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!

This article has 31 comments

  1. 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. 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. 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. 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. 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. 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.

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  8. 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.

  9. isitthetruth?

    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?

  10. Canadian Capitalist

    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.

  11. 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

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  16. “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.

  17. 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

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  19. 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?

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  22. 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

  23. Canadian Capitalist

    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.

  24. 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

  25. Sorry, just read your January 10th post on Questrade offering US$RRSP. I’m a bit behind on my blog reading. lol

  26. Sorry again, I just realized the CDN$ would have been higher at the time. My mistake. lol

  27. Gordon Wehen

    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.

  28. Canadian Capitalist

    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.

  29. I’m considering moving to Questrade just for the benefit of holdings US funds in an RRSP account. It’s costing my 1-2% per month to say with my current broker – BMO Investor Line to settle my trades in CDN and buy back again. I make about 4 trades per month.

    BMO has great service and great platform though the money savings are very tempting. I cannot understand what is taking them so long to offer this feature to hold US funds??? Speaking with their rep, they tell me it’s in progress… same thing they mentioned months ago.

    Anyone know of any other brokerages who offer US funds in RRSP or will offer it soon.

    Any advice and feedback is appreciated.

  30. From my own experiences, TD Waterhouse automatically washes the trade when you buy and sell a US stock on the same day. When you do so, the lower amount of the two orders receives the exchange rate of the higher amount. This way you get the wash trade but TD keeps their exchange rate premium on any difference in amount between the buy and sell amounts.

    For example, here the sell order receives the exchange rate of the buy order:

    Sell stock A shares for $10,000 US @23% US PREM = $12,300 CDN
    Buy stock B shares for $12,000 US @25.2% US PREM = $-15,024 CDN
    After settlement you’ll see this transaction:
    Cancel (CXL) stock A sale of $10,000 US @23% US PREM = $-12,300 CDN
    Sell stock A for $10,000 US @25.2% US PREM = $12,520 CDN

    Or the reverse situation where the buy order receives the exchange rate of the sell order:

    Sell stock C shares for $20,000 US @23% US PREM = $24,600 CDN
    Buy stock D shares for $10,000 US @25.2% US PREM = $-12,520 CDN
    After settlement you’ll see this transaction:
    Cancel (CXL) stock D buy of $10,000 US @25.2% US PREM = $12,520 CDN
    Buy stock A for $10,000 US @23% US PREM = $-12,300 CDN

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