Holding US Dollars in Registered Accounts

RBC Direct Investing recently became the first bank-owned brokerage to allow Canadians to hold US dollars in registered accounts, such as RRSPs and Tax-Free Savings accounts (TFSAs).

This is a welcome move, and we hope the other banks will follow suit. (Questrade and Qtrade have allowed US dollars in RRSPs for some time.) The cost of converting loonies to greenbacks in an investment account is significant — indeed, it’s the main reason why Canadians are often reluctant to use low-fee ETFs from US providers.

But holding US dollars in a registered account also raises a number of practical questions. A reader, Graham R., emailed to ask how US-dollar transfers to RRSPs are treated with respect to contribution limits. For example, let’s say he moves $10,000 US into his retirement account today. Early in 2011, before tax time, the brokerage will send Graham a tax slip indicating the amount of his RRSP contributions. Will this amount be indicated in US or Canadian dollars?

I spoke to Michael MacDonald, head of business strategy at RBC Direct Investing, who clarified how this works. When you deposit US dollars into a registered account, the brokerage records the contribution in the equivalent amount of Canadian dollars. (They use the exchange rate set at the end of the previous day.) For example, if the US dollar is currently valued at $1.05 Canadian, then a $10,000 US deposit would count as an RRSP contribution of $10,500 CAD.

Watch out for overcontributions

Graham was concerned that confusion about these rules might cause investors to accidentally overcontribute to their RRSPs and incur a penalty. That risk seems small today with the US and Canadian dollars so close to par, but we’d be foolish to presume that our dollar is going to remain this strong forever. (Let’s not forget it was worth $0.77 US as recently as the spring of 2009.)

The good news is the CRA gives you a little breathing room: you’re allowed to exceed your RRSP contribution limit by $2,000 without penalty. (After that, overcontributions are taxed at 1% a month.) Note, however, that you can’t claim excess contributions on your tax return. If Graham’s RRSP limit this year is $10,000 and he makes a US-dollar contribution valued at $10,500 CAD, he won’t get penalized, but he can only claim a $10,000 income deduction.

As 70,000 investors learned last year, it can be just as costly to overcontribute to a Tax-Free Savings Account. The annual limits are low ($5,000, plus any amount carried over from previous years), and every excess dollar is taxed at 1% per month. If an unwitting investor transfers $5,000 US into her TFSA when the loonie is worth US$0.85, the overcontribution penalty would be more than $100.

Before you make the switch

Some other notes for investors who considering taking advantage of dual-currency accounts at RBC Direct Investing:

  • The option is available for the whole range of retirement accounts, such as Registered Retirement Income Funds (RRIFs) and Locked-In Retirement Accounts (LIRAs). The one important exception is Registered Education Savings Plans (RESPs), which cannot hold US dollars.
  • To move US dollars in and out of your RBC Direct Investing account, you’ll need to open a US-dollar bank account with RBC. You can’t use a US-dollar account from another bank.
  • No US-dollar bank account? You might consider using Norbert’s gambit, a way of sidestepping currency conversion fees in an investment account. Let’s say you want to buy $10,000 worth of a Vanguard ETF. You could deposit this sum in Canadian dollars, convert it using the gambit, then buy the ETF in US dollars. (This technique can be complicated, so read up on it first and employ it at your own risk.) This would also eliminate any confusion about RRSP or TFSA contribution limits, since the initial deposit would be in Canadian dollars.
  • US-listed ETFs are not eligible for dividend reinvestment plans through RBC — only individual stocks in the S&P 500 are eligible. But there’s still a benefit for investors who use US-listed funds: with a dual-currency account, you can receive dividends in US dollars and there’s no forced currency conversion. RRSP clients of all the other bank brokerages currently get dinged by foreign exchange fees of about 1.5% every time their ETFs pay a distribution.

The information in this post should not be construed as tax advice. Consult an accountant or other qualified advisor if you are unclear about any tax implications of using US dollars in a registered account.

11 Responses to Holding US Dollars in Registered Accounts

  1. DM November 29, 2010 at 10:43 am #

    Thanks for the information, Dan! I am intrigued by Norbert’s gambit. Can this be done in a RSP account or does it only work in taxable accounts?

