If you hold a self-directed Registered Retirement Savings Plan (RRSP) account at a broker like TD Direct Investing or Scotia iTrade that still does not offer the ability to segregate USD-denominated securities held in RRSP accounts from securities denominated in Canadian Dollars, you are incurring a cost when dividends are paid into your account. The total cost depends on two factors: (a) the dividend yield of each holding that pays a dividend in US dollars (note that this may include both US-listed securities such as stocks and ETFs and about a score of Canadian companies that are listed on the TSX but pay a dividend in US dollars) and (b) the cost of converting US dollars into Canadian dollars at your broker.

To calculate how much it is costing you to hold a RRSP account at one of the offending brokers, I put together a simple Google spreadsheet. Just enter the cost of converting currency (as of this writing, a typical broker will charge roughly 2 percent for converting CAD into USD or vice versa), the holdings in your RRSP accounts that pay dividends in US dollars and their dividend information. The cost of dividend conversion is simply the total US dollar dividends received in a RRSP account multiplied by the cost of converting currency. Note that I have included Encana Corp. (TSX: ECA, NYSE: ECA) in my example below. Encana is a Canadian corporation that is a component of the TSX Composite Index but it pays dividends in US dollars, which will be converted into CAD in both Canadian dollar RRSP accounts and investment accounts at all brokers.

cost_of_dividend_conversions_in_rrsps

Some readers are under the mistaken impression that investors can avoid the currency conversion costs by enrolling in synthetic DRiPs. Unfortunately, DRiP investors are paying not just once but twice for converting currency. Their USD dividend payments are first converted into CAD, then their CAD are converted back into USD and only then are the dividends used to purchase more shares.

This article has 8 comments

  1. Returns Reaper

    @CC: If the advantage of a USD RRSP is that USD dividends can be used to purchase USD denominated securities without incurring forex conversion fees, wouldn’t it be more correct to consider 2x the conversion costs as the cost of not having a USD RRSP? Without the USD RRSP, as you point out, you’d pay the fees once to convert the USD dividends to CAD,

    I suppose to be thorough in the analysis, you would need to consider what percentage of dividends is used to purchase USD securities. As long as CAD dividends + contributions to the account meet or exceed the CAD denominated security purchases, then the 2x fee formula makes sense. If, ultimately, some of the dividends are converted to CAD to purchase CAD securities, then the USD RRSP provides no advantage — it only provides the 2x forex fee advantage on the portion of USD dividends that are used to purchase USD securities.

    The majority of my account is made up of USD securities, and my CAD contributions + dividends well outweigh any CAD security purchases. So for me I would consider 2x the forex fee conversion costs as the cost of not having a USD RRSP.

    • Canadian Capitalist

      @Returns Reaper: You make a very good point. If an investor is converting a portion of CAD back into USD they will paying for one more conversion. They might save some money on the conversion if they do a Norbert Gambit but if they use the broker’s transfer mechanism, they’ll be paying another 2 percent on the conversions. Either way, they are incurring extra costs.

      I probably should have mentioned this in the post. I personally let dividends accumulate and then do a Norbert Gambit. But even then we are talking about 2 extra trades $20 plus the bid-ask spread.

      • Returns Reaper

        @CC: You make a good point that the subsequent CAD->USD conversion need not use the broker’s transfer mechanism.

        But unless I don’t understand ways of implementing a Norbert Gambit, you’d require either a USD RRSP or a the ability to wash your trade. I’m actually not certain if my broker allows this (HSBC InvestDirect). I hadn’t considered it before since my contributions are generally sufficient for rebalancing, so I haven’t had the need to sell USD securities yet.

        For some reason I hadn’t considered using the Norbert Gambit on my contributions (for some reason I had it in my head that it only makes sense when converting several thousands of dollars at once, but doing some quick math, it may make sense for sums as little as $1,000). Thanks for prompting me to give this some thought!

      • Canadian Capitalist

        @Returns Reaper: I don’t know how Norbert Gambit would work at HSBC InvestDirect. If you do learn more, please share because it might be interesting for others who also have accounts with HSBC. At TDDI, Norbert Gambit is straight forward in registered accounts. Buy a stock (say TSX: TD), sell the same stock (say NYSE: TD) and once the dust settles, CAD will be converted to USD and washed into TDB 166.

        The process at TDDI is somewhat more complicated in taxable, non-registered accounts. One can use DLR/DLR.U to convert CAD into USD but it a long, winding, scenic but cheaper route. Or one can do a Gambit with one side of the transaction assisted by the broker (which costs more).

        I almost always do the Norbert Gambit now but I also took many years to become confident to use it to exchange currencies. Once you learn to do it, you won’t go back because the savings are just juicy.

  2. Retail Investor

    Agree, people should be made aware of these costs. But the decision ‘which broker to use’ involves a lot of variables that might well be considered more important ….. possible leaving you to ‘deal’ with the costs because you decide to stay with your broker.

    I don’t think anyone is saying ‘don’t buy US stocks’, so you must evaluate the decision by calculating your expected returns NET of those costs. Try the spreadsheet http://www.retailinvestor.org/USstocks.xls

  3. TD Direct Investing has no suffix to spare for a U$ RRSP account.

    The suffixes not listed below are used by TD Asset Management/TD Private Client Services/TD Financial Planning – all are on the same IBM brokerage platform. The letters I and O are not used as they are easily confused with the numbers 1 and 0.

    123456A C$ cash account
    123456B U$ cash account
    123456C C$ Cash on Delivery account
    123456D U$ Cash on Delivery account
    123456E C$ margin account
    123456F U$ margin account
    123456G C$ short account
    123456H U$ short account
    123456J TFSA
    123456Q Quebec Savings Plan account
    123456S RRSP account
    123456T RRIF account

  4. Great article, thanks for the information. This is something that I hadn’t considered before. I understand that this will apply to US securities such as stocks and ETFs, but what about Canadian mutual funds that are invested in US securities? If the mutual fund is held in a CAD RRSP, and the dividends are automatically re-invested, am I paying for a currency conversion every time a dividend is distributed and re-invested?

    • Canadian Capitalist

      @SkiWhitewater: You can rest easy. If you hold Canadian mutual funds and reinvest distributions, you are not paying for currency conversions. Of course, your mutual fund, takes your Canadian dollars, converts them to US dollars and buys US stocks but as a large investor, the fund will be paying teeny tiny fees on currency conversions compared to a retail investor.