Converting USD to CAD

[tulak]

There's a good chance my son is going to a Canadian University for his undergraduate degree in 2018 and I'm trying to figure out good way to lock in the current value of CAD vs USD. I figure that USD will most likely weaken or hold steady, so there's less downside for me to locking in a couple years of tuition right now.

There are two options that I've been able to find. The first is to buy FXC (Guggenheim CurrencyShares Canadian Dollar Trust ETF). The downside to this approach is that I'm paying a 0.40 ER and I'm not earning anything on the cash. This would be great if I wanted to speculate in CAD, but that's not what I'm trying to do.

The other option I found is Everbank. They offer CAD denominated CDs and savings account. I've looked over their website and some concerns I have are their conversion fees (up to 1% both ways) and their exchange rate. Plus I see that they are offering 0% for CDs and deposit accounts. Not very attractive.

I've also thought about a short-term Canadian bond fund, but I haven't had any luck in finding anything with a short duration. And the bond funds that I have found have high ERs. I'd think even if I find a short-term bond fund the ER and yield would probably cancel each other out. At that point FXC is looking good again.

It would be ideal if I could open up a savings account at a Canadian bank and deposit a chunk of money there, but it doesn't look like I can do this as a US citizen?

At this point I think my best option is FXC. I might lose a bit on ER and trading costs (low volume so I expect to lose on spread costs), but I'm less than worried about +/-1% and more worried about 10-20%. I'd hate for CAD to hit par with USD right when the tuition bill is due.

Has anybody done this before? Any other ideas besides FXC?

[Sunset]

I have heard but not tried it, that Interactive Brokers will hold accounts in various currencies (then you could invest in CDN stocks ).

[Ian S]

I have a bank account in Canada but opened it in person. No problem with my being a US citizen (I was born in Canada though.) One caveat: if you have more than $10,000 in the account at any time in the calendar year, there is a special annual reporting form for Uncle Sam. More detailed reporting if the value of the account is above I think $100,000. You would have to look into those details.

Another alternative might be to invest in one or more of the big five Canadian bank stocks. They have been beaten down with the low oil price just like the Canadian dollar and will come back just as strongly as the loonie. Meanwhile they pay about a 4% dividend. Most have paid dividends since the 1800's and all are financially sound. I own RY and BMO but others are TD, BNS, and CM. They trade on the NYSE. Dividends are taxed 15% or so by Canada but you get a US tax credit for up to what you paid to Canada.

[tmm99]

I moved to Canada from U.S. last year and I have a USD account as well as a CAD account at TD Bank her in Ontario. I wonder if you can do the same thing with them on the US side? They advertise themselves to be cross border friendly. (You won't necessarily have to do currency exchange using these accounts however. Investment firms usually do exchange at a better rate.)


Sent from my iPhone using Early Retirement Forum

[tmm99]

And there are a couple of VG Canadian short term bond ETF's. VSB (govt bonds) and VSC (investment grade corp bonds). Yields are better than what you get for the U.S. counterparts.


Sent from my iPhone using Early Retirement Forum

[Danmar]

Probably the best way to actually convert USD to CDND is through buying and simultaneously selling interlisted stock. Google Norbert's Gambit for the mechanics.

As far as locking in the current FX rate (too bad you didn't do this a couple of months ago) there are many possibilities including forward FX contracts (I did this when I bought our house in Arizona), buying CDN securities now and keeping them in the US, opening a CDN dollar deposit in the US (check the TD Bank USA which is a sub of the CDN bank), buying a ETF denominated in CDN $ but kept in you US broker account. As you mentioned, you may some difficulty opening a CDN domicile bank account without at least a CDN address. Good luck.

[DrRoy]

Quote:

Originally Posted by Ian S I have a bank account in Canada but opened it in person. No problem with my being a US citizen (I was born in Canada though.) One caveat: if you have more than $10,000 in the account at any time in the calendar year, there is a special annual reporting form for Uncle Sam. More detailed reporting if the value of the account is above I think $100,000. You would have to look into those details.

