A reader, Mr. L, sent the following information on how TD Waterhouse clients can avoid paying currency conversion fees when trading US-listed stocks in a self-directed RRSP account. Here is his detailed e-mail, posted with his permission (and slightly edited):
Since my last email to you, I have discovered that one brokerage house does allow you to avoid all of these costly currency conversions. I was just informed today that TD Waterhouse, which I use, will allow me to convert the Canadian cash held in my RRSP to US funds and buy their US Money Market Fund, currently paying 4.26% interest annually (code: TDB166). When I buy a US stock online using TD Webbroker, I merely have to call one day before the trade settles and ask them to sell enough of that money market fund to cover the trade (as mutual funds only take a day to settle, versus 3 days for equities) and no conversions are made back and forth. When I sell the US stock, I again must call them one day before the trade settles to have them buy an amount of the US Money Market Fund equivalent to the trade proceeds. They call this a ‘wash’ trade.
In this way they say that I can avoid paying any further currency conversions beyond the initial one in order to trade US equities. The only hassle is that even though you are trading online, you still have to phone regarding buying and selling the US Money Market Fund. A small price to pay to avoid all of the extra fees and this hopefully will eventually be changed to allow everything to be done online.
As far as I know, RBC Action Direct, which is our primary brokerage account does not offer this feature. US equities comprise a big portion of our portfolios and the ability to do a wash trade makes switching to TD Waterhouse a tempting option. Thank you for the information, Mr. L!
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29 responses so far ↓
1 MikeB // Aug 29, 2006 at 8:17 pm
Interesting thread. Why is TDW offering this to some clients while others will continue to get fleeced every time they trade US equities in their RRSP. The commission the banks are pulling in every time someone buys/sells a US equity is some kind of racket, makes me mad. What are the odds the Canadian government will someday allow you to hold US currency in the RRSP?
2 MikeB // Aug 29, 2006 at 10:12 pm
Update: I contacted TDW and asked a few question. The guy I talked to offered the concept of the wash sale to me. He was really well informed about it and I feel confident that they are offering this to everyone. I will also take advantage of this now that I know. He also confirmed that you have to call in and ask for the USD fund sale before settlement. I was really impressed with the way this guy/TDW handled my call. Keep up the great work at this site and I’d recommend TDW to you.
3 Phil S // Aug 30, 2006 at 12:30 pm
I use BMO Investorline and as far as I am aware, they do not offer this service either, you need a separate USD account. I’ve never had a need for it anyways, as I have a separate US trading account down south of the border.
4 Mr. L // Aug 30, 2006 at 8:14 pm
Phil - The point is you would have a need for it if you wanted to trade US stocks in your RRSP and didn’t want to pay the exhorbitant currency conversion fees each time you make a trade. Separate USD accounts are not available at BMO for RRSPs, nor at TD, although TD does allow you away to avoid the conversion fees as explained above. Your separate US trading account south of the border does not solve this particular problem.
5 illmatic // Sep 5, 2006 at 2:41 am
The problem with the inability for RBC/BMO/Scotia to hold USD currency lies within the brokerage software that they use - ADP. RSP accounts programmed within ADP simply do not have the option of holding USD, therefore a currency conversion will be forced everytime a buy or sell is entered in the terminal. AFAIK, TDW uses IBM as a broker terminal system, which alleviates this program.
6 scottyvr // Jan 5, 2007 at 12:11 am
Here is a late comment
The tax code and IDA rules have changed such that a USD denominated RSP is legal - it just that no one is offering it.
http://www.investorvoice.ca/Regulators/PI/2845.htm
As a tax planning strategy, I try to keep all of my foreign dividend paying stocks in my RSP, so I have a lot of USD stocks. I figure it costs about 4% to buy one USD stock and then buy another. Luckily I don’t churn my account too often, but it still hurts.
7 Investing Intelligently // Jan 18, 2007 at 1:23 pm
Foreign Currency Investments and Exchange Spreads Inside Your RRSP…
Well finally my E*Trade account has been set up and my XIC ETF has been transferred over and now I am just waiting for the mutual funds.