  2. Phil G November 29, 2010 at 12:53 pm #

    I just completed a USD transfer in-kind to my RRSP of VTV (with TDWaterhouse). If you call during the trading day, TD gives you the option of choosing at what price (between the days low / high) you wish the shares to be valued at. If you call after trading has closed it will be at the closing price. Usually not a huge swing within a day, but could make a difference if you can avoid declaring capital gains or are tight on contribution room etc. When we wrapped up the call, the TD Rep indicated what the CDN contribution amount to my RRSP would be.

  3. Ryan S November 29, 2010 at 8:10 pm #

    @Canadian Couch Potato: You can also do it at TD Waterhouse. It’s a bit more complicated there; because TDW does not allow you to hold US dollars you have to wash your trade either into a US$ Money Market fund or directly into whatever US-listed security you plan to buy. Here’s a recent thread where somebody walked through the procedure in a TDW RRSP:

    http://www.canadianmoneyforum.com/showthread.php?t=4828

  4. Canadian Couch Potato November 29, 2010 at 8:20 pm #

    @Ryan: Thanks for clarifying. I had not realized that the gambit was possible in an RRSP that doesn’t allow USD holdings. Thanks for the link, which has a ton of great detail.

    @Phil: Also a great point. No matter which broker you use, transferring US-denominated securities into an RRSP would result in the same issues regarding contribution room. Thanks for sharing.

  5. Paul December 1, 2010 at 3:36 am #

    One added bonus to in-kind contributions would be that the brokerage fee will be taken from the non-registered account when the purchase is made; the brokerage fee won’t be eating into the TFSA or RRSP contribution room

    (for someone thinking of a TFSA with 5 different investments worth 3000$ each, possibly at 30$ a trade, that can be 150$ of contribution room !)

  6. Victor March 8, 2013 at 9:50 am #

    Say hypothetically that I make the full contribution for 2013 ($5,500) into my TFSA. Subsequently during the year, I decide to open a $USD TFSA account in order to trade US-listed securities (rather than go through the FX change every time I trade within the $CAD TFSA). When the account is opened and I then transfer the $5,500 into the $USD TFSA account from the $CAD TFSA, would the FX rate at the time of transfer have any bearing on the contribution for the year or was the contribution effectively “locked” at the time the $5,500 CAD was deposited?

    example that hopefully clarifies my question:

    1) I transfer my $5,500 CAD contribution for 2013 from CAD TFSA to my newly-opened USD TFSA at $1.02 USD/CAD, resulting in $5,610 USD in my USD TFSA.

    2) 1 month later (still in 2013 year), my $5,610 USD hasn’t moved but the FX rate is now $0.98 USD/CAD.

    3) At this time, I transfer the $5,610 USD back from the USD TFSA to the CAD TFSA, resulting in $5,724 CAD.

    4) Is the $224 ($5,724 CAD – $5,500 CAD original contribution) considered an overcontribution? What if the transfer back took place in 2014, before any new contribution to the TFSA was made? Would it then be considered a $224 contribution under my $5,500 limit for 2014?

  7. Canadian Couch Potato March 8, 2013 at 10:04 am #

    @Victor: I’ll start by saying you should ask an accountant or tax specialist before doing anything like this. But if you are transferring funds from one TFSA to another (regardless of the currency) there should be no deemed withdrawal and re-contribution. My guess is it would be treated like transferring funds from one RRSP to another: this does not affect your contribution room in any way.

  8. Jon July 23, 2013 at 2:51 am #

    With respect to Norbert’s gambit, is the currency conversion rate RBC offers the same or significantly higher than what can be achieved with the gambit? ie: if I have a US dollar account with RBC, is there a point using the gambit or should I just convert the money to USD if I plan on purchasing a US listed ETF like VTI?

    Also wondering if VXUS is purchased in USD or CDN?

  9. Canadian Couch Potato July 23, 2013 at 5:34 pm #

    @Jon: If you’re converting US dollars at your local bank branch (or electronically from one bank account to another) the rate is likely to be even worse than at a discount brokerage, let alone by using Norbert’s gambit. You can determine the spread by following these steps:
    http://canadiancouchpotato.com/2012/12/17/how-much-are-you-paying-for-us-dollars/

    VXUS is traded in US dollars. For comparable Canadian-listed ETFs, see this post:
    http://canadiancouchpotato.com/2013/04/15/new-ishares-etfs-give-canadians-the-world/

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