My family has had a vacation cottage in Canada for decades and have had a Canadian bank account for a long time also. It never had over $10K in it but it does not seem to be a big deal to do the tax form. I think this would be your lowest cost and lowest risk option.

[Sunset]

Quote:

Originally Posted by Ian S I have a bank account in Canada but opened it in person. No problem with my being a US citizen (I was born in Canada though.) . ..

This makes you a Canadian Citizen as well, as in a dual citizen.
You probably have a SIN # which the banks are expecting to open an account.

[Sunset]

As couple of folks have mentioned, if you do this, be sure to follow the foreign asset rules
- extra form to report bank accounts in the tax return
- separate online reporting to the Treasury Dept

The penalties for failing to report are draconian.

[MichaelB]

Quote:

Originally Posted by kiki It would be ideal if I could open up a savings account at a Canadian bank and deposit a chunk of money there, but it doesn't look like I can do this as a US citizen? At this point I think my best option is FXC. I might lose a bit on ER and trading costs (low volume so I expect to lose on spread costs), but I'm less than worried about +/-1% and more worried about 10-20%. I'd hate for CAD to hit par with USD right when the tuition bill is due. Has anybody done this before? Any other ideas besides FXC?

There is no law against opening an account in Canada or holding funds there. All you need to do is record and report to the US Treasury. You probably need to open an account in person, and fees / transaction costs may be high. It may not be worth the effort. You might want to check and see if the University lets you pay in US$ at the prevailing exchange rate. With most options, such as the Everbank CD, the exchange gain will be treated as taxable income, which cuts into your hedge effectiveness.

One option is to shift your portfolio allocations and assign a higher % to Canadian assets. Even better if you can do this in a tax deferred account.

[Lsbcal]

I was curious how the US/Canada exchange rate looked historically. Here is a nice chart at this link:
https://research.stlouisfed.org/fred2/series/EXCAUS

Looks like it is indeed not a bad idea to lock in a rate for long term planning.

[Ian S]

Quote:

Originally Posted by Sunset This makes you a Canadian Citizen as well, as in a dual citizen. You probably have a SIN # which the banks are expecting to open an account.

While I have an SIN#, the bank did not require it to open the account. IIRC, I just needed my US passport, my SS number and my US address. Of course, my passport has my country of birth so that may figure into it. I don't have a Canadian address but I have relatives there and with my regular visits, I wanted easy access to Canadian $$.

[Ian S]

Quote:

Originally Posted by MichaelB One option is to shift your portfolio allocations and assign a higher % to Canadian assets. Even better if you can do this in a tax deferred account.

I'm thinking this may be the best approach. In an IRA, you don't get hit with the Canadian 15% withholding tax on dividends although in a taxable account, you get a tax credit to use against your US taxes. As I said previously, IMHO, the big 5 Canadian banks are one of the best ways to get Canadian exposure as easily and safely as possible. No special accounts required since they are all on the NYSE. When oil comes back, so will the loonie and so will the Canadian bank stocks. Meanwhile, a 4% dividend isn't too shabby. Each bank stock differs a little in for example its exposure to the oil patch and degree of expansion outside of Canada. They are heavily regulated which is why they came through the financial crisis pretty much unscathed.

[Meadbh]

Quote:

Originally Posted by Ian S When oil comes back, so will the loonie.

You're a bit late.

Loonie rises to highest level of 2016 as oil prices also climb - National | Globalnews.ca

Quote:

Originally Posted by Ian S .....and so will the Canadian bank stocks. Meanwhile, a 4% dividend isn't too shabby. Each bank stock differs a little in for example its exposure to the oil patch and degree of expansion outside of Canada. They are heavily regulated which is why they came through the financial crisis pretty much unscathed.

Agreed. I suggest buying some of each of the Big 5.