I was confused by something I read in E*Trade’s help:
E*TRADE Canada offers a U.S. dollar trading account and…
8 Canadian Capitalist » Reader Question: Free Trades for Switching? // Feb 12, 2007 at 10:57 pm
[...] It is very tempting to sign up with a broker that offers a great initial deal but it is far more important to look for a broker that offers everything you are looking for. For example, E*Trade has low commissions and charges no administrative fees. But if you have a lot of US stocks that you are planning to sell and buy index funds listed on American exchanges, you may want to consider TD Waterhouse, which allows “wash trades” instead. [...]
9 G$ // Feb 20, 2007 at 2:41 pm
Disnat also offers wash trades in RRSPs, although I couldn’t find any documentation on it. The way their rep explained it, you can buy and sell USD securities in your registered account and call to have them set the exchange rates on all sells and buys to match. That way, you avoid paying exorbitant exchange rates.
For example, if you buy $10,000 of one stock and sell $12,000 of another, they will give you the sell rate for both trades, so that you end up with a “net sale” of $2,000.
It’s still not perfect but they are looking at introducing USD RRSPs, like they offer for non-registered accounts. That would completely solve the problem.
10 isitthetruth? // May 29, 2007 at 10:50 pm
I read that the Income Tax Act was changed on 14jun01 to allow any foreign currency to be held in registered accounts. How difficult would it be for the ADP code system to be changed? I heard it could be changed in an afternoon by simply adding codes for the different currencies so, for example, US$ could be coded as USDC (US Dollar Currency)and CDN$ could be coded as CDC Canada Dollar Currency) assuming these codes are not already taken. If so, then unique other codes could be thought of. Since new stocks and ETFs are regularly issued with ADP codes, why not simply create a new code for each foreign currency.
But wait, if that was done in an afternoon, then rrsp holders would have more money in their rrsps and the banks would not be able to take your money without your knowledge and consent. Is that why it has not been done?
11 Canadian Capitalist // May 30, 2007 at 12:05 am
I am not surprised at all that the big five are happy with the clients they have paying $29 in trading commissions and 1%-2% each way in currency conversions. I am really surprised that upstart competitors like E*Trade, who could probably get a flood of new clients, are not willing to throw the switch either.
12 Emil // Jul 2, 2007 at 11:41 am
Questrade is working towards being able to eliminate the currency conversion inside a registered account when trading US stocks. At this point every trade in US markets inside a registered account will be followed by a currency conversion.
On the positive side, $4.95/trade and a spread of 40 to 50 pips should be quite attractive for all of you.
I will remember to write an update as soon as we come up with something new.
Regards,
Emil Vojkollari
Client Acquisitions Supervisor
Web: http://www.questrade.com
Phone: (416) 227-9876 ext.380
Toll Free: 1-888-783-7866 ext.380
Fax: (416) 227-0078
_____________________________________________________________________________
Questrade Inc. | 5650 Yonge Street, Suite 1700, Toronto, ON M2M 4G3
Trade Stocks for $4.95
13 RBC Direct Investing Review // Jul 16, 2007 at 11:15 pm
[...] Questrade is the market leader in low commissions and TD Waterhouse offers innovative features like wash trades on US equities within RRSP accounts and access to the TD’s low-cost index [...]
14 Ask Dave: Which Broker to Choose and Couch Potato Technique at Investing Intelligently // Jul 19, 2007 at 2:41 am
[...] answer: I use E*Trade and their commissions are super cheap. I think TD will allow you to do “wash trades” where you sell a USD ETF and buy another one without having to convert to CAD. They will [...]
15 TD Waterhouse Review // Jul 23, 2007 at 7:48 am
[...] our registered accounts to TD Waterhouse from RBC Direct Investing to take advantage of “wash trades“. As far as I know, TDW is the only broker that allows you to avoid the currency conversion [...]
16 How to “Wash” Your Trade? // Aug 7, 2007 at 10:30 pm
[...] stock and park the proceeds in TD US Money Market (US$) Fund (TDB166). This process is called a “wash” trade and since moving our RRSP accounts to TD Waterhouse, I have executed a few of these personally. [...]
17 Rob Bairos // Aug 21, 2007 at 9:14 am
“Questrade is working towards being able to eliminate the currency conversion inside a registered account when trading US stocks. At this point every trade in US markets inside a registered account will be followed by a currency conversion.
On the positive side, $4.95/trade and a spread of 40 to 50 pips should be quite attractive for all of you.”
Attractive if this were accurate. 95 to 109 pips per transaction is what the support person just quoted me to explain why my rsp account shows a loss after a few positive US day trades.
