Norbert's gambit - Can$ to US$ or vice versa

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
User avatar
leoc2
Contributor
Contributor
Posts: 441
Joined: 06 Feb 2011 08:10

Re: Norbert's gambit - Can$ to US$ or vice versa

Post by leoc2 »

nielkfj wrote: 04 Apr 2017 23:30 I'm with BMOIL. They just told me just today the exact opposite - that I must buy the shares using account A first then sell them in account B. They said that I can't sell the shares in B first if I don't own them. Does this sound correct?
I am with BMOIL and I have completed NG this way. It sounds correct. :thumbsup:
SQRT
Veteran Contributor
Veteran Contributor
Posts: 5441
Joined: 01 Nov 2012 11:33
Location: Ontario/Arizona

Re: Norbert's gambit - Can$ to US$ or vice versa

Post by SQRT »

nielkfj wrote: 04 Apr 2017 23:30
SQRT wrote: 20 Dec 2016 08:58
auntyvirus wrote: Does the order matter? It makes more sense to me that I buy RY(US) first and then sell RY(TSX). In this order I am never really short RY because the shares are already in the US account. This also makes me ask why I need a margin account at all.
Order does matter. Must do the short first. They have rules preventing the short sale of a stock you already own. I went too fast once, thinking the short sale was done (it wasn't). Had to reverse the purchase and start over again. Of course the market moved away from me in the meantime. Cost me a couple hundred bucks.
Are those rules specific to TDDI?
I'm with BMOIL. They just told me just today the exact opposite - that I must buy the shares using account A first then sell them in account B. They said that I can't sell the shares in B first if I don't own them. Does this sound correct?
Not sure, TDDI told me I can't short a stock if I already owned it. That's what I needed to do (ie short the stock in the US market). Shorting a stock is different than selling a stock you already own. When you short, you "borrow" the stock from someone else. When you sell a stock you already own, don't have to borrow it.
User avatar
AltaRed
Veteran Contributor
Veteran Contributor
Posts: 33398
Joined: 05 Mar 2005 20:04
Location: Ogopogo Land

Re: Norbert's gambit - Can$ to US$ or vice versa

Post by AltaRed »

nielkfj wrote: 04 Apr 2017 23:30 I'm with BMOIL. They just told me just today the exact opposite - that I must buy the shares using account A first then sell them in account B. They said that I can't sell the shares in B first if I don't own them. Does this sound correct?
If you don't have a short enabled, i.e. margin, account, you must buy in account A first. That is the way I would always do it as I have never had, nor have I ever wanted, a margin account.
Imagefiniki, the Canadian financial wiki The go-to place to bolster your financial freedom
gobsmack
Contributor
Contributor
Posts: 447
Joined: 04 Sep 2015 13:16

Re: Norbert's gambit - Can$ to US$ or vice versa

Post by gobsmack »

nielkfj wrote: 04 Apr 2017 23:30 Are those rules specific to TDDI?
The process may be slightly different for each broker. We cannot autojournal with TDDI so that's why the process requires shorting a stock first. It should be easier with BMO because you can buy the stock in one market and just sell it in the other (i.e., autojournal??... I think that's what's called). Beware of spurious interest charges though.
pmj
Veteran Contributor
Veteran Contributor
Posts: 3412
Joined: 27 Feb 2005 18:15
Location: Ottawa

Re: Norbert's gambit - Can$ to US$ or vice versa

Post by pmj »

gobsmack wrote: 05 Apr 2017 11:23 The process may be slightly different for each broker. [SNIP] It should be easier with BMO because you can buy the stock in one market and just sell it in the other (i.e., autojournal??... I think that's what's called). Beware of spurious interest charges though.
Re BMOIL, in an RRSP, I can confirm interest charges exactly as described at the linked site, levied at the US side of the account IIRC. And indeed several days before they showed up. Fortunately there was cash available to cover the charges - I wonder if BMOIL would have sold something had there been no cash?
Peter

Patrick Hutber: Improvement means deterioration
User avatar
ClosetIndexer
Contributor
Contributor
Posts: 267
Joined: 27 Feb 2012 02:20
Location: Vancouver, BC
Contact:

