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
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.