Over the years, I’ve frequently been asked whether opening a U.S. dollar investment account is worthwhile. My response has often been vague, as I lacked a definitive stance on its benefits and drawbacks. I generally preferred to keep my investment strategies uncomplicated. Nevertheless, I recognize the potential value of U.S. dollar investment accounts. To shed light on the matter, I invited James Gauthier, Chief Investment Officer at Justwealth, to share insights in this guest post.
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Many Canadians are likely familiar with the option to open a U.S. dollar bank account at various Canadian financial institutions. However, it may come as a surprise that numerous investment companies also offer U.S. dollar investment accounts. Here are several reasons to think about opening one of these accounts.
Minimize U.S. dollar conversion costs
Each time you convert Canadian dollars to U.S. dollars (or the other way around), a fee is imposed by the financial institution facilitating the exchange. This fee is commonly referred to as the currency spread, which is illustrated by examining the “bid” and “ask” prices offered by the financial institution. For instance, if the current spot exchange rate is $1.35 Canadian for one U.S. dollar, the bid price you would receive for selling U.S. dollars might be $1.32, while the ask price to purchase U.S. dollars could be $1.38. This means that with every transaction, you are losing 3 cents on each dollar. For individuals who frequently convert currency, these costs can accumulate significantly!
Many Canadians unwittingly incur avoidable currency conversion costs by buying or selling U.S.-listed securities within a Canadian dollar investment account, allowing brokers to benefit from the currency spread on trades, dividends, or interest payments. The more transactions made, the greater the losses. Such expenses can be eliminated if you hold U.S.-listed securities within a U.S. dollar investment account, as it removes the need for continuous currency conversions during transactions.
Mitigate fluctuations in currency exchange rates
Have you ever found yourself curtailing your travel spending to the U.S. due to the historically low value of the Canadian dollar? Or perhaps you hesitated to buy that item listed in U.S. dollars on eBay because it seemed excessively priced? The exchange rate between the Canadian dollar and the U.S. dollar has varied significantly over the years, swinging from above $1.60 Canadian for every U.S. dollar to below $1.00—at times, even placing the Canadian dollar at a higher value than the U.S. dollar!
Instead of leaving it to chance, consider investing a portion of your portfolio in U.S. dollars. This way, you’ll always have access to those funds without incurring conversion fees, and the current exchange rate will no longer be a concern as conversions won’t be necessary. For anyone who often needs U.S. dollars for travel, business, or purchases, having a U.S. dollar investment account could be extremely beneficial.
For example, picture a savvy Canadian investor who takes an annual one-week vacation in Orlando, Florida, spending approximately $5,000 U.S. dollars each year. By opening a U.S. dollar investment account and allocating $100,000 U.S. dollars into an income-generating investment yielding 5% annually, this investor could comfortably withdraw the annual $5,000 without needing to worry about currency exchange rates or conversion fees!
Avoid PFIC reporting (for U.S. citizens residing in Canada)
Unfortunately, U.S. citizens living in Canada face the obligation to file U.S. income tax returns. Moreover, these individuals are subject to additional IRS reporting requirements for Passive Foreign Investment Corporations (PFICs), which can result in extra tax liabilities. If you possess any mutual funds or exchange-traded funds affiliated with Canadian companies, they are considered PFICs. Regulations dictate that all mutual funds acquired in Canada must be from Canadian companies. This requirement can create significant hurdles for some investors due to the need for enhanced reporting.
Fortunately, there’s a straightforward workaround: by investing in U.S.-traded exchange-traded funds within a U.S. dollar investment account. While purchasing U.S. mutual funds from Canada is not permitted, U.S. exchange-traded funds can be acquired, and these do not fall under the PFIC classification. Problem solved!
It’s worth noting that not every investment firm offers U.S. dollar investment accounts or possesses the expertise in managing U.S. dollar-based investments. At Justwealth, we provide U.S. dollar accounts for nearly every type of account, including RRSP, RRIF, LIRA, TFSA, and non-registered plans. Additionally, Justwealth features a wider array of U.S. dollar portfolio options than most firms offer in Canadian dollars!