Re: Norbert's gambit - Can$ to US$ or vice versa

Post by ClosetIndexer »

I just wanted to say again how much I appreciate this technique. I run a web-based business that earns US dollars but pays salaries (including mine!) in CAD. Norbert's gambit saves me a ridiculous amount of money. :thumbsup:
nielkfj
Contributor
Contributor
Posts: 67
Joined: 02 Apr 2017 21:42

Re: Norbert's gambit - Can$ to US$ or vice versa

Post by nielkfj »

I haven't tried Norbert's Gambit yet, but plan to do so in the next week or so. A few final questions:

Which interlisted stocks are generally the best to use?

In choosing the best interested stock to use, which factor is the most important to consider: the ratio of bid/ask spread to share price, or the average daily trading volume?

How do you determine the maximum amount that can be moved in one gambit with a given stock?

If you moved the market with a large trade, wouldn’t this work to your advantage?
User avatar
AltaRed
Veteran Contributor
Veteran Contributor
Posts: 33398
Joined: 05 Mar 2005 20:04
Location: Ogopogo Land

Re: Norbert's gambit - Can$ to US$ or vice versa

Post by AltaRed »

You pick a highly liquid stock that trades potentially tens (if not hundreds) of millions of dollars per day and hundreds of thousands of shares. That will never move the market unless you are a big money manager. Pick a high cost stock like CIBC to minimize the effect of the bid/ask spread. And don't forget, do not use a stock you already own in a non-reg account since you will have to average your ACB.

If you have the funds to move the market, it will always be against you.... rising when you are buying, and falling when you are selling. Exact opposite that you want.
Imagefiniki, the Canadian financial wiki The go-to place to bolster your financial freedom
User avatar
deaddog
Veteran Contributor
Veteran Contributor
Posts: 3422
Joined: 19 Jan 2008 19:59
Location: Central BC/Arizona

Re: Norbert's gambit - Can$ to US$ or vice versa

Post by deaddog »

Also do your transaction on a day when the market and the stock you are trading are moving to the upside.
"And the days that I keep my gratitude higher than my expectations, well, I have really good days" RW Hubbard
User avatar
adrian2
Veteran Contributor
Veteran Contributor
Posts: 13333
Joined: 19 Feb 2005 08:42
Location: Greater Toronto Area

Re: Norbert's gambit - Can$ to US$ or vice versa

Post by adrian2 »

deaddog wrote: 02 May 2017 20:25 Also do your transaction on a day when the market and the stock you are trading are moving to the upside.
That depends on the order of buy/sell: with a short enabled account, you have to do the short first, so you'd like to pick a downside day.
Imagefiniki, the Canadian financial wiki
“It doesn't matter how beautiful your theory is, it doesn't matter how smart you are. If it doesn't agree with experiment, it's wrong.” [Richard P. Feynman, Nobel prize winner]
ig17
Veteran Contributor
Veteran Contributor
Posts: 3418
Joined: 21 Feb 2005 20:54

Re: Norbert's gambit - Can$ to US$ or vice versa

Post by ig17 »

adrian2 wrote: 02 May 2017 21:07
deaddog wrote: 02 May 2017 20:25 Also do your transaction on a day when the market and the stock you are trading are moving to the upside.
That depends on the order of buy/sell: with a short enabled account, you have to do the short first, so you'd like to pick a downside day.
Both statements assume that stocks move up (down) in a straight line, more or less. Green day: stocks move up. Red day: stocks move down.

If only it was that easy. It's quite common to have a red day where stocks gap down sharply, only to recover later in the day. Or the opposite: a green day where stocks gap up, only to lose steam later.

And then there is Trump factor. Who knows what he is going to tweet and when.

Try to execute the second leg as quickly as possible, and hope for the best.
User avatar
deaddog
Veteran Contributor
Veteran Contributor
Posts: 3422
Joined: 19 Jan 2008 19:59
Location: Central BC/Arizona

Re: Norbert's gambit - Can$ to US$ or vice versa

Post by deaddog »

ig17 wrote: 02 May 2017 21:18 Both statements assume that stocks move up (down) in a straight line, more or less. Green day: stocks move up. Red day: stocks move down.

