Back once the Canadian dollar was trading roughly at par using the U.S. dollar (and briefly above it), it had been a great chance of Canadian investors to diversify outside of the Canadian equity market to buy world-class U.S. stocks in sectors underrepresented in Canada: technology, health care, pharmaceuticals, consumer staples and the like.
Many of these U.S. stocks pay healthy dividends, so ideally you would like to own those stocks within your RRSP. Go forward to 2016 and many Canadian investors may have enjoyed a double win with that strategy: capital gains around the underlying stocks (especially if they were sold before the big selloffs began starting last August), plus currency gains as the loonie began to lose ground towards the greenback.
In the past week, both my wife (who is currency savvy because of her profession) and my financial adviser independently deducted that it was time for you to book those currency gains by repatriating U.S. dollars into the Canadian dollar.
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In my case, when i took profits on certain U.S. stocks recent times, I’d kept the proceeds in U.S. dollars, either as cash or short-term bond ETFs. The latter have to be sold before you can proceed.
The next thing is to ask your lender to convert those U.S. dollars back into Canadian dollars. We’ll assume this really is all happening inside your RRSP so you can ignore tax considerations, and you are utilizing a discount brokerage. In this instance, you may either ask the client service people to help or initiate the transfers yourself under a “Transfer Funds” tab.
Say you’ve raised US$10,000: you just transfer in the US$ part of your RRSP to the C$ some of it. They will give you the current conversion rate. With my case, the exchange rate now was 1.3809. So the $10,000 US$ multiplied by 1.3809 means you’ll now have $13,809 in Canadian funds to become reinvested. You can choose high-yielding Canadian stocks such as the banks or BCE or just use 2-year GICs or perhaps a short-term bond ETF like the Vanguard Canadian Short-Term Bond ETF (VSB/TSX). Personally, I hold Canadian dividends in non-registered accounts and TFSAs so for that repatriated RRSP dollars I’m splitting the proceeds between your GICs and the ETF.
Note the loonie could still fall further from here; if you feel that’s likely, you might not need to transfer all of your U.S. dollars at one shot. You can transfer another or a half now and monitor currencies within the next few weeks and months, committing incrementally more for each additional 3-cent decline in the loonie, for example.
If you do “repatriate” funds by doing this, remember that the next time the loonie rises, heading towards parity, you’ll want to start rebuilding those positions in U.S. securities, so you can ride the currency cycle all over again. Whether that happens any time soon remains seen. Those of us of the certain age may conclude it isn’t likely for which remains in our lifetime: if you’re planning to retire and live totally on Canadian dollars, the repatriation risk turning to be considered a one-way trip.
Jonathan Chevreau founded the Financial Independence Hub and could be reached at email@example.com.