A New Way to Sidestep Currency Conversion Costs

One of my biggest frustrations as an ETF investor is that so few online brokerages allow you to hold US dollars in registered accounts. Last year BMO InvestorLine became just the fourth brokerage to add this feature, following RBC Direct Investing, Questrade and Qtrade.

A few other brokerages offer partial solutions: TD Waterhouse, for example, allows you wash your trade if you’re selling one US security and buying another in an RRSP. But that doesn’t help you if you have new US dollars your want to contribute to your registered accounts.

My own brokerage, Scotia iTrade, offers a so-called US-Friendly RRSP. For a flat fee of $30 per quarter, you can buy US securities in your RRSP with Canadian dollars and avoid the usual spread, which is about 1.5%. I test-drove this service last year, and it’s adequate if you’re making a large transaction once a year. But I’m not going to pay $120 annually for it. Especially now that I’ve discovered a solution for sidestepping currency exchange fees in RRSPs—a solution that should work at any brokerage.

Four simple steps

Although most brokerages do not allow you to hold US dollars in RRSPs, they all allow you to do so in non-registered accounts. So here’s the technique: you buy the New York–listed ETF in US dollars in a non-registered account, and then transfer it in-kind to your RRSP. I tried out the strategy this month, and it worked without a hitch.

If you already have US cash in a bank account, follow these steps:

  1. Open a non-registered account with the same brokerage where you hold your RRSP. (Make sure the account carries no annual fee.) It took about a week for my new account to be up and running, as I had to send some paperwork by mail.
  1. Link the non-registered account to your US-dollar bank account so you can transfer funds without converting the currency. My US-dollar bank account is also at Scotiabank, so this was simple, but it may be more problematic if your brokerage account and your bank account are with two different institutions.
  1. Transfer US dollars from the bank account to the non-registered brokerage account and use this money to buy shares of a US-listed ETF. I bought additional shares of Vanguard’s Total International Stock ETF (VXUS), a core holding in my RRSP. Because the purchase was made with US dollars, I paid no currency conversion fee. My only cost was the $10 trading commission, which I would have had to pay anyway.
  1. Transfer the ETF shares in-kind from the non-registered account to the RRSP. At Scotia iTrade, there is a simple online form for this transfer request and it took about 30 seconds. If your brokerage does not offer this service online, you may have to call customer service. Once the transfer is complete, you will receive credit for an RRSP contribution equal to the market value of the shares in Canadian dollars.

The tax consequences

This sleight of hand may not be entirely without tax consequences. An in-kind transfer to an RRSP triggers a deemed disposition, meaning the Canada Revenue Agency treats it as though you sold the shares. If your ETF goes up in value between the time you buy it and the time you transfer it, you’ll incur a taxable capital gain. Unfortunately, if the value of the shares falls, you cannot claim a capital loss.

This is a rather small risk, however, as you can transfer the shares almost immediately. I filled out the online form the day after I made the purchase—I didn’t even wait for the trade to settle—and the shares showed up in my RRSP the following day. Because you pay a trading commission and a bid-ask spread when you purchase the ETF shares, you’re already starting with a small loss. So for you to incur a significant tax hit, the market would have to move up quickly and dramatically. Even then, the tax bill would likely be lower than the currency conversion fee you would have paid.

A gambit to call my own

Even if you don’t have a US-dollar bank account, you can still use this trick if you start with Canadian dollars. Simply transfer your loonies from your bank account to the Canadian side of your non-registered account and then use Norbert’s gambit to convert the currency before you make your ETF purchase.

You can do this using the Horizons US Dollar Currency ETF (DLR and DLR.U), which trades for free at Scotia iTrade. I tried this method as well, and it works fine, although I did have to wait three days for the DLR trade to settle before customer service could journal it over the US side of the account so I could sell it. The bid-ask spreads cost me about 0.20%, or $2 on every $1,000 converted.

I’ve always envied Norbert Schlenker for having a gambit attached to his name. So I invite investors everywhere to use this trick and to share it with others, but you have to refer to it as “Dan’s gambit.” I think it’s a fair exchange, don’t you?

72 Responses to A New Way to Sidestep Currency Conversion Costs

  1. TJ April 10, 2013 at 9:53 pm #

    Dan, your recent post on calculating ACBs tweaked this question, but I thought I’d post my question within this thread since it seems to be more relevant to the discussion here …

    If you use DLR / DLR.U for the Gambit, there’s still going to be a ‘loss’ when compared to the official exchange rates for the day(s). Can a person claim these buy / sell losses as a capital loss? I realize you’re not a tax accountant … just curious if you’ve heard of anyone else doing this in the past? Thanks.

  2. Canadian Couch Potato April 10, 2013 at 10:18 pm #

    @TJ: You can only compare the prices of actual transactions: you can’t compare anything to the USD/CAD exchange rate.

  3. smaynill May 26, 2013 at 6:21 pm #

    Hi everyone,

    this is the very first time I’m posting here but I’ve been reading the blog for a while. I am curious about using services from CurrencyFair, or travelex. Who really offers the best deal for foreign exchange? Would it be better than Questrade’s 0.5% for registered account? Is Nobert’s gambit better?
    CurrencyFair seems appealing for people with a foreign account. I also have the opportunity to open a euro account in France and I’ll need to find something more than Norbert’s Gambit. I’d really appreciate to know what is the best deal for foreign exchange outside US$.

