Save Foreign Exchange By Washing Trades

by Tax Guy - Burlington Accountant on September 17, 2009 Print This Post Print This Post

Most registered retirement savings plans are denominated in Canadian dollars. If you have U.S. dollar securities in your Canadian dollar RRSP, you may be able to save some money when you buy and sell securities by washing your trades.

Washing Is Not Laundering

Washing Trades
Money laundering is a criminal activity where the criminals undergo a series of transactions to make dirty money (the proceeds of crime) appear clean (appear legitimate).

Washing trades on the other hand is simply asking your stock broker or discount broker to use the same foreign exchange rate for stock sales or other transactions with the same settlement date.

Investment Dealers Make Money On Foreign Exchange

All financial institutions make money on foreign exchange by buying and selling currency to you at different rates. For example, if you have $100 CAD and move it to USD and then back to CAD on the same day, you’ll end up with something less than $100 CAD…The broker ends up with the difference.

How To Wash A Trade

First of all ask your broker or investment dealer if they offer this service. Not all brokers wash trades and if you have a large number of U.S. stocks, you might want to look for another broker.

Step 1 – Sell your U.S. securities.

Step 2 – Buy new U.S. securities the same day.

You need to ensure the buy and sell transactions will settle the same day or else your broker may not wash the trade!

Step 3 – Ask your broker to wash the trade.

Your broker will eliminate the foreign exchange cost from your transaction.

Other Ways To Wash Trades?

Another way you can hedge currency and reduce foreign exchange costs is to wash to a money market fund.

  • If you have an excess (your buy is less than your sell), you can ask your broker to wash the difference to a USD money market fund.
  • If you are selling a stock but want to wait before making another purchase, or want to maintain your USD position, ask your broker to sell your securities and wash the entire sale into a USD money market fund.

These techniques simple preserve your USD position without incurring foreign exchange conversion costs.

Next Week – Special Stock Option Series

By request, I’ll be running a three part series on stock options. If you have purchased or used stock options in the past, you won’t want to miss this series. I’ll address what options are, how they are used and how they are taxed in Canada.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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sam September 17, 2009 at 10:18 pm

While true, the original definition for wash trade is illegal

“A transaction designed to make it appear that a purchase and sale has occurred even though no change in ownership occurred. For example, an investor might simultaneously buy and sell shares in one company through two different brokerage firms in order to create the appearance of substantial trading activity that will draw in other investors. Wash trades are illegal.”

Tax Guy September 17, 2009 at 11:18 pm

@ Sam:

Thanks. I wasn’t aware the term had that origin.

larry macdonald October 1, 2009 at 10:37 am

What about transferring cash from a Canadian-dollar brokerage account to a U.S-dollar brokerage account (or into a U.S. security) at same brokerage house — can the currency fee be washed?

Tax Guy October 1, 2009 at 11:05 am

@ Larry:

Probably not. The thing about washing trades is that the investor is selling a USD stock in a CAD account and purchasing another USD stock. At the end of the transaction, the investor is only changing the stock they are invested in and the washing process eliminates any FX gain or loss the broker would get in the meantime.

Moving cash is a disposition and ultimately results in a change in currency.

Jim Piel December 27, 2012 at 5:02 pm

I have a somewhat related question. If an individual purchases a “non-tradeable currency at a very low rate, then after some time, the currency revalues, as in examples like Kuwaits Dinar, or the German Mark, how is the tax law as far as how it relates to the possible gain in value when the froeign currency is converted back to Canadian dollars?

Tax Guy - Burlington Accountant December 27, 2012 at 7:24 pm

@ Jim
The same!

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