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Norbert’s Gambit at TD Direct Investing

March 6, 2017 - 23 comments

US-listed ETFS are the most tax-efficient way to invest in foreign equities within your RRSP account.  The funds also tend to have lower annual fees than Canadian-listed ETFs.  However, they must be bought and sold in US dollars, and if you have to exchange your Canadian dollars for greenbacks, it can be extremely costly.  Many discount brokerages charge about 1.5% – or a whopping $150 on a $10,000 conversion.  If you’re going to use US-listed ETFs, you need to find a way to mitigate these high costs.

If you need to convert loonies to US dollars, I’ll show you a technique that can save you hundreds of dollars per transaction.

Introducing Norbert’s gambit

Savvy DIY investors have long used a technique called “Norbert’s gambit” to sidestep these steep currency conversion costs. The name comes from Norbert Schlenker, an investment advisor in B.C. who was the first to popularize it.

Norbert’s gambit with DLR and DLR.U

The simplest way to do Norbert’s gambit is with the Horizons US Dollar Currency ETF.  This ETF – which is equivalent to holding US cash – is available in two versions.  Both trade on the TSX, but the first, with the ticker symbol DLR, is bought and sold in Canadian dollars, while the second, DLR.U, trades in US dollars.

You can use these ETFs to exchange Canadian dollars for US dollars and then use the proceeds to buy US-listed ETFs.  Norbert’s gambit can be confusing, so I’ve put together a video tutorial that you can follow along with.  For more information on this strategy, please refer to our white paper.

Note: TD Direct Investing began offering US dollar RRSP accounts shortly after our white paper was published, so please refer to the video tutorial below for the updated Norbert’s gambit procedure.

 

By: Justin Bender with 23 comments.
Comments
  05/09/2017 1:45:25 PM
Justin Bender
@Guillaume: Unfortunately, I do not hold a Disnat account, so I am unfamiliar with the account procedures there.
 
  03/09/2017 4:52:38 PM
Guillaume
Hi There,

Any idea if this can be achieve for non-registered accounts with Disnat? Thanks in advance!
 
  28/08/2017 11:12:06 AM
Justin Bender
@Kelly: Unfortunately, I have no experience with this type of transaction. Are you able to set-up CAD/USD brokerage accounts in the US and wire the CAD cash to the Canadian dollar account (and perform the gambit with inter-listed stocks instead)?
 
  28/08/2017 11:11:31 AM
Justin Bender
@Daniel: I’m glad you’ve enjoyed our online resources J

In regards to your questions:

1. Holding US-listed ETFs in RDSP accounts does not mitigate the foreign withholding tax drag (probably best to just think of the RDSP account like an RESP or TFSA account): http://www.taxtips.ca/rrsp/investmentsinorout.htm

2.If you purchase foreign equity ETFs (whether they are US-listed foreign equity ETFs or Canadian-listed foreign equity ETFs), you have a long position in the underlying country currencies (USD, GBP, AUD, etc.). If the Canadian dollar appreciates relative to these underlying currencies over your investment horizon, you will have a lower return in Canadian dollar terms (the reverse is also true).
 
  21/08/2017 8:45:02 PM
Kelly
Hi Justin - any idea how this should work for a Cndn citizen but US resident alien for tax purposes (non-green card holder)? I'm looking to convert CAD to USD from my TD non-registered account however as a non-resident in Canada my non-reg accounts are frozen - I can only sell. I'm guessing this means I cannot use this Gambit but wondering if you know of options... Thank you!
 
  03/08/2017 3:01:41 PM
Daniel
Hi Justin! First off, I want to thank you and Dan for putting so much time into everything - your white papers, blog posts, etc. - these resources have helped me immeasurably!

I have two questions, hopefully easily answered, as I'm an investing newbie.

1) Does everything we've read about Norbert's Gambit - reducing currency conversion fees, avoiding withholding taxes in my RRSP because the ETF is now U.S. listed also apply to my RDSP (Registered Disability Savings Plan). In addition to my RRSP investments, I'd like to use N's Gambit in my RDSP and invest in ETFs that are U.S. listed to avoid withholding taxes.

2) I understand, as you've clearly outlined, that there is currency risk during the settlement period following Norbert's Gambit. Isn't there also long term currency risk between the initial purchase price and then reconverting back to CAD when I'm ready to retire and start pulling on these funds? E.g. if the CAD has appreciated in 30 years, I would lose out there as well no? Dan mentioned fully appreciating the full implications of this before proceeding, any help would be greatly appreciated!
Thanks Justin.
 
  24/07/2017 4:16:00 PM
Justin Bender
@Andreas: Purchases and sales of DLR and DLR.U settle on T+3 (soon to be T+2 in September 2017). However, at RBC Direct Investing, you can immediately buy DLR, sell DLR.U, and buy your US-listed ETF (as all trades will settle on the same day, as long as there are no differences in stock market holidays between the Canadian and US stock markets).

If you are planning to withdraw the US dollar proceeds from the sale DLR.U, you will have to wait until the settlement date to access the funds.
 
  20/07/2017 3:31:05 PM
Laura
Just a further warning about that 3 day settlement period. In the 3 days I've had to wait, I've already got an unrealized loss of nearly $1400 due to the sinking US dollar. :(
I'm going to now transfer the shares to my CAD account, but I think I have to wait now for the US dollar to recover somewhat, but not even sure if that's going to happen any time soon!
This is my first time utilizing Norbert's gambit. It's not quite as stress free as I thought it would be. And I'm not sure I would advise doing this in TD at all due to the T+3 period.
 
