Many investors sign up for synthetic Dividend Reinvestment Plans (DRiPs) at discount brokers to save on trading commissions. With a synthetic DRiP, an investor can reinvest dividend payments in whole shares and have the leftover amount deposited as cash in their account. Let’s take an example. Investor John owns 1000 shares of ABC Corp. (ABC), which pays a quarterly dividend of $1.25. ABC Corp. is currently trading at $100. Since John had signed up for a synthetic DRiP on ABC Corp., his broker purchased 12 shares of ABC Corp. with a recent quarterly dividend payment of $1,250 and deposited another $50 into John’s account. This arrangement is beneficial from John’s point of view because he was able to increase his investment in ABC Corp. without paying a trading commission.

While DRiPs are usually a good thing, investors need to pay attention to the hidden costs they are incurring when they sign up for synthetic DRiPs on US Dollar stocks or Exchange-Traded Funds (ETFs) held in registered accounts such as RRSPs and TFSAs at discount brokers that do not segregate US Dollar and Canadian Dollar holdings (TD Waterhouse would be an example). Investors are probably aware that US Dollar dividends are converted to Canadian dollars at a rate that is typically 1.5 percent higher than the spot rate. But if you had signed up for a synthetic DRiP, the Canadian dollar dividends are again converted to US Dollars at a rate that is 1.5 percent higher than the spot rate and used to purchase whole shares of a stock or ETF. In effect, investors who are DRiPping US Dollar stocks or ETFs in registered accounts could be paying as much as 3 percent in foreign currency conversion charges.

A recent post on Canadian Money Forum provides an estimate of the hit from DRiPing US Dollar stocks in a RRSP account. Client received US$325 worth of US Dollar dividends out of which US$219 was DRiPped into shares and C$96.50 was deposited as cash. An exchange rate of 0.9645 for the converting US dollars to Canadian dollars. If no currency conversion charges were applied on the DRiPs, client would expect to receive $102 as a cash deposit. Instead he received $6 less. In other words, it cost C$6 to DRiP US$219 worth of shares or 2.8 percent.

What you can do about it

Fortunately, discount brokerage clients who are hit with double currency conversions on US Dollar DRiPs in registered accounts have a few options. If your broker allows segregation of US and Canadian dollar holdings, make sure your US Dollar denominated holdings are held in the US side of the account. If your broker does not offer segregated accounts, take a long hard look at whether synthetic DRiPping is worth the additional currency conversion charge. The break-even point for converting currency with the Norbert Gambit and then purchasing shares yourself is $2,000 (assuming 1.5 percent currency conversion charge, 2 trading commissions for the Norbert Gambit and 1 trading commission for the buy order). Therefore, a rough thumb rule would be that it’s better to reinvest on your own if you receive more than $2,000 worth of dividends. If you would really really like to implement synthetic DRiPs but the costs bother you, consider moving your accounts to a broker that does segregate holdings in registered accounts.

It is likely that clients at all discount brokers, even those that currently offer segregated USD registered accounts, charged double currency conversion fees on US stock DRiPs in the past. I hope that clients would raise this issue with their brokers and demand why currency was converted twice in synthetic DRiPs and what the brokers are going to do about it.

This article has 46 comments

  1. I don’t use BMO Investorline’s synthetic drip service, but I do know that they left U.S. securities in the Canadian dollar side of RRSPs by default after they introduced a U.S. side of RRSPs. (Customers have to ask to have securities moved over.) This makes me suspect that most synthetic drippers at Investorline are getting hit with these double currency conversions, but I don’t know for certain.

    • Yes you do have to tell them what you want. Some people want the cash coonverted so they need you to tell them what you want.

  2. This seems to directly contradict what you wrote a couple of years ago (http://www.canadiancapitalist.com/how-to-avoid-currency-conversions-on-us-dividends/), at least specifically with respect to TDW. If this article truly reflects the way things work I recommend that you add a disclaimer to the old article so that folks going through the archives aren’t misled.

  3. One of the reasons I switched out of TDWH and went to Questrade. Not that this is costing me that much money, but I hate the feeling of getting robbed.

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  5. @Michael: I suspect you are right as well. I don’t think this issue is limited to TD Waterhouse but I don’t have any information otherwise either.

    @Richard: You are right. That post is totally incorrect today. I’ve added disclaimers and thanks a nuch for catching it.

    @Slacker: Are you happy with Questrade? I tried them once years back and I had a lot of trouble with them. I still hear complaints occasionally, so I’m loathe to give them another chance. If I were to move, it would be to RBC Direct or BMO IL.

  6. > It is likely that clients at all discount brokers, even those that currently offer segregated USD registered accounts, charged double currency conversion fees on US stock DRiPs in the past.

    I don’t think that’s true. What makes you think that? I remember Questrade making it a point in some of their advertising that they never do double conversions.

    At this point, I just think that management at TD Waterhouse doesn’t really have any respect for its customers and essentially has no problem with nickel and diming them. I’m still steamed that they don’t mention “wash trading” in any of their account materials or in their help system. (I would never have discovered the concept if I hadn’t clued into the personal finance blogs, especially yours, and I’m sure I’m not alone.) I lost thousands in forced conversions over the years because of that. People should be willing to vote with their feet and use brokers with proper dual currency accounts… I did.

