A thread that winds through many of the posts on this site is the idea of finding the balance between satisficing and optimizing, and currency exchange strategies are no exception.  Below, I’ll outline some of the best ways to exchange currency between Canadian Dollars (CAD) and US Dollars (USD).  There isn’t one best way, though, and the best way for you will ultimately depend on where you draw the line in terms of how much effort you want to expend on optimization.  It will also likely vary based on the amount and frequency of your currency exchanges.

Currency Exchange Overview: Rates, Spread and Fees

If you have assets on both sides of the border, you are likely going to find yourself in situations where you need to change Canadian dollars to US dollars or vice versa.  The efficiency with which you do this will ultimately be determined by three things: the exchange rate, the spread, and the fees.  Like with investing, predicting future exchange rates is impossible, but unlike investing I do think it’s possible to do a bit of currency exchange timing.  I’ll do a future post sharing some strategies on how I approach this.  For the most part, though, just like with investing, the main focus should be on controlling the costs, meaning reducing the spread and the fees as much as we can.

Spread

The spread is the difference between the rate that an institution buys a currency at (bid) vs. what they sell the currency at (ask).  The smaller the spread, the lower the cost.

Fees

In addition to making money on the spread, financial institutions also charge fees for currency exchanges.  For the Big 5 Banks, these fees are often invisible (baked into the spread), but some services list their fees explicitly. For some strategies (e.g. forex trading or Norbert’s Gambit), the fees would include any trading commissions incurred.

A Real-World Example

This is a snapshot of the non-cash exchange rate from one of the Big 5 Banks.

If I click the two arrows in the middle to switch the direction of exchange, I get this:

The gap between the two exchange rates (1.4332 – 1.3534 or .0798) is the spread. The “true” rate is the mid-market rate between them.

Here’s what I see using one of the alternative foreign exchange services.

Rather than making money on the spread, this provider quotes the exchange rate (which you’ll note is very close to the middle of the bid and ask prices given by the bank a few minutes before) and has explicit fees (46.11 USD).  Importantly, using this alternative provider results in getting an additional $365.48 CAD in our $10,000 USD exchange.

Currency Exchange Options

There are at least four main options when it comes to exchanging currency.

Method	Cost	Ease	Tax Implications?
Big 5 Banks	High	High	No
Alt. Exch. Svcs	Low	High	No
Forex Platform	Very Low	Medium	Potentially
Norbert’s Gambit	Very Low	Medium	Potentially

This is where we really get into satisficing vs optimizing.  For me, the combination of low fees and simplicity has meant that I’ve used (and typically recommend) using an alternative exchange service.  If you’re exchanging a large amount, though, or exchanging currencies frequently, you may want to consider a forex broker or Norbert’s Gambit.  We’ll dig more into the details of each of these options below.

One option that I’m going to cover for currency exchanges is airports.  Ideally, you should never use an airport (or other tourist facing entity) for currency exchanges.  Their spreads are exceptionally high, and they often also have high commission fees or service charges.  If you want to have Canadian cash on hand when you first arrive, you’ll get a better rate ordering from your US bank before you leave.

The Big 5 Banks 

The Big 5 Banks are still used by many Canadians to exchange between USD and CAD. In my opinion, the only reason to do this would be to get cash ahead of a trip if you had no other option.  Even for those offering “cross-border” banking, the spreads and fees are high.  Cross-border banking can be useful in some ways – for example, to transfer USD freely between a US account and a Canadian account – but I generally wouldn’t recommend using it for currency exchange.

Alternative Exchange Services

The landscape of alternative currency exchange and transfer services is always changing, but there are a few that have been around for a while that consistently offer better rates and lower fees than the Big 5 Banks.  Wise is the one I most often recommend.  Their costs are low, and their customer service is excellent.  Others that I have heard positive things about are OFX and Knightsbridge.

In brief, here’s how these alternative currency exchange services work.

1. Create an account.
2. Link that account to your bank accounts (e.g. a USD one in the US and a CAD one in Canada)
3. Initiate a transfer
4. Receive the cash

Note that these services aren’t instantaneous, they take a few (2-5) business days.  The speed varies based on currency, funding method (wire vs. ACH), and whether or not the bank accounts being used are domestic or international.  The fastest way to do it would be to use a USD account and CAD account that are both located in Canada and fund it by wire, but the fees are typically higher by wire than ACH (which is slower).

You can also use these services to send money to other people. For example, we were able to use Wise to both exchange our USD into CAD and to send it to the escrow account at a Canadian bank when we were buying our house in Canada, before we had entered the country.

