The Loonie Flies Higher –
Personal Tax
Planning and
Compliance
The Benefits and Drawbacks of a Strong Canadian Dollar
Since the beginning of 2003, Canadian currency has surged in value relative to U.S. currency.
In fact, the exchange rate has risen from approximately 64 cents (U.S.) to over 80 cents (U.S.)
- a startling rise of approximately 30%. The weakening of the U.S. Dollar brings both positive
and negative results for the Canadian marketplace. The loonie has continued its aggressive
rise against the U.S. Dollar in large part due to higher interest rates in combination with U.S.
economic slowdown, geopolitical uncertainty and an escalating U.S. deficit. With no end to the
loonies’ growth in sight, it is important to understand how this shift impacts both Canadian
business owners, consumers, and investors.
For the most part, consumers are reaping the benefits of the more valuable loonie. For seasoned
snowbirds and people taking annual vacations to the U.S., the dramatic rise in the Canadian
dollar has resulted in a tremendous cost savings. In previous years, vacationers to the U.S. would
be limited in the amount of time they could enjoy the more temperate southern climate due
to the strength of the U.S. Dollar. Now winter escapees enjoy trips that are considerably less
sustained period of time, people aren’t ruling out an increase to an 85 to 90 cent dollar.
expensive, allowing them to extend their stay south of the border. People taking one day trips
into the U.S. can take advantage of the weak U.S. Dollar by purchasing clothing and other items
at closee to a 445% discount when factoring in GST and PST savings.
When one buys U.S. stocks with Canadian funds, U.S. dollars are effectively being purchased..
This means the return on the investment will be the fund’s return plus or minus the return on
foreign exchange. Therefore, investors who haven’t moved into U.S. investments may want to do
With regard
regard to U.S. property
prope
ownership, people with mortgages can take advantage of the
so. Investing in U.S. securities is an important part of a well-diversified investment game plan.
loonie’s strength
ngth byy pa
paying
ing their
eir d
debt down more quickly. Although real estate prices in the U.S.
Experts agree that the current foreign currency environment provides a potentially excellent
have increased significantly
ign ant over
ove the
he last few years, much of that increase is eliminated by the
opportunity to buy U.S. securities with Canadian dollars. Today, the loonie buys a lot more in
strengthening Canadian
dia dollar.
olla In
n ccontrast,
ras the one downside for Canadians already owning U.S.
the U.S. market than it did a few years ago.
property and looking too ssell is th
that they
hey seee m
much of their real estate appreciation likely mitigated
by the weakened U.S. Dollar.
oll
Many investors who are worried about the currency exposure are being advised to institute a
While the rising loonie is making
ak
most
o consumers
nsu
happy,
h
it’s a real concern for many investors.
with a fairly expensive price tag attached. Hedging strategies generally cost between two and four
Investors like the fact that interest
te
rates
te havee consistently
c
te
been more attractive in Canada than
percent of the hedged amount. Should the Canadian dollar decline, then investors who want
across the border. The big question
st for th
those with
ith U.S. in
investments is: Where is the dollar headed
to play a rising Canadian dollar can do so in a defensive approach. One can buy a U.S. equity
and what should they do?
mutual fund that is hedged and protects the investor against currency exposure.
A year ago, when the loonie w
was tradingg at 70 cents
e to the
he U.S. dollar, most observed that the
Last year, many investors who purchased U.S. investments were unaware just how much of their
dollar would stay in the mid
d 770 cent range.
n Now tthat the loonie
o
has toed the 80 cent mark for a
returns were based on currency fluctuations and not stock selection. These investors got a real
hedging strategy. On the surface, hedging would seem like a prudent strategy except it comes
shock as a rising Canadian dollar wiped out the gains of most U.S. investments. As a result, many
investors questioned whether they’d be better served by owning only Canadian denominated
investments. However, this strategy would be a mistake given that Canada represents less than
4% of the global market economy.
So what’s ahead for the U.S. Dollar? Without a working crystal ball, it is impossible to tell. A
year ago at this time, the debate was whether the loonie would reach 80 cents to the U.S. dollar.
Today, thee debate
Toda
d
is whether we will see a 90 cent loonie or maybe, just maybe, hit par. What
we doo kn
know is tthat with appropriate planning and strategies, both consumers and investors can
realize substantial
sta al gains from the rise of the loonie.
The Loonie Flies Higher
her – The Benefits and Drawbacks of a Strong Canadian Dollar was authored by Mike
Stoyan. Mike is a Partner
ner in Fuller Landau’s Assurance Services Group. To contact Mike directly, please call
(416) 645-6545 or emailil [email protected].