Currency conversion

Currency conversion, also known as foreign exchange (forex), for Canadians is the exchange of Canadian dollars to or from another currency. Many Canadians have financial transactions involving funds that involve a requirement for currency conversion and they should be aware of the fees and margins involved.

Banks charge retail customers substantial fees to exchange Canadian dollars to or from foreign currencies. Credit card companies typically charge 2.5% to convert transactions made outside of Canada into Canadian funds. Most Canadian financial institutions offer US dollar accounts and US dollar credit cards, but there is still a need to minimize costs when exchanging between currencies.

Prudent consumers have a number of techniques available that can help to minimize the costs of currency exchanges. Within brokerage accounts, there is a low cost way to convert CAD to USD, or vice versa, that has become known as Norbert's Gambit. This article also discusses how best to pay for expenses in foreign currency while travelling overseas.

Low cost CAD/USD exchange within brokerage accounts
In the common case of Canadian to US dollars (or vice versa), those with a discount brokerage account can convert funds inexpensively by technique which has become known as Norbert's Gambit. Non-registered Canadian discount brokerage accounts typically have sub-accounts in both Canadian and US dollars. Investors using this method should verify that the account has this feature before beginning. The mechanics are simpler for margin accounts, especially if short sales are allowed, but neither is strictly necessary. The method can also be used in registered accounts, even within a single Canadian dollar sub-account, if the brokerage offers automatic or on demand "wash trades" (e.g., TD Direct Investing).

Choose a reasonably liquid interlisted stock. The large Canadian banks and resource companies are usually good choices. The simultaneous purchase of such a stock in one country and sale of the same stock in the other country will effectively convert one currency to the other at close to the spot rate. The investor's cost is two trading commissions and some bid-ask spread, which is usually much less than the standard 1% (or greater) fee at a bank or broker.

Spending overseas and sending money overseas from Canada
When traveling overseas, you will make payments in foreign currency and depending on the duration of the trip, you may want to transfer some money from Canada to the other country. A partly similar situation is transferring money to relatives, friends or employees overseas, but this section focusses on transferring money to yourself. There are several methods to do this, which vary in cost and convenience. Some of the costs are obvious (e.g. fees at the ATM or at the currency exchange office; transfer fees for wire transfers) whereas others are hidden in the exchange rate. Therefore many people end up paying much more than they realize.

Calculating the hidden costs of foreign exchange
To calculate the fees hidden in the exchange rate, one can try to compare a specific quoted rate to the mid-market (neutral) rate available on a number of websites, but the mid-market rate changes all the time.

The easiest method is to get two rates from the same provider at the same time: both the currency X to currency Y rate, and the Y to X rate. For example, on December 1st, 2015, the CAD to EUR rate offered by a big-5 Canadian bank on non-cash transactions smaller than $1000 was 1.4719, whereas the EUR to CAD rate was 1.3670. Sometimes the second rate looks very different from the first (e.g., the second rate would be expressed as 0.7315), in which case divide the number one by the second rate to get 1.3670. The halfway point is (1.4719+1.3670)/2 = 1.4195. Therefore the bank was charging (1.4719-1.4195)/1.4195 = 3.7% to convert CAD to EUR, or EUR to CAD. Presumably on larger transactions the rates offered would be somewhat better, but the hidden forex fees would still be several percent.

Short trips outside Canada
On short trips, many people use a combination of ATM withdrawals and credit/debit card payments. Some foreign cash may also be obtained before departure at one’s bank or at a currency exchange office. These methods are convenient but have high costs in percentage terms.

Foreign ATMs
Using Canadian debit cards at foreign ATMs is a surprisingly costly way to obtain cash when all the fees are added up. First, there are fixed fees commonly charged both by the bank issuing the debit card (e.g., at BMO, CIBC, RBC or TD: $3 in the US ±Mexico and $5 elsewhere) and by the owner of the overseas ATM (perhaps $3). Then Canadian banks charge 2.5% on the forex.