[Ian S]

Quote:

Originally Posted by Meadbh You're a bit late. Loonie rises to highest level of 2016 as oil prices also climb - National | Globalnews.ca

Still not too late. After all, less than two years ago it was around 94 cents US. It has a way to go before we see that level again.

[tmm99]

Quote:

Originally Posted by Ian S Still not too late. After all, less than two years ago it was around 94 cents US. It has a way to go before we see that level again.

Exactly. You can always look at the top, but compared to the bottom, this is very, very favorable for people who have USD to convert to CAD. You are guaranteed to get 25-30% gain on the money in an instant (well, everything seems to cost more in Canada, but I am still keeping the same budget here in Canada as when I was in the US, so in my case, it is definitely 25-30% gain on my money. It would take me many years to get this kind of gain via CD's, bonds, even equities, etc.) In addition, you can invest your money in Canadian short term bonds that could yield 2-3%, so I don't see any downside to this.

I wish I had more cash available to convert right now...

[tulak]

Lots of good info. Thanks to everyone for the advice. Now I have to spend time looking at which option will be easiest.

Quote:

Originally Posted by tmm99 And there are a couple of VG Canadian short term bond ETF's. VSB (govt bonds) and VSC (investment grade corp bonds). Yields are better than what you get for the U.S. counterparts.

This is a possible solution. I'd need to setup a new account, but on the plus side, it will all be domiciled in the US so I wouldn't have to worry about FBAR. It looks like Schwab and Fidelity offer accounts that lets you trade and settle in different currencies, so theoretically all I'd have to do is get them a bunch of Canadian Dollars and I'd be set. That might be the harder part though, since they charge a 1% conversion fee, which seems high to me, but maybe I can find a 3rd party alternative. It'd be nice to avoid wire transfers though, since that's incurring extra costs. I'll have to research this some more.

Quote:

Originally Posted by Danmar Probably the best way to actually convert USD to CDND is through buying and simultaneously selling interlisted stock. Google Norbert's Gambit for the mechanics. As far as locking in the current FX rate (too bad you didn't do this a couple of months ago) there are many possibilities including forward FX contracts (I did this when I bought our house in Arizona), buying CDN securities now and keeping them in the US, opening a CDN dollar deposit in the US (check the TD Bank USA which is a sub of the CDN bank), buying a ETF denominated in CDN $ but kept in you US broker account. As you mentioned, you may some difficulty opening a CDN domicile bank account without at least a CDN address. Good luck.

I was reading about Norbert's Gambit last night on the bogleheads site. It looks like an interesting approach, but I'm not sure how easy it is to do using a US brokerage. I was reading an article on the Schwab site and they seem to imply that if you purchase the shares on NYSE, then the shares stay denominated in USD and attached to the NYSE. Clearly I need to read more on how this works.

And yes, it's a bummer I didn't do this a couple of months ago. I've been procrastinating some, but I also realize that this will only be a partial hedge. We're not a 100% sure DS is going to Canada. He still needs to get accepted and then decide among his other choices (even though Canada is at the top of his list right now).

I don't see much downside in doing this though, since I think the chance of USD weakening or staying the same is greater than it strengthening.

Quote:

Originally Posted by Sunset As couple of folks have mentioned, if you do this, be sure to follow the foreign asset rules - extra form to report bank accounts in the tax return - separate online reporting to the Treasury Dept The penalties for failing to report are draconian.

Yes, don't forget about FBAR. I had to do this a few years ago after a foreign real estate transaction. It's easy to do.

Quote:

Originally Posted by MichaelB There is no law against opening an account in Canada or holding funds there. All you need to do is record and report to the US Treasury. You probably need to open an account in person, and fees / transaction costs may be high. It may not be worth the effort. You might want to check and see if the University lets you pay in US$ at the prevailing exchange rate. With most options, such as the Everbank CD, the exchange gain will be treated as taxable income, which cuts into your hedge effectiveness. One option is to shift your portfolio allocations and assign a higher % to Canadian assets. Even better if you can do this in a tax deferred account.

