Over time, many individuals have inquired about the value of establishing a U.S. dollar investment account. I always hesitated to provide a definitive answer due to my lack of concrete insights regarding its advantages and drawbacks. My preference lean towards keeping my investment strategies uncomplicated, which led me to avoid such accounts. Nonetheless, I recognize their potential benefits, which is why I invited James Gauthier, Chief Investment Officer at Justwealth, to clarify this topic in the following guest post.
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Most Canadians are likely aware that U.S. dollar bank accounts can be set up at numerous Canadian financial institutions. However, it’s less commonly known that various investment firms also enable you to open U.S. dollar investment accounts. Here are a few reasons why exploring a U.S. dollar investment account might be a good decision.
Minimize U.S. dollar conversion fees
Whenever you exchange Canadian dollars for U.S. dollars (or the other way around), a conversion fee will apply, charged by the financial institution facilitating the transaction. This fee, referred to as the currency spread, can be observed in the difference between the “bid” and “ask” prices shown by the institution. For instance, if the spot exchange rate stands at $1.35 Canadian for every U.S. dollar, the bid (price offered for selling U.S. dollars) might be $1.32, while the ask (price for purchasing U.S. dollars) could be $1.38. Consequently, each dollar exchange results in a 3-cent loss. When these transactions are repeated often, the expenses can add up significantly.
Many Canadians incur unnecessary currency conversion expenses when they buy or sell U.S.-listed securities within a Canadian dollar investment account, allowing brokers to profit from the currency spread on these transactions—be it purchases, sales, dividend payments, or interest. The resulting losses increase with frequency of trading. By simply holding U.S.-listed securities in a U.S. dollar investment account, you can sidestep these costs as no currency conversion is necessary with each trading action.
Mitigate the effects of currency fluctuations
Have you ever found yourself hesitating to travel to the U.S. because the Canadian dollar’s value was discouragingly low? Or perhaps you haven’t made a purchase on eBay because the prices were in U.S. dollars, making them seem prohibitively expensive? The comparative value of the Canadian dollar against the U.S. dollar has experienced considerable volatility over the years. In the last few decades, the exchange rate has shifted from over $1.60 Canadian per U.S. dollar to below $1.00, with the Canadian dollar occasionally becoming more valuable than its U.S. counterpart!
Why rely on unpredictable fluctuations? When part of your investments is in U.S. dollars, you can access these funds whenever needed, eliminating conversion costs and reducing concerns about the exchange rate, as you won’t be converting anything. For individuals who frequently require U.S. dollars for activities like travel, shopping, or business transactions, maintaining a U.S. dollar investment account is a sensible strategy.
As an illustrative example, let’s consider a savvy Canadian investor who vacations in Orlando, Florida, every February for one week. This annual trip usually costs around $5,000 U.S. dollars. If this individual had a U.S. dollar investment account with a $100,000 U.S. dollar portfolio yielding a steady 5% annually, they wouldn’t have to worry about fluctuating exchange rates or conversion fees, as they could comfortably withdraw $5,000 U.S. dollars each year!
Avoid PFIC reporting (for U.S. citizens in Canada)
For American citizens residing in Canada, filing U.S. income tax returns is unfortunately a requirement. On top of that, the IRS imposes additional filing obligations for Passive Foreign Investment Corporations (PFICs), which can lead to extra tax liabilities. If you hold any mutual funds or exchange-traded funds provided by Canadian companies, these investments fall under the PFIC classification. Due to existing regulations, all mutual funds purchased in Canada have to be issued by Canadian companies, which can create reporting challenges for some investors.
Fortunately, there’s a straightforward solution: opt for investing in U.S. exchange-traded funds within a U.S. dollar investment account. While U.S. mutual funds cannot be bought in Canada, U.S. exchange-traded funds are accessible and do not fall under PFIC categorization. This alleviates the reporting burden!
Not every investment firm offers U.S. dollar investment accounts or possesses the expertise needed for managing U.S. dollar-focused investments. However, Justwealth is equipped to provide U.S. dollar accounts across a wide array of account types, including RRSPs, RRIFs, LIRAs, TFSAs, and non-registered accounts. Furthermore, Justwealth boasts more U.S. dollar portfolio options than most competitors in the Canadian dollar space!