If only it was that easy. It's quite common to have a red day where stocks gap down sharply, only to recover later in the day. Or the opposite: a green day where stocks gap up, only to lose steam later.
There is a higher probability of success if you don't fight the market direction. Adrian is right of course if you are shorting you want the market moving down. The quicker the transaction the less risk of the market moving against you.
"And the days that I keep my gratitude higher than my expectations, well, I have really good days" RW Hubbard
nielkfj
Contributor
Contributor
Posts: 67
Joined: 02 Apr 2017 21:42

Re: Norbert's gambit - Can$ to US$ or vice versa

Post by nielkfj »

I have another question about Norbert's Gambit.

I am a dual national Canadian-US citizen. (Really I'm Canadian, but just happen to have US citizenship - I was born and lived here almost my entire life.)

Having US citizenship compels me to avoid owning any Canadian securities that would be considered a "Passive Foreign Investment Company" (PFIC) by the IRS, due to the paperwork this involves when filing a US tax return. DLR/DLR.U would be considered a PFIC, so those are out for me. I'm intending to use interlisted Canadian bank stocks.

The question: Does anyone know if Canadian banks are considered PFICs by the IRS?
User avatar
AltaRed
Veteran Contributor
Veteran Contributor
Posts: 33398
Joined: 05 Mar 2005 20:04
Location: Ogopogo Land

Re: Norbert's gambit - Can$ to US$ or vice versa

Post by AltaRed »

nielkfj wrote: 04 May 2017 19:29 The question: Does anyone know if Canadian banks are considered PFICs by the IRS?
No!
Imagefiniki, the Canadian financial wiki The go-to place to bolster your financial freedom
User avatar
ClosetIndexer
Contributor
Contributor
Posts: 267
Joined: 27 Feb 2012 02:20
Location: Vancouver, BC
Contact:

Re: Norbert's gambit - Can$ to US$ or vice versa

Post by ClosetIndexer »

I don't normally agree with deaddog, as I'm much more of a passive investor, but in this case I actually do. The main reason why it's so difficult to invest on momentum profitably is trading expenses (mostly the bid/ask spread). But if you're doing a NG you have to pay that anyway, so if you feel like it, you might as well take the very slight edge offered by going along with momentum.

That said, if you're doing it right the buy and sell should be less than 30 seconds apart, so it's really not going to matter much. Personally I don't bother, and just do the gambit when I need the funds exchanged, but it certainly couldn't hurt.
nielkfj
Contributor
Contributor
Posts: 67
Joined: 02 Apr 2017 21:42

Re: Norbert's gambit - Can$ to US$ or vice versa

Post by nielkfj »

After a bit of research on the internet I've answered my own question - I think.

There is an exception to the definition of "passive income" in section 1297(b)(2)(A) of the IRS tax code for companies in the banking business. See the link here:

https://www.law.cornell.edu/uscode/text/26/1297

Section 1297(b)(2)(A) says:

"Except as provided in regulations, the term “passive income” does not include any income—
(A) derived in the active conduct of a banking business by an institution licensed to do business as a bank in the United States (or, to the extent provided in regulations, by any other corporation),"

What the precise legal definition of 'active conduct of a banking business' is, I don't know. But the simple interpretation would be that it means all of the activities that a major bank is typically involved in. If this assumption is correct (and perhaps this is a big assumption) then essentially none of the bank's income would be considered passive income.

Also, I don't know how to check if any of the big five Canadian banks are actually licensed in the USA, so I tried to judge this by checking their web sites for the services provided in the USA. Here's what I found out:

TD: Has brick and mortar retail banking branches in the USA.
BMO: Has brick and mortar retail banking branches in the USA.
RBC: Has brick and mortar retail banking branches in the USA, under the subsidiary City National Bank.
ScotiaBank: No retail banking, but has corporate banking services in the USA.
CIBC: No retail banking, but has corporate banking services in the USA.

So, since all five banks indicate some kind of banking business in the USA on their websites, I think it's safe to assume that they are all 'licensed to do business as a bank' in the USA.