Forex Trading

Forex trading is the most direct, low cost way to exchange USD and CAD.  Interactive Brokers is a popular platform, but I have heard mixed things about their willingness to work with Canadian-resident US citizens.  There are a number of other forex brokers that operate in Canada, though, and some may be willing to do business with US persons.  Look for one that is regulated by IIROC as there are some scammy players in the forex space.

One thing to bear in mind is that forex trading will require tax reporting if you make gains on your currency exchanges.  The forex broker will be able to provide you with the required tax slips.

While forex trading may be lower cost, it isn’t free.  There are still spreads (which vary by institution and by account type) and many charge commissions.  There can also be account inactivity fees, funding or withdrawal fees.  Thus, before going this route, you’ll definitely want to fully understand the fee structure of the particular forex platform you’re using to make sure it makes sense for you.

Norbert’s Gambit

As a recovering optimizer, I love the idea of Norbert’s Gambit.  It offers a way to exchange unlimited amounts of USD and CAD for free, assuming you have a commission free brokerage account.  If you want to go down this route, I encourage you to research how exactly Norbert’s Gambit works at your particular brokerage as the details vary.  Generally speaking, though, it’s fairly simple.

1. Buy shares in a cross-listed¹listed both on a Canadian exchange and a US exchange stock equivalent to the value you want to exchange.
2. Journal these shares over²at some brokerages you can do this yourself, others require you to call customer service to their cross-listed counterpart.
3. Wait ~3 business days for this process to finalize.
4. Sell the shares of the stock in the new currency.
5. Wait for the trade to settle and withdraw the currency.

Despite it potentially being very low cost, there are some potential risks with Norbert’s Gambit.

Price Fluctuations

The price of the cross-listed stock could change while you are waiting for the journaling process to finalize. For non-US persons, this is less of a risk as use could use a stable ETF like DLR / DLR.to.  For US persons, though, this would be considered a PFIC and, personally, I would avoid it.  Instead, I’d look for a high volume cross-listed stock like RBC ($RY) or TD Bank ($TD). The prices of these stocks could certainly change, though, in the few days this process takes.

Tax Implications

Because this approach relies on trading stocks (or ETFs), there will be tax reporting requirements. If the prices don’t change, you won’t owe any taxes, but it adds a bit of complexity. In addition to reporting any capital gains or losses, I’d also recommend not using stock that you currently own, have owned in the past 30 days, or will own in the next 30 days to ensure that you don’t run afoul of the superficial loss rules in the Income Tax Act.

If you do use Norbert’s Gambit using one of these stocks, you’ll also want to be sure to time it so that you are not receiving a dividend during the time you hold the stock, as you may end up collecting a dividend on one side of the account and paying it out on the other. In this situation, the dividend you collect is taxable income and the dividend you pay is not deductible.

Fees

Even if you’re using a commission-free discount broker (like one recommended here), they may charge for journaling shares. For example, Questrade charges $9.95 per journaling request. They also offer free journaling with a Questrade Plus account, which costs $11.95 per month.

Additional Information

Despite these complexities, Norbert’s Gambit is a strategy I will explore further when and if I find myself in a situation where I am primarily using US assets to fund a Canadian lifestyle.  Finiki has a great overview of Norbert’s Gambit.  Note, though, that Finiki isn’t writing for a cross-border audience, so the ETFs they recommend may not be a good fit (due to PFIC risk) for US persons.  For people with US tax reporting requirements, this mega-list of cross-listed stocks offers some ideas.

Thus, while the concept of Norbert’s Gambit is quite simple, there are complexities in the details, particularly for US persons.  If you’ll frequently be exchanging funds, though, or if you want to optimize a large exchange, it is worth considering.  This is definitely an area where you’ll want to do some thorough, brokerage-specific research to ensure that you have the latest info on the process, costs, and timing.

Conclusion

As we established at the outset, choosing a currency exchange strategy is a classic case of balancing optimization with convenience.

• For the ‘Satisficer’: If your goal is a simple, transparent, and significantly cheaper process than the big banks, alternative services like Wise offer a great sweet spot. They require minimal effort for substantial savings.
• For the ‘Optimizer’: If you are moving large sums or exchanging frequently and want to squeeze every last basis point out of the transaction, exploring a forex platform or mastering Norbert’s Gambit will yield the lowest possible costs, provided you’re comfortable with the added complexity and tax considerations.

Ultimately, the goal is to make a conscious choice. By moving away from the high-cost default of the big banks, you’re already making a financially savvy decision that will leave more money in your pocket for your life in Canada.

• 1
  listed both on a Canadian exchange and a US exchange
• 2
  at some brokerages you can do this yourself, others require you to call customer service