Wednesday, January 12, 1994

ELLEN ROSEMAN

AN anomaly in the RRSP rules has cost Pat Slattery a lot of money, and he's not happy about it.

Mr. Slattery, an analyst with investment dealer Maisons Placements Canada Inc. in Toronto, recently sold one Asian mutual fund denominated in U.S. dollars in a self-directed registered retirement savings plan and bought another. He discovered he had to convert back and forth into Canadian dollars.

"This is a stupid, bureaucratic rule," he complains. "They get you coming and going when you sell something and buy something else."

Financial institutions charge different prices for foreign currency transactions, depending on whether you're buying or selling. This is how they make their money.

The spread can be quite substantial, as the accompanying chart shows. If you are selling U.S. currency and buying it back in amounts under $25,000, you will lose anything from 2.5 cents to 5.8 cents for each U.S. dollar.

The spread narrows as the transaction gets larger, but never entirely disappears. And it can be quite an irritant for someone who actively trades foreign currency stocks, bonds or mutual funds in a tax-sheltered retirement plan.

"Given the size of Canadians' foreign RRSP assets, this is a huge gift for the banks," says Mr. Slattery, who found the Canadian-U.S. dollar spread ate up a good portion of his return on the Asian fund transaction.

The Income Tax Act, Section 204(E), Subsection (i), says money that is legal tender in Canada is an eligible investment for RRSPs. This is interpreted as meaning that foreign currency is not an eligible RRSP investment.

So, when a foreign investment matures or is sold and replaced with another, the RRSP trustee will convert back and forth into Canadian dollars to avoid holding foreign cash in the plan, even for a few hours or days.

The problem was brought to Ottawa's attention about two years ago and the government decided to give some administrative leeway.

"We said that if the foreign currency was held for a short, reasonable time for the purpose of reinvestment, then we wouldn't apply the penalty provisions," said a Revenue Canada rulings official, who did not want to be named.

To save time in clarifying its policy, Revenue Canada put out a letter, not an interpretation bulletin, which takes a while to get approved. A copy of the letter can be obtained under the Access to Information Act.

What is a "reasonable" time for a self-directed RRSP to hold foreign currency soon to be reinvested? Many financial institutions use one month as the limit, the official said, adding that there is no formal definition.

If you see unnecessary foreign currency conversions in your self- directed RRSP, make sure the trustee knows about Revenue Canada's policy, which the official says was well-publicized at the time. And investors such as Mr. Slattery, who have already paid the charges, should ask for a refund.

In a Dec. 15 column, I passed along advice about choosing a financial adviser from Green Line Investor Services Inc., which has published a 22- page booklet on the subject. Reader Tony Andras of Toronto described his own selection process.

When his Nesbitt Thomson broker moved, Mr. Andras decided to do a systematic search. He got the name of five full-service brokers and asked each to do a sample portfolio.

"You need to rattle about inside several minds to make an informed choice," he says. "I manage my own account, making it all the more important to find someone who can expand one's information and ideas threshold."

He gave each broker the value of his portfolio, his investment objectives (growth, medium risk), what he favours (Far East, small cap stocks) and what he doesn't (GICs, cash). He also asked how much research he would receive and the minimum annual rate of return they thought they could deliver.

Finally, he put a deadline of two weeks (over the Christmas period) to receive the sample portfolio.

The results were disappointing: "No real insights, no originality, no sense of service."

Four brokers offered sample portfolios, but only one would go out on a limb and estimate a minimum annual rate of return. At 29 per cent, it was fairly ambitious.

When Mr. Andras asked about the stocks he'd like to retain, two brokers said they couldn't comment because they don't follow those companies.

"That's a sure sign they offer passive service. If I were in their position and had the prospect of an active client, I would run the list by appropriate company analysts, ask for an assessment and pass on their recommendations and my own."

After this exercise, he has decided to go to a discount broker, buy research when he needs it and manage his own affairs entirely. "Perhaps that is the conclusion most of the true market players have already come to," he says.

U.S. CURRENCY SPREAD

What institutions buy and sell U.S. dollars for, amounts under $25,000 Canadian.

 

	Buy	Sell	Spread
American Express	1.288	1.346	5.8
Bank of Montreal	1.303	1.343	4.0
Royal Bank	1.299	1.337	3.8
CIBC	1.303	1.389	3.6
Thomas Cook	1.309	1.334	2.5