My conclusion then is that in all likelihood none of the big five Canadian banks would be considered PFICs, and hence are safe to use for Norbert's Gambit.

However, to be on the safe side I am also looking for non-bank stocks to use. At first glance Enbridge (ENB) looks pretty good.
User avatar
adrian2
Veteran Contributor
Veteran Contributor
Posts: 13333
Joined: 19 Feb 2005 08:42
Location: Greater Toronto Area

Re: Norbert's gambit - Can$ to US$ or vice versa

Post by adrian2 »

nielkfj wrote: 06 May 2017 20:25 So, since all five banks indicate some kind of banking business in the USA on their websites, I think it's safe to assume that they are all 'licensed to do business as a bank' in the USA.

My conclusion then is that in all likelihood none of the big five Canadian banks would be considered PFICs, and hence are safe to use for Norbert's Gambit.

However, to be on the safe side I am also looking for non-bank stocks to use. At first glance Enbridge (ENB) looks pretty good.
Any company listed on a US stock exchange is not a PFIC.
Imagefiniki, the Canadian financial wiki
“It doesn't matter how beautiful your theory is, it doesn't matter how smart you are. If it doesn't agree with experiment, it's wrong.” [Richard P. Feynman, Nobel prize winner]
nielkfj
Contributor
Contributor
Posts: 67
Joined: 02 Apr 2017 21:42

Re: Norbert's gambit - Can$ to US$ or vice versa

Post by nielkfj »

I don't think that's correct. I'm no expert in tax law but I believe that by "foreign", it means the company is formed under the laws of a different country. I can't see how simply having their stock traded on a US stock exchange the company is then not considered foreign. Do you have a reference where this is explained?
User avatar
adrian2
Veteran Contributor
Veteran Contributor
Posts: 13333
Joined: 19 Feb 2005 08:42
Location: Greater Toronto Area

Re: Norbert's gambit - Can$ to US$ or vice versa

Post by adrian2 »

nielkfj wrote: 08 May 2017 02:01 I don't think that's correct. I'm no expert in tax law but I believe that by "foreign", it means the company is formed under the laws of a different country. I can't see how simply having their stock traded on a US stock exchange the company is then not considered foreign. Do you have a reference where this is explained?
I'm not saying a Canadian company listed on a US exchange is not considered "foreign" by Uncle Sam, I'm saying it's not "passive" as it reports to a SEC as a "company", not an investment fund or similar. PFIC is intended to catch funds, ETF's and similar entities whose accounting statements are prepared in accordance to non-US rules; in order to be listed in US, one has to report as per SEC rules.
Imagefiniki, the Canadian financial wiki
“It doesn't matter how beautiful your theory is, it doesn't matter how smart you are. If it doesn't agree with experiment, it's wrong.” [Richard P. Feynman, Nobel prize winner]
nielkfj
Contributor
Contributor
Posts: 67
Joined: 02 Apr 2017 21:42

Re: Norbert's gambit - Can$ to US$ or vice versa

Post by nielkfj »

I'm not saying a Canadian company listed on a US exchange is not considered "foreign" by Uncle Sam, I'm saying it's not "passive" as it reports to a SEC as a "company", not an investment fund or similar. PFIC is intended to catch funds, ETF's and similar entities whose accounting statements are prepared in accordance to non-US rules; in order to be listed in US, one has to report as per SEC rules.
As far as I can tell "passive" refers only to the type of income earned, not how the company prepares its accounting statements for the SEC.

Section 1297 of the IRS Code states:

(a) In general
For purposes of this part, except as otherwise provided in this subpart, the term “passive foreign investment company” means any foreign corporation if—
(1) 75 percent or more of the gross income of such corporation for the taxable year is passive income, or
(2) the average percentage of assets (as determined in accordance with subsection (e)) held by such corporation during the taxable year which produce passive income or which are held for the production of passive income is at least 50 percent.
(b) Passive income
For purposes of this section—
(1) In general
Except as provided in paragraph (2), the term “passive income” means any income which is of a kind which would be foreign personal holding company income as defined in section 954(c).

