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Recently, I heard that when you buy U.S. stocks with Canadian money in a Questrade account, they actually make a loan of the U.S. dollar amount you bought even if you have enough money to do the conversion.

Interest will then be charged as long as you keep that loan and you could get a surprise a year later when you sell the stock.

  • This is exactly how Interactive Brokers handles it as well. Except, of course, for the lower margin rates and negligible forex spread if you do convert. – brian Jul 17 '14 at 2:46
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The reason it's not automatic is that Questrade doesn't want to force you to convert in margin accounts at the time of buying the stock. What if you bought a US stock today and the exchange rate happened to be very unfavorable (due to whatever), wouldn't you rather wait a few days to exchange the funds rather than lose on conversion right away?

In my opinion, Questrade is doing you a favor by letting you convert at your own convenience.

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I personally spoke with a Questrade agent about my question. To make a long story short: in a margin account, you are automatically issued a loan when buying U.S. stock with a Canadian money. Whereas, in a registered account (e.g. RRSP), the amount is converted on your behalf to cover the debit balance.

Conversation details

Me:

What happens if I open an account and I place an order for U.S. stocks with Canadian money? Is the amount converted at the time of transfer? How does that work?

Agent:

In a margin account, you are automatically issued a loan for a currency you do not have, however, if you have enough buying power, it will go through. The interest on the overnight balance is calculated daily and is charged on a monthly basis. We do not convert funds automatically in a margin account because you can have a debit cash balance.

Agent:

In a registered account, the Canada Revenue Agency does not allow a debit balance and therefore, we must convert your funds on your behalf to cover the debit balance if possible. We convert automatically overnight for a registered account.

Agent:

For example, if you buy U.S. equity you will need USD to buy it, and if you only have CAD, we will loan you USD to cover for that transaction. For example, if you had only $100 CAD and then wanted to buy U.S. stock worth $100 USD, then we will loan you $100 USD to purchase the stock. In a margin account we will not convert the funds automatically. Therefore, you will remain to have a $100 CAD credit and a $100 USD debit balance (or a loan) in your account.

Me:

I see, it means the longer I keep the stock, the higher interest will be?

Agent:

Well, yes, however, in a registered account there will be not be any interest since we convert your funds, but in a margin account, there will be interest until the debit balance is covered, or you can manually convert your funds by contacting us.

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    I think the advantage of doing things that way in a CAD margin account, i.e. with USD loan made when you buy U.S. stock, is it lets you choose when/whether to convert your CAD to USD. Realize the fees for converting currencies in a typical account can be steep (~1% or ~1.5% on top of fx rate), and so if you round-trip money from CAD to USD and back again, you can quickly lose ~2% or ~3% of the value converted. Whereas if the U.S. stock position is short term, proceeds from the sale can be used to cover -- and the idea is the interest charged would be considerably less than any fx fees. – Chris W. Rea Sep 20 '13 at 12:46
  • @ChrisW.Rea That's a very good point actually! I haven't thought about that. You could almost have posted that as an answer! Thanks – ForceMagic Sep 20 '13 at 14:45
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    You're welcome. Your answer covered the "What happens?" well -- I just added some possible rationale for why it happens that way. :) – Chris W. Rea Sep 20 '13 at 15:14
  • Interesting Q&A. Is this the case for any broker in Canada? Do the larger US Companies have ADRs that trade in Canada without this issue? – JoeTaxpayer Sep 20 '13 at 17:28
  • @JoeTaxpayer I'm not sure about that, I only heard about Questrade working this way. I used to have an account with National Bank Direct Brokage and they do make the conversion right away. However, it was not a margin account, it was not registered either though. – ForceMagic Sep 20 '13 at 18:07
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I don't believe from reading the responses above that Questrade is doing anything 'original' or 'different' much less 'bad'.

In RRSPs you are not allowed to go into debt. So the costs of all trades must be covered. If there is not enough USD to pay the bill then enough CAD is converted to do so. What else would anyone expect?

How margin accounts work depends on whether the broker sets up different accounts for different currencies. Some do, some don't. The whole point of using 'margin' is to buy securities when you don't have the cash to cover the cost. The result is a 'short' position in the cash. Short positions accrue interest expense which is added to the balance once a month. Every broker does this.

If you buy a US stock in a USD account without the cash to cover it, you will end up with USD margin debt. If you buy US stock in an account that co-mingles both USD and CAD assets and cash, then there will be options during the trade asking if you want to settle in USD or CAD. If you settle in CAD then obviously the broker will convert the necessary CAD funds to pay for it. If you settle in US funds, but there is no USD cash in the account, then again, you have created a short position in USD.

  • You are right, my question is not clear enough, I will edit it later today. The particularity with Questrade is that even if you have enough money you have to manually trigger the Conversion, by doing a Conversion Request in their Web Platform. This will not be automatic. – ForceMagic Jul 16 '14 at 15:55

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protected by Chris W. Rea May 1 '15 at 18:59

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