Reduce your foreign exchange costs inside registered
accounts by washing trades
When a brokerage does not allow the holding of
foreign currencies in registered accounts, buying and selling stocks
which are traded in US dollars can be quite costly, because of the
premium charged by the brokerage when the funds are converted to and
from Canadian dollars. On January 14, 2008, Questrade
announced in a press
release that it is the first brokerage in Canada to allow
registered accounts to hold US dollars. Hopefully other
brokerages will be providing this option in the near future.
When this option is not provided, washing trades can help save on the
currency conversion costs.
Not all brokerages provide the service of "washing
trades", so if you are shopping for a brokerage, this is a good
thing to ask about. Also ask what the difference (spread) is between their rates
for converting your purchases and sales of US$ transactions to Cdn$. This will vary depending on the amount of the transaction,
but it also varies between brokerages. The lower the difference,
the less you will lose on US exchange.
When a person with a Canadian $ account is buying or selling
securities which are traded in US$, they should
ask the brokerage to wash their trades to reduce
their exchange cost. When one US security is purchased, and another is sold
with the same settlement date, a request can be
made to the brokerage to apply the same exchange
rate to both trades.
If no request is made to wash the trades, one trade will be made at
the "buy" rate, and the other will be made at the
"sell" rate, with a resulting cost to the investor for the
conversions, as in the following example:
Sell US shares for $15,000 US
Convert to Cdn$ @1.06 (sell rate) = $15,900 Cdn
Purchase US shares for $15,000 US
Convert to Cdn$ @1.08 (buy rate) = $16,200 Cdn
Since the above trades were not washed, they have cost the investor
an extra $300 Cdn.
If a request is made to wash the trades, both will be converted at the
same exchange rate, as in the following example:
Sell US shares for $15,000 US
Buy US shares for $15,000 US
Tell brokerage to wash the trades.
The washing of the trades eliminates the $300 Cdn exchange cost.
Using US money market funds with wash trades
When US stocks are bought and sold in a Cdn$ account, the trades will never
be exactly the same amount, and are often made on different days. In order
to eliminate the exchange cost, US money market funds can be used. A US
money market fund is a fund which holds US dollars. The first time you
sell an investment that is traded in US$, you should instruct your brokerage to
purchase US money market funds with the proceeds. The minimum amount
for the initial purchase of a US money market fund is sometimes
$1,000 or more. When selling US money market funds to pay for the purchase of a US$
investment, always leave a small balance (say $1) in the money market fund in
order to keep it open. This way, if you receive foreign proceeds of less than
$1,000, you can purchase US money market funds.
If the trades are made on different days or for different amounts, they
can be washed with US money market funds, as in the following example:
Sell US shares for $15,000 US
Tell brokerage to wash trade by buying US money market funds
Buy US shares for $8,000 US
Tell brokerage to wash trade by selling US money market funds
The washing of the above trades with US money market funds
eliminates any exchange costs.
Tip: Use US money market funds to wash
trades in a Canadian $ account.
The information on this site is not intended to be a
substitute for professional advice. Each person's situation differs, and
a professional advisor can assist you in using the information on this web
site to your best advantage.
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