerage commissions apply when you buy and sell. If your broker has these commissions, weigh these costs against the higher interest rate.
-- Rob Carrick, personal finance columnist
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Ask Globe Investor
Question: I contributed to my daughter’s individual RESP at my bank each year as she was growing up and received the maximum CESG totaling $7,200 over that period. I have been drawing down the RESP to fund her university education for the past few years, using a combination of contribution withdrawals and educational assistance payments (EAPs), which consist of government grants and investment earnings. Having withdrawn all the money in the account recently, I was surprised to get a letter from the federal government stating that my daughter received $7,521 in CESG payments and that I now need to repay the excess of $321. Was this a mistake? It may be relevant that part of the RESP was invested in guaranteed investment certificates and part in mutual funds, which are managed by different divisions of the bank.
Answer: It appears somebody goofed here.
First, some background about CESG overpayments: With a family RESP that has two or more beneficiaries, it is possible for one beneficiary to inadvertently exceed the $7,200 CESG limit, with the excess having to be repaid to the CRA. That’s because a family RESP has one pooled CESG balance that can be shared among beneficiaries. Because of the default formula financial institutions use to calculate the percentage of earnings vs. CESG in an EAP, one beneficiary could max out his or her $7,200 CESG and unintentionally dip into the other beneficiary’s grant money, pushing the first beneficiary over the $7,200 limit. To avoid this, the RESP subscriber can ask the bank to tweak the proportion of earnings vs. CESG in the EAP to prevent one beneficiary from exceeding the $7,200 limit.
But that’s not the case here. You have an individual RESP with one beneficiary, your daughter. When you were contributing to her RESP, she was entitled to receive a maximum of $7,200 in CESG. Yet, now that you are making withdrawals, the bank allocated a total of $7,521 of CESG to her. In other words, the bank “withdrew” $321 of grant money that shouldn’t have even been there in the first place.
As you indicated, it’s possible that the problem arose because her investments were managed by different divisions of the bank, and the left hand may not have known what the right hand was doing. However, the bank should have kept a running total of the overall CESG balance and not pushed your daughter over the $7,200 limit.
It’s possible that there is another explanation for what happened, but this looks like a mistake. You should take your complaint to the bank manager, in writing, and then escalate it if the problem is not resolved. Let me know how you make out.
--John Heinzl (E-mail your questions to jheinzl@globeandmail.com)
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Compiled by Globe Investor Staff
Rob Carrick