18 Emil Vojkollari // Aug 22, 2007 at 2:28 pm
Hi Rob,
The official answer is 50 basis points for each trade done prior to 4:00 o’clock. And 100 basis points on after hours trades.
I apologize for the wrong information given by The Client Service Specialist.
Best,
Emil Vojkollari
Client Acquisitions Supervisor
Web: http://www.questrade.com
Phone: (416) 227-9876 ext.380
Toll Free: 1-888-783-7866 ext.380
Fax: (416) 227-0078
_____________________________________________________________________________
Questrade Inc. | 5650 Yonge Street, Suite 1700, Toronto, ON M2M 4G3
Trade Stocks for $4.95
19 TD Waterhouse Lowers Commissions, E*Trade Still Not Offering Wash Trades at Investing Intelligently // Sep 11, 2007 at 5:00 pm
[...] those who don’t know what a wash trade is, a wash trade allows you to convert a holding in USD into another holding in USD without having to [...]
20 Sam Luu // Oct 4, 2007 at 5:31 pm
I’m already with TDW and I’m leaning towards using ETF for my RRSPs. Since the majority of ETFs are traded on the AMEX, I assume they funds are mostly in USD. With ‘wash trades’, what happens when you have money left over from the trade?
I assume you have to buy in certain block sizes, and the amounts of the sell/buy may not equal exactly?
21 Ask Dave: US Dollar Investments Inside Your RRSP at Investing Intelligently // Nov 7, 2007 at 4:15 am
[...] do it for a phone trade, not an online trade). Refer to the Canadian Capitalist’s site on how to make a wash trade. At the time (August 2006) the Canadian Capitalist said that “as far as I know, RBC Action [...]
22 Choosing a discount broker « centsprout // Nov 15, 2007 at 1:55 pm
[...] appeals to me because it seems that makes moving money around easier. TDW also allows you to do wash trades, which is useful if you are trading US [...]
23 Tope // Feb 8, 2008 at 4:46 pm
Hi Emil
Can you pls. explain what 50 basis points mean. as a e.g. I have a trade for 100 stock of ORCL at $19.00 How much canadian $ will it be at current market rate of 1 us$ = 0.99C$.
What will be the 50 bsis point in this transaction ?
Thanks
24 Canadian Capitalist // Feb 8, 2008 at 6:07 pm
Hi Tope:
1 basis point is a fancy term for 0.01%. In the example you have cited, though the business news might report the dollar at 99 cents, retail investors don’t get that rate. Brokerages build in a spread, i.e. sell to you at a higher price and buy from you at a lower price. According to Emil, Questrade’s spread is 0.5%. In your example, ORCL in C$ will be $18.715 ($19 * 0.99 * 0.995). Hope this helps.
25 augustabound // Feb 13, 2008 at 11:50 am
CC, wouldn’t the spread work the other way?
In your example the spread actually lowers your cost, would it not be $19*0.99*1.005?
I thought I saw that Questrade now offers wash trades as of about a week ago. Maybe Emil can confirm this?
Thanks to all
26 augustabound // Feb 13, 2008 at 12:22 pm
Sorry, just read your January 10th post on Questrade offering US$RRSP. I’m a bit behind on my blog reading. lol
27 augustabound // Feb 16, 2008 at 11:25 am
Sorry again, I just realized the CDN$ would have been higher at the time. My mistake. lol
28 Gordon Wehen // May 2, 2008 at 1:47 pm
Can anyone explain what does it mean by ‘Premium on US funds’ on the wash trade transaction ? I noticed that ‘premium’ is on both my ‘in’ and ‘out’ wash trades.. and I actually loss about 4% resulting from the exchange with the ‘premium’ factored in.
29 Canadian Capitalist // May 2, 2008 at 2:15 pm
Gordon: Did you buy a US stock and sell it on the same day with TD Waterhouse? If you did, the premium refers to the exchange rate. Let’s say during the sell TDW calculated an exchange rate of 1 USD = 1.015 CAD. It would show up as a “CONVERT TO CDN @1.5%” transaction. Now, when you buy and TDW calculates the exchange rate of 1 USD = 1.035 CAD. At this point, the trades haven’t been washed.
A day or two later, TDW adjusts one of the transactions to use the same exchange rate on both the buy and the sell. Check your statement to see that it is actually done and if not call them and they should fix it for you.
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