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:
- 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.
- 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.
- 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.
- 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?