You learn something new every day. A reader commenting on the Canadian Couch Potato blog here revealed two possible ways on avoiding currency conversion on US dollar dividends received in a self-directed RRSP account. The first of these methods works at TD Waterhouse (my review here), where the reader holds his accounts but it should be applicable at any broker who washes trades by setting the buy and sell exchange rates to the same value.

Note that unless you have a substantial sum invested in US-listed ETFs, you won’t save all that much by avoiding currency conversions on dividend payments. For example, the Vanguard Total Market Index Fund (VTI) has a dividend yield of 2%. If you have $100,000 invested in VTI, your annual dividends will be $2,000. Assuming currency conversion charges run the typical 1.5% each way, avoiding these conversions entirely will save you between $30 and $60 annually.

Enroll in a Synthetic DRiP

Unfortunately, an investor enrolling in a synthetic DRiP would incur double the currency conversion charges. See this post for details.

Synthetic Dividend Reinvestment Plans (DRiPs) offered by many discount brokers allow investors to reinvest dividend payments into whole shares of a stock or ETF. It turns out that when you sign up for a DRiP offered on a US-listed stock or ETF, any dividend payments are held in US dollars and used to purchase whole shares of the stock or ETF. The exchange rate on the US dividends and the stock purchase are set to the same value, effectively eliminating USD-CAD conversions.

Wash dividends into a US Dollar Money Market Fund

Unfortunately the author is unable to confirm that TD Waterhouse clients are able to avoid forced foreign exchange conversions. The author was clearly told by client service representatives that washing US Dollar dividends is not possible.

The reader said that TD Waterhouse offers a second method of avoiding foreign exchange conversions on dividends received from US-listed ETFs. A client can call one day prior to the dividend payment and wash the US dollar dividends into TDB166. However, a quick call to TD Waterhouse revealed that the broker will not wash dividend payments into the US Dollar Money Market account. That’s a shame. As an investor who prefers to accumulate dividends in cash and reinvest it in an asset class that is below target, I would have liked to employ this method and avoided the forced currency conversion.

This article has 23 comments

  1. There are better alternative, with RBC Direct Investing, you can just hold US securities in the US side, and your dividend received will not be convert to CAD.

  2. Pingback: Tweets that mention How to avoid currency conversions on US Dividends | Canadian Capitalist --

  3. @Jerry: Yes, but RBC Direct Investing is the only big bank broker to offer a USD RRSP. Since TD Waterhouse offers wash trading, not having a USD RRSP isn’t a huge limitation for the type of investing that I do. And, currency conversions on US-listed ETFs are not a major reason for me to switch.

  4. Most already know by the silly TV ads of the guy slapping himself, that Questrade will also let you receiving U.S$ dividends without converting them.

  5. Just open a USD RSP offered by half a dozen brokers (except TDW!) or hold your USD assets in a USD account outside an RSP which is better for most Canadians because of the Foreign Tax Credit.

    You can DRIP but no washing or laundering required!

    • @Sean: Apart from QTrade, Questrade and RBC Direct Investing, are there any other brokers that offer USD RRSP accounts? I must have missed the news because I didn’t see any other announcement of a USD RRSP.

  6. What with the currency risk, currency-0conversion fees (or hassles of avoiding them like making phone calls) and drawbacks of RRSPs (e.g. convert capital gains and dividends to regular income for tax purposes, etc), it’s not surprising I often hear Canadians say they don’t do much foreign diversification!

  7. Synthetic Dividend Reinvestment Plans (DRiPs) are excellent. I always run them in my trading accounts, RRSP and TFSA. Ram, this is exactly what happens to me; JNJ and KO, for example, buy me whole stock shares effectively eliminating USD-CAD conversions. Another reason to love DRIPs!

    I need to buy some Vanguard to further diversify though; VTI and VWO are on my list.

    Great post and very helpful for many DIY investors!

  8. I was the reader mentioned in CC’s post. Note that as I haven’t yet purchased any $USD ETFs, I haven’t seen this in action myself yet, but the response from TDW’s customer service seems pretty clear. It seems strange that they can’t set a flag to wash dividends into TDB166 automatically (like the flag to DRIP something) and avoid the phone call. I don’t know if they want to discourage the loss of forex spreads, or just have clunky infrastructure.