  4. Victor August 23, 2013 at 2:05 pm #

    Dan, I am with TD Waterhouse. I have my DLR shares journaled from CAD margin account to USD margin account yesterday. However, the shares show up as DLR, not DLR.U, in my USD margin account.

    Did TDW make a mistake?

    Victor

  5. Canadian Couch Potato August 23, 2013 at 2:18 pm #

    @Victor: Probably no mistake. We’ve found this occurs with several brokerages: the security appears on the US side of the account, but the ticker does not include the “.U”. You will often see a short position on the Canadian side, too, until the trade settles. It’s all very confusing. Be sure to add the “.U” to the trade order when you sell it, however.

  6. Victor August 23, 2013 at 5:10 pm #

    @Dan, I called TDW. Indeed, there is no mistake. I was told that when I sell the DLR shares to get USD, make sure that I select US Exchange.

    Love your blog, and thank you for the quick reply.

  7. Canadian Couch Potato August 23, 2013 at 5:52 pm #

    @Victor: Actually I think TD gave you bad advice. DLR.U is denominated in USD, but it trades on the TSX, so you should not select US Exchange. This is actually a common mistake we point out to our DIY clients whenever we do Norbert’s gambit.

  8. Victor August 28, 2013 at 9:22 am #

    @Dan, you are correct. DLR.U is listed on TSX. The advice from TDW was wrong. I was able to sell my DLR shares in my USD account using DLR.U symbol.

    Many thanks for your accurate advice.

  9. Eric October 19, 2013 at 4:50 pm #

    Thanks for the post! Just to confirm, this would work equally well for any registered account, be it RRSP, TFSA or RESP?

  10. Canadian Couch Potato October 19, 2013 at 5:32 pm #

    @Eric: Yes, you should be able to transfer securities in kind from a non-registered account to any type of registered account, but I recommend verifying with your brokerage before you try it.

  11. MikeC October 22, 2013 at 7:00 pm #

    Dan, a belated congratulations on your own gambit!
    I have a TDW RRSP account but no US accounts so I would need to combine gambits. Could you please confirm that I’ve got this right…?
    1. Open a non-registered account with TDW.
    2. Move CAD into it and buy (e.g.) DLR.
    3. Call TDW and request that these shares be journaled over to the USD side of the account where they show up as DLR.U (or maybe just DLR).
    4. Sell all DLR.U.
    5. Use these USD funds to buy (e.g.) VXUS
    6. Call TDW and request a Transfer-in-kind of the VXUS shares to my RRSP acct.

    Now, assuming I got all that right, this will work for any new RRSP contributions. But is there any way to take existing RRSP holdings in CAD and turn them into new USD holdings inside the RRSP? Or does this call for a new gambit?

  12. Canadian Couch Potato October 22, 2013 at 7:12 pm #

    @MikeC: It sounds like you have all the steps covered. In step 6 you may not have to call TDW: Scotia iTrade allows you to do this online, but If not sure whether that is a common feature at other brokerages.

    As for existing holdings in your RRSP, what you describe is just the original Norbert’s gambit.

  13. MikeC October 22, 2013 at 9:03 pm #

    Thanks, Dan.
    But as you point out, Norbert’s Gambit won’t work if the existing holdings are in a TDW RRSP account. So it looks like TDW RRSP investors can sidestep currency fees:
    (a) for new contributions, using Dan’s Gambit,
    (b) for reallocation of existing USD holdings, or
    (c) not at all when selling the USD holdings.
    Based on your earlier analysis of the breakeven point for USD funds (11 years I believe), would it make more sense for us TDW people to stick to CAD funds?

  14. Canadian Couch Potato October 22, 2013 at 9:22 pm #

    @MikeC: My original comment in the post was misleading and I have amended it: it is possible to do Norbert’s gambit in a TDW RRSP, as this post explains. But it is more complicated than at other brokerages because of the additional step of washing the trade.
    http://www.canadiancapitalist.com/easy-norbert-gambit-in-td-waterhouse-rrsp-accounts/
    http://canadianmoneyforum.com/showthread.php/12522-Nortbert-Gambit-in-TD-Waterhouse-RRSP

    In this post I was thinking specifically about people who already have US dollars but cannot contribute these to their RRSP because they use a brokerage that does not allow USD cash holdings, such as TDW and iTrade.

    That estimate about the breakeven point for US and Canadian ETFs included a lot of assumptions that may or may not hold up, so don’t put too much faith in any specific number (11 years sounds way too long). In an RRSP, the withholding tax advantage of the US-listed ETFs can’t be ignored and it’s worth using them if you are able to get a decent exchange rate.

  15. MikeC October 22, 2013 at 10:05 pm #

    That’s very good to know. I feel much better about TDW now. My only comment on the article in Cdn Capitalist is that most of us will be wanting to move the USD out of the TD U.S. Money Market Fund and into a USD ETF. That would involve another two trades increasing the total cost by another $20, would it not? Still, definitely worth it for a large enough sum.

  16. Canadian Couch Potato October 22, 2013 at 11:08 pm #

    @MikeC: There is no fee for money going in or out of a money market fund.

  17. MikeC October 23, 2013 at 8:08 am #

    @CCP: Perfect! Thanks for your helpful pointers.

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