For example, the fine print at RBC says:

″Each Debit Transaction from a Canadian dollar Account you make at a non-RBC Royal Bank ATM outside Canada displaying the PLUS System logo and any fees that may be imposed by any third party for using the ATM are converted to Canadian dollars no later than the date we post the transaction to your Account at our exchange rate that is 2.5% over a benchmark rate set by Visa International, a subsidiary of Visa Inc., and that Royal Bank of Canada pays on the date of conversion.″

Visa International takes about 0.3% on USD-CAD exchange or 0.4% for EUR-CAD, so the total forex charge is 2.8-2.9%. Therefore, when withdrawing the equivalent of 100 CAD in Europe, the total fee is about $5 + $3 + $103*2.9% = $10.98. Yes, that’s an 11% fee. Upon withdrawing the equivalent of 500 CAD, the fee would be $5 + $3 + $503*2.9% = $22.59 or 4.5%.

Scotia Bank is part of the Global ATM Alliance, which means no fixed fees when using ATMs from participating institutions, but the fine print (see their note 1) seems to imply that you still incur the 2.5% conversion fee.

Credit cards
When making credit card purchases overseas, Canadian banks typically add a 2.5% surcharge on the rate provided to them by Visa International or MasterCard Worldwide (e.g., ). Visa International itself charges on average about 0.3% for the CAD-USD pair (note 1) or 0.4% for the CAD-EUR pair (note 2). On a $1000 Visa purchase in the US, the total fee is therefore $28 (2.8%), or $29 in the Eurozone (2.9%).

Therefore, using credit cards is generally cheaper than using ATMs, although in some countries credit cards are not widely accepted. Merchants in places like Australia and Europe can also charge more on credit card purchases than when using other forms of payment.

Cash advances
One can use regular credit cards for cash advances at ATMs overseas but the cost seems unlikely to be less than when using debit cards. Interest charges will also be counted from the day of the cash advance, unless the card is prepaid or paid on the same day.

Long or frequent trips
On longer trips, or for people traveling regularly, such high percentage costs cannot be ignored in the name of convenience.

Credit cards
Some credit cards have no exchange rate surcharges on foreign purchases, so that the only cost is the half spread charged by the credit card company. The amazon.ca Visa card from Chase is an example that is popular on the Financial Wisdom Forum. Such cards can be used for purchases overseas, with balances paid in full every month to avoid interest charges. On a $1000 purchase in the US, the total fee is $3 (0.3%, note 1). The cost would be about 0.4% or $4 a $1000 purchase in Europe (note 2), assuming no surcharge by the merchant.

Cash advances
A cash advance on the Amazon.ca Visa can be obtained from a local bank overseas (ideally, at which the customer has opened an account), in which case Chase will add 1% (or a minimum of $5) on top of the Visa International half spread. Interest charges will apply from the day of the transaction, unless the cash advance has been pre-paid or is paid back on the day of the transaction (for example using online banking at a Canadian institution). On a $1000 cash advance in the US, the total fee is about $13 (1.3%), or $14 (1.4%) in the Eurozone. Note however that the cash advance limit on the Amazon.ca Visa is only one fifth of the total credit limit, constraining the amounts that can be transferred this way.

Wire and other transfers
If larger amounts of cash need to be transferred before or during the trip, then it could be useful to have a bank account in both countries and do an international transfer, although the money will take several days to arrive at its destination so this should be planned in advance. There are typically two components to an international money transfer: the transfer itself, and the currency exchange. The transfer fees are typically transparent, whereas the forex fees are a percentage hidden (or not) in the exchange rate. A traditional wire (SWIFT) transfer from a Canadian bank will cost a few tens of dollars (say $25 or more), and the receiving institution may also deduct a fee, e.g. $10. In theory the currency can be the same at the other end, in which case the fees end there. But commonly there is forex involved and then the originating bank applies an undisclosed but high percentage charge (about 3-4% depending on the currency ). On a $5k transfer to the Eurozone, the total cost would be about $25 to send, $10 to receive, and $170 in forex charges (3.4%), totaling $205 or 4.1%.

There are now FinTech alternatives to traditional wire transfers, with much lower fees. Examples are discussed in the. The advantage of these new money transfer companies is that the forex fees are reasonable and transparent, typically ≤0.5-1% depending on the currencies involved.