I checked with the University and they recommend using International Funds Transfer with Western Union. They were accepting credit cards, but in 2015 they phased it out. That's would have been a great solution. I could have used my Chase Sapphire card with no fee, get a good exchange rate, and earn points.

As for Western Union, I went to their website and the rate that they are quoting isn't too bad. For $100USD you get $128.47CAD. Looking at the Visa exchange rates, I'd get $129.23CAD.

Shifting to a higher % of Canadian assets might work. This is why I've been looking at how to buy fixed income funds/etfs. I'm hesitant to buy any equities due to volatility, but maybe I'm being overly cautious.

Quote:

Originally Posted by Lsbcal I was curious how the US/Canada exchange rate looked historically. Here is a nice chart at this link: https://research.stlouisfed.org/fred2/series/EXCAUS Looks like it is indeed not a bad idea to lock in a rate for long term planning.

Yep, that's what I'm thinking.

Quote:

Originally Posted by Ian S While I have an SIN#, the bank did not require it to open the account. IIRC, I just needed my US passport, my SS number and my US address. Of course, my passport has my country of birth so that may figure into it. I don't have a Canadian address but I have relatives there and with my regular visits, I wanted easy access to Canadian $$.

It's good to know there's no issues opening an account in Canada. I was worried I'd need the equivalent of an SSN (SIN#) or something like that. We're a couple of hours from the border, so it wouldn't be that big of a deal to take a day trip to Canada and open an account. Then I'd have to figure out how to fund the account, which might be a bit trickier.

[Danmar]

Quote:

Originally Posted by Ian S As I said previously, IMHO, the big 5 Canadian banks are one of the best ways to get Canadian exposure as easily and safely as possible. No special accounts required since they are all on the NYSE. When oil comes back, so will the loonie and so will the Canadian bank stocks. Meanwhile, a 4% dividend isn't too shabby. Each bank stock differs a little in for example its exposure to the oil patch and degree of expansion outside of Canada. They are heavily regulated which is why they came through the financial crisis pretty much unscathed.

Agree with this idea. If you want to get the most CDN exposure buy CIBC (CM) as they have the least exposure outside of Canada. TD, RY,and BMO all have sizeable US banks, especially TD. TD has the least exposure to oil patch but all banks have very well diversified loan books. I used to work for one of these banks. They are exceptionally well managed, run a very efficient domestic oligopoly and accordingly earn very high ROE's. Over the last 45 years they have returned over 12% CAGR total returns. Still represent the largest component of my portfolio.

Also, I am a little surprised you can open a CDN bank account without a SIN or CDN address. Regs have really tightened re know "know your client" rules, terrorism, and money laundering. But certainly worth a try.

[tulak]

Quote:

Originally Posted by Danmar Also, I am a little surprised you can open a CDN bank account without a SIN or CDN address. Regs have really tightened re know "know your client" rules, terrorism, and money laundering. But certainly worth a try.

It looks like it's possible with TD Bank. I found this thread on their TD Helps website: https://www.td.com/to-our-customers/...1|vid=38385405

One of the team member responses:

Quote:

I'm pleased to inform you that as a US Citizen you are eligible to hold an account with TD​ Canada Trust. To open an account as a non-resident, it is necessary to visit a TD Canada Trust branch wi​th two pieces of identification. Locations can be found here: Locate a TD Canada Trust ATM or Branch Location Near You. The common types of acceptable ID to open an account as a non-resident are a foreign Pas​sport, Driver's License and foreign Credit Card with your name embossed. You can view a li​st of our generally accepted pieces of ID here: https://www.tdcanadatrust.com/document/PDF/account...

I'm on the West Coast, so no TD branch in the US. I'd have to drive to Canada to open an account. If I go this route, I'll call beforehand to make sure it's possible and confirm what documentation I need. I'd hate to show up and be missing something.

[Danmar]

I stand corrected. TD looks to be trying hard to capture cross border clients. They would probably be the best bank for your purposes.