    I’d assume the Scrooge McDuck’s of the world could combine the two – DRIP (which buys only full shares) and phone in to wash the fractional remainder and save those last few pennies.

    As for US dollar subaccounts in the RRSP, I asked about this as well. The response was: “We have heard from management that TD Waterhouse is planning on a $US denominated RRSP account. However, we would be unable to comment further with regards to the expected timeframe for completion.” I would have mentioned this as well, except I think they have been saying this for ages, from what I’ve Googled. Hopefully the pressure from RBC will cause them to roll this out sooner rather than later. My TDW discount brokerage account is fairly new, and I went with them in part to have access to the e-Series funds, so I didn’t do a lot of comparisons. $US in RRSP may be less important if it is more tax efficient to put bonds in the RRSP before US equities, since the bonds will likely take most of the RRSP room.

    I do know the kid (er, young associate) who set up my stuff at the Waterhouse branch said they are supposedly working on merging the TFSA accounts in with a main account – right now it is a separate account #.

    • @NorthernRaven: Yep, that’s the line I heard from TD Waterhouse as well. A separate US dollar RRSP doesn’t offer a compelling reason to switch from TDW because they offer “wash” trading. I’ve tried about four brokers so far and I like TDW the best, though RBC Direct is a close second.

  9. I am wondering with the MER for the TDB 166 at 0.23% and their current yields at 0.02%, whether it is still worthwhile to wash the dividends into TDB 166? It seems like TDW charged me a 3.2% conversion fee in the latest VTI dividend payout. Any thoughts?

    PS. I’m still a small investor and therefore do not have enough dividend to enroll in the synthetic DRIP for VTI.

    • @Newbie: One share of VTI trades around $60. If your dividends are less than that, you may not be able to wash into TDB166 anyway because you need a minimum of $100 for an initial or subsequent investment.

      Money Market Funds at least try and keep the unit price level at $10. It’s very rare for a MMF to lose money. It seems TDB166 pays around 0.05%. That’s not much but it’s highly unlikely that investors will lose money in it.

  10. @CC
    In addition to the three brokers you mentioned, Virtual Brokers, Jitney and Option Express also offer USD RSP hence my “half a dozen” comment above.

  11. I checked with TDW and the $100 minimum for TDB166 is indeed in effect for dividend washing, so Scrooge McDuck is out of luck on small holdings or DRIP fractions. At $60/share and quarterly 30 cents/share distributions, you’d need around US$20,000 of VTI to get a DRIP share each quarter. If the average remainder is assumed as $30 (half of the VTI price) and TDW takes 1.5% to convert it, they make 45 cents per quarter for each customer even if they are set to DRIP, and of course 1.5% of the entire dividend if they aren’t. Multiply this by all customers and all US dividend payments they are generating, and it probably adds up to some nice pocket change. Probably another reason they are in no rush to bring in the US subaccounts… 🙂

    @Newbie – the yield on the money market account would be after the MER is applied, so it isn’t like it is 0.02 – 0.23 = -0.21% and you are losing money by parking it.

  12. Called Qtrade and they don’t offer synthetic drips for US listed stocks and I don’t really want to pony up the $50/yr for a US$ RRSP account. Maybe its time to consolidate my accounts with TDW.

  13. Excellent discussion, great input Northern Raven.

  14. Pingback: LinkStuff – Halloween Edition

  15. If the dividend is less than $100, has everyone tried to sell $100 TDB166 first then buy back ($100 + dividend)?

  16. Pingback: Canadian Personal Finance & Investing Carnival

  17. RockyMountainHat

    I checked at TDW and the rep told that they do not wash dividends. Surprised. Nice discussion.

    • @RockyMountainHat: Let me check with TDW again. When I called in to confirm this post, the rep I reached said US dividends can be washed into USD MMF. It may not longer be the case. If I’m able to confirm, I’ll be updating this post.

  18. @RockyMountainHat: I discussed this in my call with TD Waterhouse yesterday. You are right. TDW will not wash dividends. I’ve updated the story with the correction. I thank you for pointing this out. Teaches me to double check everything I hear 🙂

  19. Still no luck at TDW. They refuse to wash US dividends. You can buy into TDB166 using Canadian money. Minimum $100.