This study examines the relationship between stock returns and the term structure of interest rates in a Canadian setting. Following Zhou’s study of the US market (Federal Reserve Board, 1996), the hypothesis tested is the excess return hypothesis, which states that expected returns move one-for-one with interest rates. This relationship is explored using nominal and real return data for Canadian stocks and bonds. In addition, given the close relationship between the Canadian and US economies, the study examines the ability of US interest rates to predict Canadian stock returns. Using first differenced returns, the study finds that nominal Canadian interest rates have predictive power vis-à-vis nominal Canadian stock returns, but, unlike Zhou’s (1996) results for the US, the relationship is negative. This is also true when real returns are used. As for US interest rates and Canadian stock returns, the relationship is of mixed sign and mainly insignificant for both nominal and real stock returns and interest rates. The only evidence supporting the excess return hypothesis occurs when two-stage least squares, using the short-term interest rate as an instrumental variable, are used to regress real Canadian stock returns on real US interest rates. Finally, tests to determine whether the results are dependent on the period studied indicate that they are not sample-dependent.