How Canadians earning in American dollars can manage their money
Earn money in the United States? Keep your cash in a U.S. savings account until the time is right.
With Canada’s small population of just over 38 million people, it’s essential we think outside the Great White North when considering business opportunities. Personally, as a freelancer, I’ve found a ton of advantages to thinking beyond my own country’s borders.
For example, a bunch of my clients are based in the United States. As a country with roughly ten times the population of Canada, the U.S. can be a great source of clients, partnerships, small business opportunities and more for anyone operating an enterprise in Canada. Depending on the conversion rate between CAD and USD, too, expanding your client base to the U.S. could mean as much as a 30 per cent rate increase. I often seek out American clients for this exact purpose.
But unlike many Canadians, who immediately deposit and convert the cash to CAD in a Canadian account, I choose to keep most of my U.S.-based earnings in USD and save it inside a USD savings account.
Simplii Financial asked me to look into why this is such a great option for those Canadians like me who earn U.S. income.
How to save U.S. income in a Canadian USD savings account
You have a few options for moving your income into a U.S. savings account, depending on how you get paid. You can ask your clients to wire the money to your U.S. savings account, deposit a USD cheque, or link your account to a third-party payment provider and transfer the funds. When you want to exchange funds to CAD, simply log in to your account and move the desired amount to your Canadian savings account — it only takes a few clicks of a button.
Here are the top 3 reasons to consider accepting payments for your business in USD.
1. Take advantage of currency fluctuations
If you immediately convert your earnings to Canadian dollars, you may not be taking advantage of the best currency rate Opens in a new window.. If you can wait until the Canadian dollar is weaker, you can make extra money without having to work for it — and that’s what we call a life hack.
Currency fluctuates daily, and you can find the daily exchange rates through a simple Google search. It may also be a good idea to glance at the business section of a newspaper every day, which only takes about 30 seconds in the morning. If you spot a headline like “Canadian dollar hits 9-month low,” it might be a favourable day to convert some greenbacks. But in the meantime, why not let your USD accumulate in a savings account that earns interest?
2. Buy American stocks with lower fees
If you only invest in the TSX, your investment opportunities are limited. For true diversification and a shot at more growth, you may want to dive into the American markets through broad-market-based exchange-traded funds (ETF) or investments in specific American companies. The U.S. dominates sectors that aren’t available in Canada in the same way — such as tech and consumer goods.
Many brokerages give you the option to convert your Canadian funds to American dollars inside your account, but you’re probably going to pay a steep conversion fee. You could also buy Canadian ETFs that track the U.S. market, but these funds almost always have higher management fees than their U.S. counterparts.
So why not use the funds you’ve already earned in the U.S. to directly purchase stocks? This process lets you bypass additional fees.
Many brokerages will allow you to electronically link your USD savings account and transfer funds while keeping it in USD. You can hold dual currencies in both registered and non-registered accounts. With the U.S. funds, you can purchase whatever American stocks you want. You may want to consider doing this in a Registered Retirement Savings Plan (RRSP) or a non-registered account. Tax-Free Savings Accounts (TFSAs) aren’t the best place to hold U.S. stocks, as you may have to pay a withholding tax.
3. Shop until you drop in America
Even the proudest Canadians can admit that there are some shopping advantages to the States — hello, outlet shopping.
If you live in a city close to the border or fly down south in the winters, why not keep your funds in USD and withdraw them before you go? That way, you won’t have to consider currency exchange issues — and you can spend your hard-earned cash however you like.
Tax implications of U.S. earnings
Of course, you have to pay your taxes — even on money earned in the U.S. or any other foreign country. But it’s pretty easy to do this. Simply declare your earnings in Canadian dollars using the official exchange rate in effect on the day you received the income. The Canada Revenue Agency (CRA) then taxes you at your normal marginal rate. Keeping your earnings in USD, or withdrawing it at a later date, doesn’t have an impact on this.
So if you’re a freelancer, sole proprietor, business owner or have other investments in the States, consider keeping your money in a U.S. savings account until the time is right to convert it, invest it or spend it as you please.