Throughout the years, many individuals have inquired whether opening a U.S. dollar investment account is a wise decision. Initially, I hesitated to provide a concrete viewpoint as I lacked a compelling argument detailing the advantages and disadvantages. Typically, I informed people that I preferred to keep my investment strategy straightforward, without the complexities of additional accounts. However, I understand the potential benefits of U.S. dollar investment accounts, which is why I invited James Gauthier, Chief Investment Officer at Justwealth, to share his insights in this guest piece.
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Many Canadians know they can set up a U.S. dollar bank account at most financial institutions across Canada. However, they might not be aware that an array of investment companies also provide U.S. dollar investment accounts. Here are several compelling reasons to contemplate the option of having a U.S. dollar investment account.
Minimize Currency Conversion Costs
Each time you exchange Canadian dollars for U.S. dollars—or the other way around—you incur a fee imposed by the financial institution facilitating the currency conversion. This fee, referred to as the currency spread, can often be recognized through the difference between the “bid” and “ask” prices provided by the institution. For instance, if the current exchange rate is $1.35 CAD for each USD, the bid (the price you receive when selling USD) might be $1.32, while the ask (what you pay when buying USD) could be $1.38. Thus, every time you engage in currency transactions, you incur a loss of 3 cents per dollar. If currency conversion becomes a regular activity, these costs can accumulate significantly!
Many Canadians incur unnecessary currency conversion expenses when trading U.S.-listed securities using a Canadian dollar investment account. This situation allows brokers to profit off the currency spread on transactions, including purchases, sales, dividends, or interest. The more frequently you trade, the greater your losses can become. Such costs can be easily avoided by holding your U.S.-listed securities in a U.S. dollar investment account, as this eliminates the need for currency conversion on each transaction.
Protect Against Currency Exchange Rate Variability
Have you ever felt compelled to limit your travel spending in the U.S. due to the low value of the Canadian dollar? Or avoided purchasing an item in U.S. dollars from eBay because of the high price? The Canadian dollar’s value relative to the U.S. dollar has seen significant fluctuations over the years, swinging from over $1.60 CAD per USD to below $1.00—there have even been instances when the Canadian dollar was stronger!
Rather than leaving your financial future to chance, holding a portion of your investments in U.S. dollars provides access whenever you need it. This approach eliminates conversion fees and negates the importance of current exchange rates since you wouldn’t be converting anything. For individuals who regularly require U.S. dollars for travel, business, or shopping, a U.S. dollar investment account can be quite advantageous.
For a practical example, consider a savvy Canadian investor who vacations annually in Orlando, Florida, spending about $5,000 USD for the week. By opening a U.S. dollar investment account and investing $100,000 USD in an income-generating portfolio with a consistent 5% annual return, this investor could easily withdraw the necessary $5,000 each year without concern for exchange rates or conversion fees!
Avoid PFIC Reporting (for U.S. Citizens Residing in Canada)
Unfortunately, U.S. citizens living in Canada are still obliged to file U.S. income tax returns. Complicating matters, the IRS has additional reporting requirements concerning Passive Foreign Investment Corporations (PFICs), which could lead to extra taxes. If you own mutual funds or exchange-traded funds from Canadian firms, they fall into the PFIC category. Given that regulations state all mutual funds purchased in Canada must originate from a Canadian company, this can create reporting challenges for some investors.
However, there is a relatively simple workaround: invest in U.S. exchange-traded funds under a U.S. dollar investment account. While Canadian investors cannot purchase U.S. mutual funds, they can buy U.S. exchange-traded funds, which are not categorized as PFICs, thus resolving the issue!
Not all investment firms provide U.S. dollar investment accounts or possess the expertise needed for effective management of U.S. dollar investments. Justwealth stands out by offering U.S. dollar accounts for nearly every account type, including RRSP, RRIF, LIRA, TFSA, and non-registered accounts. Additionally, Justwealth boasts a broader selection of U.S. dollar portfolio options than most firms have for Canadian dollars!