  20/07/2017 12:14:06 PM
Andreas
Hi Justin, I just spoke with RBC direct investing and they are saying settlement in 3 days as well... he said it's the market that sets that rule. Am I missing something??
 
  14/07/2017 10:54:16 AM
Justin Bender
@Ezio Bobbato: Once you purchase DLR, you are immediately exposed to the US dollar (if the US dollar appreciates relative to the Canadian dollar during the T+3 settlement period, you win – if it depreciates, you lose). There could also be an opportunity cost for waiting to purchase the US-listed ETFs. If equities increase during the settlement period, the missed opportunity may offset any benefit from the cheaper currency conversion (the opposite is also true). This is why I prefer implementing the gambit at brokerages that allow you to complete all of these steps on the initial day (RBC Direct Investing is an example of one).
 
  13/07/2017 2:53:19 PM
Ezio Bobbato
Hi Justin,
Just viewed your YouTube tutorial (excellent work) but have the following questions:
1. Given the T+3 settlement delay following the purchase of DLR, is there an exposure to price fluctuations that could affect the net proceeds when selling DLR.U or is this a minor issue?

2. When you request to move DLU shares from the Canadian dollar account to the associated US dollar account, will TD do this free of charge or is there a fee involved?

Thanks
 
  07/07/2017 4:47:58 PM
Justin Bender
@Maria: I’ve never attempted the gambit in a US brokerage account (I assume the steps would be similar). If you are planning to open a non-registered Canadian brokerage account (with CAD and USD sides of the same account), you could set this up first and then wire the funds from your US bank account to the US-dollar side of your new Canadian brokerage account (and then implement the gambit by buying DLR.U in your USD account with your US dollars and selling DLR in your CAD account).
 
  05/07/2017 4:07:05 PM
Maria
Thank you very much for this informative article. I have USD in a US-based bank account - do I need to move it into a Canada-based USD account first to do Norbert's Gambit? I am new to this and need to exchange a large amount. Thank you in advance!
 
  29/06/2017 11:14:48 AM
Justin Bender
@Serge: It doesn’t need to be an RRSP account (non-registered and TFSA accounts work as well). The main benefit to holding US-listed ETFs in an RRSP (which require US dollars to purchase them) is a reduction in foreign withholding taxes: https://goo.gl/Bu89dv
 
  29/06/2017 1:14:06 AM
Serge
Why does it have to be an rrsp account? Would there not still be benefit in doing this even if it's a regular trading account?
 
  28/06/2017 1:37:29 PM
Justin Bender
@Tony: Nobert’s gambit can be implemented in reverse – you would simply buy DLR.U in your US dollar RRSP account, and sell DLR in your Canadian dollar RRSP account. Before selling your US stocks, please ensure that you have a US dollar RRSP open and that the US stocks have been transferred to the account (if they are held in a Canadian dollar RRSP account, there will be a forced currency conversion at the higher brokerage FX rates when you sell them).
 
  28/06/2017 1:02:34 PM
Tony
Hi Justin,

I have large amount of US$ and US stocks in my RRSP and would like to convert to C$ in anticipation of withdrawing.
Can this technique be used in reverse?
Thank you
Tony
 
  16/05/2017 4:20:22 PM
Justin Bender
@Barry: Holding XAW would have similar foreign withholding tax implications as holding US, international and emerging market equity US-listed ETFs (with the exception of international equities, as XAW holds XEF, which holds the underlying stocks directly and is therefore more tax-efficient than holding IEFA in a taxable account).

The main benefit of holding US-listed ETFs in a taxable account would be their lower expense ratios (but you have to weigh that benefit against the complexity and cost of converting CAD to USD).

In an RRSP account, the benefits are relatively large (if you properly use Norbert's gambit to convert your CAD to USD). In a taxable account or TFSA account, the benefits are smaller (I generally do not hold US-listed ETFs in TFSA or taxable accounts).
 
  16/05/2017 3:05:45 PM
Barry
Mardi's question: I assume you could benefit on the exchange rate by using this technique, in either a registered or non-registered account. I think that is what she is asking about. The withholding tax issue is a separate one.
 
  20/03/2017 12:53:33 PM
Justin Bender
@mardi: The benefits of reducing the foreign withholding tax drag is more relevant in RRSP accounts (in TFSA accounts, holding US-listed ETFs does not avoid the problem, and in taxable accounts, the foreign withholding tax drag is similar - with the exception of holding Canadian-listed international equity ETFs that hold the underlying stocks directly).

For more detailed information, I would recommend reading our white paper on the subject of foreign withholding taxes: http://www.canadianportfoliomanagerblog.com/wp-content/uploads/2014/09/2016-06-17_-Bender-Bortolotti_Foreign_Withholding_Taxes_Hyperlinked.pdf?850eac
 
  19/03/2017 4:56:53 PM
mardi
You say your calculations are based on the assumption that the ETFs are being held in either a tax-deferred or tax-free account. What if XAW is held in an open account--Canadian or US?
 
  14/03/2017 10:32:13 AM
Justin Bender
@David Scott: If you haven't watched the YouTube tutorial above, it walks you through the updated step-by-step process.
 
  09/03/2017 9:43:16 AM
David Scott
Hi Justin,
Re Norberts Gambit for TD, TD DI does allow you to have US cash in registered accounts now. How does this change the process for Norberts Gambit? Sorry, I'm new to this technique, don't fully understand it yet and I would appreciate your help with NG given the change at TD.

Thank you in advance,
David Scott
 



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