Updated 2020 to provide additional information about an additional way to convert large amount of CAD to USD using Currency Brokerages / Money Transfer Comparison
Back in late 2014, I wrote about how great it was to be holding US Dollars (USD) due to the declining Canadian dollar (CAD). At the time of that post, it cost $1.13CAD to purchase $1 USD, or a 13% premium. Due to the drastic oil decline over the past 18 months, CAD has followed the price of oil, today it costs about $1.40CAD to purchase $1USD. What does that mean in context? Well, say you want to purchase a $100k USD condominium in Florida. In November 2014, it would have cost $113k CAD (forget about foreign exchange fees for now). Assuming that the condo did not appreciate since 2014, the condo today would cost $140k CAD.
Needless to say, those that took advantage of the opportunity to buy deflated US real estate when CAD/USD was at par (2010-2013) have made a great investment! Not only has US real estate prices appreciated (for the most part), but selling a USD investment today means a 40% premium when converted to CAD. Same goes for those who loaded up on US stocks during that time. Not only are you getting capital appreciation, but your dividends are getting paid in USD.
So what happens now if you have a bunch of USD and want to convert it back to CAD, or otherwise?
Most financial institutions charge a healthy spread for foreign currency exchange, usually in the 2.5%-5% range, which on $100k is up to $5k in fees.
Discount brokerages do a bit better 1% and 2%. The former is not a bad at all margin for a trade but still isn’t the cheapest way to convert Canadian Dollars to US Dollars.
In light of this, here are some ways to reduce the cost of exchanging your USD to CAD.
1. Norbert’s Gambit
For those of you with a lot of USD in a trading account and looking to capitalize on a weaker CAD, there is a strategy called Norbert’s Gambit that you should be aware of. While this strategy is not for novices, it can basically reduce your FX spread to two trading commissions (plus buy/ask spread). In other words, very cheap.
To start, this strategy is best with RBC and BMO trading accounts. At a high level, the investor will purchase and an inter-listed stock (stock listed on both a US and Canadian exchange) like RY in USD, then immediately sell the same stock in CAD. BMO and RY trading accounts will automatically move shares from USD to CAD, so there is no delay, so less risk of the stock moving against you. Most discount brokerages will require a phone call to “journal” your shares from your USD to CAD account.
It may sound complicated, but here is a step by step on Norbert’s Gambit.
2. Interactive Brokers
This may be a the ultimate method of moving money from USD to CAD or reverse, as it is cheap, quick and easy (ish). Most discount brokers charge about 1-2% per CAD to USD currency exchange, Interactive Brokers charges: 1 basis point (0.01%) + $2.50 USD. Login to your account, place a forex trade for symbol USD.CAD, and sell the amount that you wish.
However, there are some drawbacks of using IB as your primary currency conversion tool. First, you need an account with them which costs a minimum of $120/year (USD). In addition, if you EFT the money from a USD bank account into the IB account, and withdrawn into a different account (CAD bank account), they will hold the money for 60 days. Third, the IB user interface is not beginner friendly. to summarize, we recommend other online brokers like Questrade, but their currency exchange spreads are x100 higher than IB’s.
I can see this option being a great solution for existing IB account holders AND if you don’t need the money within 60 days, and willing to go with a brokerage that hasn’t ranked the highest on our discount brokerages comparison. You can read my full Interactive Broker review here.
3. Do it Online with Currency Brokers / Money Transfer Companies
Back in 2014 I wrote
While the two options above may not the best for someone without any trading experience, there are options out there that are truly easy and offer their services for a reasonable rate (relative to the big banks). I’m a bit hesitant to write any examples as I have never used their services, but from what I’m reading online, a couple of competitive options are Knightsbridge FX and XETrade.
How do they work? With Knightbridge (minimum $10k), you wire them your USD (approx $20 fee), they would do the exchange, and EFT CAD back to your account. From what I can see on their website, it appears that they charge a fee of approximately 0.5%-1.0% of the amount requested to be exchanged (plus wire fee).
Nowadays, Million Dollar Journey’s writers are far more knowledgeable about this topic and feel those are reliable companies that can handle large CAD to USD transactions very well. They are known for the bespoke service and also offer a range of non-speculative hedges, so they might be worth a shot.
The way it works with big Currency Brokers or money transfer companies, as they like to be called nowadays, is as described originally in 2014. You transfer CAD to their bank account (a segregated account held by a major Canadian bank).
They exchange it (in our case exchange CAD for USD), and transfer it back to you domestically in the currency you desire to your own U.S denominated bank account (or – if this is a payment, to the desired recipient anywhere in the world). Major brokers like OFX (formally Canadian Forex, in Canada), Currencies Direct, Moneycorp, and XE (merged wtih HiFX), to name a few, will have Canadian bank account and access to approximately 120 currencies on average.
If the purpose of your conversion is to transfer the money internationally to the USA, then you can simply name the recipient and they will pay him the money in USD through a local U.S bank account (except WorldFirst, which has shut down its American offices in 2018).
Spreads of 0.5%-1% for a large CADUSD transfer or conversion were pretty much the industry’s average circa 2014, but aren’t anymore. Companies like Transferwise commit to a certain margin of approximately 0.5%, while others like Currencies Direct or Moneycorp don’t necessarily commit to a certain margin but if you are transferring tens of thousands CAD or more, they’ll likely to offer a price competitive enough to beat the two aforementioned companies (WorldFirst, Transferwise).
The lowest possible margin you can get on a very large transfer or as a corporate client is likely to be at around 0.25%.
When it comes to being hesitant about recommending them, that hesitation has dissolved during this period. The money transfer company solution has become widely popular. Just look at Transferwise which is moving more than 5bn CAD equivalent every month, and is considered the top UK startup nowadays in terms of valuation (2021 updated – about to go on an IPO). You have a lot more companies who move billions annually and adhering to very strict regulations and rules in regards to what they can and can’t do with their clients money. Companies like Currencies Direct are monitored by the British FCA, as well as by FinCEN and FinTRAC.
Here you can read additional reviews of the best international money transfer companies.
For those of you who regularly exchange money from USD to CAD, or convert CAD to USD, what is your strategy to reduce fees? what do you think is the absolute best way to convert CAD and USD?
I've Completed My Million Dollar Journey. Let Me Guide You Through Yours!
Sign up below to get a copy of our free eBook: Can I Retire Yet?