  7. Definitely in my weekend reading list for this week…great post.

    I have and will continue to call TDW every few months to see where they are with this initiative (USD $ RRSP accounts).

    I called tonight about something else, and they said about this acccount:

    “We are actively working on it.” I asked if they had a timeline, and the representative said “you should expect to hear something about this account in another 6 months.”

    We’ll see….

    Mark

  8. I’m ok with Questrade. Yes there has been a couple of screw ups, but TDWH had screw ups as well. The difference is that TDWH fix the problem a lot better and faster.

  9. I am a bit confused by your post. When I recently spoke to a rep at TDW, he told me that my US$ dividends from my US$ holdings could be reinvested in additional shares before the currency is converted to Canadian. He claimed that hey would only convert the remaining cash balance of the dividend that could not be used to purchase a whole share.

    In his description, I am only paying the currency conversion on a small portion of the dividend, not the whole thing, and certainly not paying it twice.

    Did I miss something in your post?…Or have I been misled by TDW?

  10. Like BMO, RBC DI also left US securities in CAD accounts unless customers actively requested journalling. Its possible that RBC customers get double dinged too if they haven’t made the switch. I’ll try to check my records, but I don’t think I dripped any US shares after they introduced the USD accounts.

  11. Paully, you have probably been misled by an unknowing rep.

    Great Post CC!

  12. @Mark: It’s my understanding as well that TDW is working on dual currency accounts. I don’t DRiP and the hit from forced currency conversion of US ETF dividend payments is small enough for me to stick with TD for the convenience factor of consolidating all accounts at one place.

    @Slacker: Good to know that your experience with Questrade has been satisfactory. Still, I pay $10 per trade and I trade so little, so TDW it is for me. Unless of course, some other broker offers me a deal I can’t refuse to switch.

    @Paully: I believe the TDW rep was misinformed. Can you post any USD DRiP info you have, so we can double check whether TDW was correct?

    @Sampson: It would be nice to have information on other brokers. One doesn’t always get the correct information from brokerage agents. TDW told me in the past that they do not charge currency conversion fees on USD DRiPs and then I learn different.

    @Cal: Thanks.

  13. I spoke with TDW recently (when I noticed this issue) and they confirmed that US dividends were subject to Fx charges both ways in a registered account because it is a synthetic drip (this was not explained when I enrolled in their autowash and synthetic DRIP programs). Based on comparing the conversions I experienced over the last year compared to the bank of Canada noon rate for US dollars the currency conversion cost is 1.7% over the spot price each way. As 80% of my equity holdings are in VEA, VWO and VTI this has meant I have paid approximately $200 in hidden fx charges due to the fact that TD cannot handle US cash in their registered accounts. I am now seriously considering switching to a discount brokerage that can allows US dollars in registered accounts. If they are in fact going to create a US side to registered accounts I would happily stay, but only if they refund my double fx charges will I wait for the registered accounts with US sides. For now I am testing out Questrade and RBCDI practice accounts to see where I will move.

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  15. I am a firm believer that anyone that writes an article about fees and or compensation should be required to disclose what they were compensated to write the article

  16. Looking back through my records, RBC DI also double-dipped for USD-denominated synthetic DRIPs. Thankfully they set up the USD RRSP quite some time ago.

  17. Scotia iTrade does not double dip their drips. I have a synthetic drip set up with VWO in my RRSP and only the leftover dividends is subject to the foreign exchange fee.

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  19. @Rick_J: I understand your frustration. I recall calling TDW to check whether one can save on forex conversions by signing up for a DRiP and I was informed yes. But turns out it is worse. We get dinged twice on foreign exchange. The poor disclosure is troubling and I would say that you are justified in asking for a refund of at least one of the foreign exchange conversions.

    @Scott: I was paid $0 to write this post. See http://www.canadiancapitalist.com/what-you-can-expect-on-this-blog/ for editorial policy on this blog.

    @Sampson & @Ted: That’s good to know. Can you share actual numbers?

  20. I just spoke to RBC and they do not currently offer a US dollar side in their RESP. This is a deal breaker for me as I hold 70% of my equity allocation in Vanguard ETFs.

  21. I am at Scotia iTrade. I have DRIP for VIG in RRSP account. Just recent example(Sept 28,2012), I have 476 shares and dividend rate: 0.323/share for total=USD$153.75. $149.75CAD were deposited into the account. There were 2 shares bought at $59.48USD(total $118.96USD). $115.87CAD were taken out of the account. Total amount left in the account: $33.88CAD

  22. BMO now allows all retuns from US trades to remain in US dollars. There is also a class action lawsuit to make them refund what they charged in the past.

  23. From my calculation:
    spot rate sept 28th 1.0167 USD = 1 CAD

    If you got spot rate you should have gotten $151.22 CAN instead of $149.75 CAN
    2 shares @ 59.48 USD = $118.96 USD should have cost you $117.01 CAN but you only paid $115.87.
    Remainder should be $34.21 instead you have $33.88

    Pretty close to spot rate but the way they do it baffles me unless my math is wrong.

