Currency Exchange issue

[Spock]

My dad is part owner of a seed company that does a lot of business in Canada. The company does not want to bring money back from Canada because the Canadian dollar is worth less than the US dollar.

I fully get that currency exchange rates fluctuate and so forth-but at some point, don't you just have to say-the exchange rate is what it is and bring some money back? In theory, wouldn't Canadians be paying, say, $120 in Canadian money for what we pay $100 in US money here. Shouldn't it come out in the wash?

Part of me wonders if we get caught up in the fact that the Canadian currency is also called a dollar and think OMG, the Canadian dollar is worth less than the US dollar. Would we care as much if the Canadian money was officially called the "Loonie?"

What am I missing here?

[silverscreenselect]

What you're missing is that any time you exchange one type of currency for another, you pay a fee of sorts because the exchange rate is not the same for buying as selling.

Say you go to a bank and the "official" exchange rate is $1.20 Canadian for $1.00 American. In theory, you return from Canada with $1.20 and get $1 American and vice versa.

In actuality, if you pay $1.20 in Canadian currency and get back $1 American, leave the bank, return a minute later and give them the $1 American, you'll probably only get something like $1.18 Canadian back. Those missing two cents are the bank's brokerage fee (just like you pay a stock broker a fee). Do that enough times and the money mounts up.

Now, if you're sharp enough, you can make money out of currency arbitrage, the same as you can make money off any type of arbitrage, but if you continue to exchange currency, all things being equal, it's the bank that makes the money. Look at the currency exchange rates for any bank and they differ, depending on whether you're buying or selling each type of currency.

[BackInTex]

The exchange rate should not be part of the decision process unless they also consider themselves in the business of currency speculation or investment. The "loss" has already happened. If they think, in the short term, the exchange rate will move to their benefit, then they should wait, but that means they are speculating on the currency. It could go the other way or stay the same for a long time. It depends on what they want to do with the money in the US (opportunity cost for leaving the money in Canada).

What should be of concern are any taxes that may be due for repatriating the money. Once it crosses the US border it will likely be classified as income and needs to be offset by the US dollar investment that went to Canada to make the money. Given the current rate, it may result in a tax loss that could be used to offset US income for the past few years resulting in a refund or offset to current US taxes due. That would be a good reason to bring it back now.

I'm not a tax guy, let alone an international tax guy, but if they have no use (re-investment) for the money in Canada, aside from currency rate speculation, they should bring it back, in my opinion.

[silverscreenselect]

The exchange rate should not be part of the decision process unless they also consider themselves in the business of currency speculation or investment. The "loss" has already happened.
I'm not a tax guy, let alone an international tax guy, but if they have no use (re-investment) for the money in Canada, aside from currency rate speculation, they should bring it back, in my opinion.

The loss occurs when you exchange one currency for the other. In order to do business in the United States, you need to convert Canadian currency into US. Now, if Spock, Sr. "leaves" the money in Canada, I assume he's not going to dig a big hole in the ground and bury it. Instead, he'll use it to buy things either for business or personal use. So, let's assume he needs widgets in his manufacturing process and a widget costs $1.20 Canadian or $1.00 American. If Spock Sr. goes to the Canadian Home Depot and plunks down his $1.20, he gets a widget. If he goes to the US and goes to the bank, he won't get $1 back, he'll get 98 cents back and he can't buy that same widget here in the US.

So, to the extent you have things you can buy in Canada with that money, you're better off buying them in Canada then bringing the money back here, converting it, and taking a loss.

And it's the same if he uses the money for personal use, let's say to buy one of those dollar tacos from Taco Bell. He can buy one for $1.20 in Canada, but if he comes back here and exchanges his money, he can't buy the same taco and he goes hungry.

And this has nothing to do with whether the Canadian dollar is worth more or less than the US dollar. Canadian companies are better off leaving their money here and using it rather than taking it back to Canada as soon as they can.

[silverscreenselect]

Of course, if someone "leaves" money in Canada because he or she thinks that the Canadian dollar "should" be worth the same as the US dollar (and someday will be worth the same), that is speculation (that the exchange rate will change favorably) and that may or may not succeed.

[Spock]

The exchange rate should not be part of the decision process unless they also consider themselves in the business of currency speculation or investment. The "loss" has already happened.

This is basically where I am at-The "Loss" has already happened. I want to ignore the tax situation as that is a needless level of complexity for now.

I need to look at SSS's thoughts more carefully, but my first impression is that he is describing transactional costs that would happen at whatever time you bring the money back.

[BackInTex]

I need to look at SSS's thoughts more carefully, but my first impression is that he is describing transactional costs that would happen at whatever time you bring the money back.

