RRSPs and RRIFs -> Stocks, Bonds etc. -> Reduce Foreign Exchange Costs in Registered Accounts by Washing Trades

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.

Not All Brokerages Have US$ Locked-In RRIFS

Most brokerages are now providing the option of having US dollar balances in registered accounts. When this option is not provided, washing trades can help save on the currency conversion costs.

Most (possibly all) brokerages finally have US$ accounts for Registered Retirement Income Funds (RRIFs), unless the accounts are locked-in. RBC and Scotia brokerages have US$ locked-in RRIFs (LIFs or LIRAs). TD does not, but expects to have them in 2022. Other brokerages have not been checked.

Washing Trades

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. This can probably be set up to be done automatically by your brokerage.

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 on day 1
Tell brokerage to wash trade by buying US money market funds
Buy US shares for $8,000 US on day 5
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.

Some brokerages will do the trade washing using US money market funds automatically in your RRSP, RRIF or TFSA account, so that you don't need to contact them each time you would like this done. Check with your brokerage.

Tip: Use US money market funds to wash trades in a Canadian $ account.

Revised: October 26, 2023