  24. Great post. Should I pay the $125 rrsp transfer fee to move from TDW to RBC and save about $60 in double dipping fee every year… Or will TDW finally support $US rrsp soon enough? RBC has had that feature for over 2 years. If TDW was seriously actively working on it, they would have had it by now. Not looking promising at all.

  25. TDW has hardly been forthcoming on this DRIP matter. When you check the Activities list in your account, it makes no mention of forex. It just says DRIP, the number of stocks purchased and the value. The double conversion is totally hidden from the records provided by TDW. This really comes as a bad surprise.

  26. I won’t be able to determine how iTrade handles the synthetic DRIP of US$ securities because according to the rep I spoke with they do not offer it for VOO, VBR, VNQ, VWO and VEA.

  27. Joe K,
    In my experience, iTrade is really good adding securities to the DRIP. If the etf is not already on the DRIP, ask the rep to send a request to add it. VXUS was not on DRIP, just asked them. It’s on the list now. I had more than 3-4 etfs that were not on list, now they are.
    When I was researching to consolidate my assets, I tried RBC Direct, there were a lot of etfs that were not on DRIP and they told me that if there are enough customers with that etf then then would consider adding it to DRIP hence I consolidated at Scotia iTrade.

  28. Talk about hit and miss. Called iTrade and now all of those securities are available for DRIP except VOO which is one of the largest of them all. I asked to request VOO and was told it is Vanguard who decides that and not iTrade.

  29. This is the answer I got from TDW ( email: td.waterhouse@td.com ), relative to the synthetic drip in a RRSP for US ETFs.

    “TD Waterhouse does not charge a currency conversion twice when dripping ETFs. Shares are first purchased with the US dividend paid and then the remaining cash will be converted to Canadian Dollars. ”

    I then sent them a link to this forum and asked them to really confirm who is right here about the double dipping. But I get no answer anymore.

    Am I the only one who find this very misleading? Shouldn’t TDW be required to clarify broker’s fees? Or are they actually correct and the information in this thread doesn’t apply to TDW?

  30. That reply is indeed more informed than the one I got. Hopefully their representatives will finally be spreading correct information from now on.

  31. As a follow up to this most interesting post, I checked with Scotia to see if they double-dipped on RRSP accounts, and indeed they are. This is the answer I got:

    “Thank you for your email inquiry. In regards to your inquiry about USD
    dividends and the rate they are charged at, Scotia iTRADE applies the
    end of day rate for currency exchange. When the Dividend is paid you
    will be paying 2 times for exchange, one from USD to CAD when dividends
    are issued, and then again from CAD to USD for the DRIP on the security.”

  32. Spitfire 6280,

    It seems to me they are as well; however, if you look further up in the comments the final amount seems to be pretty good.

    I have only receieved cash for my $US dividends and I have been charged less than 1% in FX fees.
    I won’t be able to confirm what kind of rate I get for DRIP’s in US$ securities until Jan.

    Joe

    • Joe K,

      I agree the double conversation may not expensive depending on what FX fees you get charged, but it remains a less-than-optimal situation. This 1% may be a small pebble, but after 20 years that pebble will be a rock of sizeable proportion :-)

      I sent another e-mail to Scotia following their response, and it appears that iTrade is exploring an option to avoid this double conversion in the future, although nothing official yet.

      I think our best bet – as clients of Scotia, TD and other banks – is to strongly suggest their representatives to work on better solutions to avoid such charge.

  33. Here.s some more numbers from dividend payout Dec 27, 2012. There.s a DRIP set up on VT (Vanguard Total World Stock) in TFSA account at TD Waterhouse:

    338 shares * US $0.555 dividend = US $187.59
    US $187.59 less 15% US withholding tax = US $159.45
    DRIP.d 3 units of VT closing price of US $49.08 * 3 = US $147.24
    So US $159.45 less US $147.24 = US $12.21
    US $12.21 = CAD $12.15 at BoC closing rate (12.21 * 0.9949 = 12.15)
    At BoC exchange rates, I expect CAD $12.15 cash in TFSA when all said and done.
    What I actually had in cash is CAD $10.65

    This doesn.t seem bad to me. In fact it seems good. Has TD fixed the double dipping issue?

  34. Can you clarify why it “would be that it’s better to reinvest on your own if you receive more than $2,000 worth of dividends.” Can you explain why if you receive less than $2K in dividends it’s ok to enroll in the syn. DRIP?

    • @red: I’m referring to using the Norbert Gambit to do a currency conversion. $2,000 is the break even point for a Gambit. So if you receive large dividends in chunks greater than $2,000, you can convert on your own cheaper than the bank would on a synthetic DRiP.

  35. Oh I see, so if I have VTI for example invested in my RRSP, it would not be a good idea to enroll in the synthetic DRIP due to the double dipping, it would be best to just collect the dividends and invest it perhaps once a year?

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