The referenced section 954(c) states:

(c) Foreign personal holding company income
(1) In general
For purposes of subsection (a)(1), the term “foreign personal holding company income” means the portion of the gross income which consists of:
(A) Dividends, etc.
(B) Certain property transactions
(C) Commodities transactions
(D) Foreign currency gains
(E) Income equivalent to interest
(F) Income from notional principal contracts
(G) Payments in lieu of dividends
(H) Personal service contracts

I deleted the detailed description for each type of income. Here is a link to that section if you want to see the full verbiage: https://www.law.cornell.edu/uscode/text/26/954
User avatar
AltaRed
Veteran Contributor
Veteran Contributor
Posts: 33398
Joined: 05 Mar 2005 20:04
Location: Ogopogo Land

Re: Norbert's gambit - Can$ to US$ or vice versa

Post by AltaRed »

Not sure where you are going with this but the only Canadian assets I'd be concerned about as possibly PFICs generally issue their income via T3 tax slips, i.e. trusts. That includes mutual funds, REITs and other closed end funds with a .UN trading designation, and Canadian domiciled ETFs. Partnerships as well perhaps. I really don't know any of the above that are interlisted on US stock exchanges.
Imagefiniki, the Canadian financial wiki The go-to place to bolster your financial freedom
nielkfj
Contributor
Contributor
Posts: 67
Joined: 02 Apr 2017 21:42

Re: Norbert's gambit - Can$ to US$ or vice versa

Post by nielkfj »

Not sure where you are going with this but the only Canadian assets I'd be concerned about as possibly PFICs generally issue their income via T3 tax slips, i.e. trusts. That includes mutual funds, REITs and other closed end funds with a .UN trading designation, and Canadian domiciled ETFs. Partnerships as well perhaps. I really don't know any of the above that are interlisted on US stock exchanges.
The concern is that certain Canadian companies might be considered PFICs, especially if their income is typically "passive", which is basically "unearned" income - interest, capital gains, dividends etc. So if you trade their stock when doing Norbert's Gambit, and if you file US tax returns, you would have to report ownership of the stock using special tax forms, and any loss (or gain) is taxed differently. Its a hassle just figuring out what needs to be done, so I intend to simply avoid using any such stocks for the Gambit.

The big five Canadian banks are probably not PFICs since there is an exemption for income derived from the business of "banking" by foreign companies that are licensed as banks in the USA. But potentially any company could be considered a PFIC for a given year if enough of their income is "passive". For example, Sun Life Financial or Manulife Financial, which are interlisted Canadian companies, might be PFICs (IMO) as they don't appear to be banks and might have a lot of passive income (just based on their names).

Using the stock from a US company would be ideal for US tax filers. But I can seem to find any that are interlisted with the TSX.

A partnership is not considered a PFIC AFAIK because it has a different legal definition than a "company".
ig17
Veteran Contributor
Veteran Contributor
Posts: 3418
Joined: 21 Feb 2005 20:54

Re: Norbert's gambit - Can$ to US$ or vice versa

Post by ig17 »

IANAL, but foreign insurance companies appear to be exempt just like the banks.

§ 1297 (b)(2)(B)
https://www.law.cornell.edu/uscode/text/26/1297

Use railroads if you are that concerned. Surely they are not PFICs. They are well suited for NG: high nominal price, decent volume, low volatility.
nielkfj
Contributor
Contributor
Posts: 67
Joined: 02 Apr 2017 21:42

Re: Norbert's gambit - Can$ to US$ or vice versa

Post by nielkfj »

IANAL, but foreign insurance companies appear to be exempt just like the banks.

§ 1297 (b)(2)(B)
https://www.law.cornell.edu/uscode/text/26/1297
Good to know. Thanks.
User avatar
always_learning
Contributor
Contributor
Posts: 530
Joined: 01 Mar 2005 21:44
Location: Halifax

Re: Norbert's gambit - Can$ to US$ or vice versa

Post by always_learning »

I'm a US citizen comfortable using Canadian banks to do NG's, but I would think you could also use big Canadian oil/gas/pipeline companies. Typically, they're interlisted, too.
a_l
Post Reply