Yes, and he assumes you can just bring widgets across the borders for free. You can't. Not widgets for use in business. And the same widget in Canada if produced in the US will be cheaper in the US, cheaper by more than the cost to exchange money. It is cheaper to exchange money than ship a widget 2,000 miles (all other things being equal). He is also focusing on a retail transaction between a consumer and a bank. Yes there may be a fee, but there is a cost to keeping money in a place you don't need or want it, and not having money is a place you do. And then there are taxes. Do not ignore them. To me, that is the biggest variable. You may be able to recoup GST on repatriated money as well. I never fully understood Canadian GST, but we have a large amount on our balance sheet for our Canadian subsidiary. I know at the end of the business we get it back, but continuing to do business it is just a number on the books.

[TheConfessor]

I haven't been paying attention to the Canadian dollar exchange rate. I'm surprised to see that it's now $1.33, so that creates a psychological concern for those who think of the two currencies as traditional peers. But as Spock said, that's irrelevant. The Australian and New Zealand dollars are worth even less. Just think of them as Loonies or Trudeaus or Arctic Pesos, and get on with your business.

SSS and others have brought up some side issues that were not part of original statement of the problem, which was:
"The company does not want to bring money back from Canada because the Canadian dollar is worth less than the US dollar."
Whether the exchange rate is high or low is subjective. The rate is what it is today, so take it today and get on with your life, or leave it and become a currency speculator.

[Bob Juch]

The U.S. dollar will probably drop in the next year, maybe even enough so that the Canadian dollar will be more than one-to-one.

[Bob78164]

My dad is part owner of a seed company that does a lot of business in Canada. The company does not want to bring money back from Canada because the Canadian dollar is worth less than the US dollar.

I fully get that currency exchange rates fluctuate and so forth-but at some point, don't you just have to say-the exchange rate is what it is and bring some money back? In theory, wouldn't Canadians be paying, say, $120 in Canadian money for what we pay $100 in US money here. Shouldn't it come out in the wash?

Part of me wonders if we get caught up in the fact that the Canadian currency is also called a dollar and think OMG, the Canadian dollar is worth less than the US dollar. Would we care as much if the Canadian money was officially called the "Loonie?"

What am I missing here?

There's another potential issue. Some goods may be cheaper in Canada than in the U.S., even after factoring in the exchange rate and transportation costs. For example, this is infamously true for many prescription medications (or would be if you were allowed to import more than a rather small amount). If that's the case for something the company wants to purchase, there's a business case to be made for keeping at least some cash in Canadian currency. --Bob

[BackInTex]

The U.S. dollar will probably drop in the next year, maybe even enough so that the Canadian dollar will be more than one-to-one.

Based on your track record of predictions, I'm selling all my Canadian dollars today!

[a1mamacat]

The U.S. dollar will probably drop in the next year, maybe even enough so that the Canadian dollar will be more than one-to-one.

Based on your track record of predictions, I'm selling all my Canadian dollars today!

Nah, just pop it in the mail and send it to me, I'll absorb the loss

[Bob Juch]

The U.S. dollar will probably drop in the next year, maybe even enough so that the Canadian dollar will be more than one-to-one.

Based on your track record of predictions, I'm selling all my Canadian dollars today!

Nah, just pop it in the mail and send it to me, I'll absorb the loss

That would be loony.

[Chukwuma Charles Soludo]

The U.S. dollar will probably drop in the next year, maybe even enough so that the Canadian dollar will be more than one-to-one.

Based on your track record of predictions, I'm selling all my Canadian dollars today!

Excellent decision! Nigerian Naira are the currency of the future! Just look for my smiling face!

[Spock]

The exchange rate should not be part of the decision process unless they also consider themselves in the business of currency speculation or investment. The "loss" has already happened.

This is basically where I am at-The "Loss" has already happened. I want to ignore the tax situation as that is a needless level of complexity for now.

Is there really a "Loss?"

The basic business model is that the company has people that grow seed (wholesale) in Canada and then sells it there (retail) to farmers. The US company owns the rights to the seed and makes a little money off each retail sale.

The issue is-when do you kick a little of that retail profit back to the owners in the US. The Canadians are a little pissed about the US ownership-but this company was one of the first to develop soybean seed suitable for the prairie provinces.

The original seed for the wholesale growers was probably grown in the US as that is where the breeding programs and so forth are.

[BackInTex]

Is there really a "Loss?"

The basic business model is that the company has people that grow seed (wholesale) in Canada and then sells it there (retail) to farmers. The US company owns the rights to the seed and makes a little money off each retail sale.

The issue is-when do you kick a little of that retail profit back to the owners in the US. The Canadians are a little pissed about the US ownership-but this company was one of the first to develop soybean seed suitable for the prairie provinces.

The original seed for the wholesale growers was probably grown in the US as that is where the breeding programs and so forth are.

No, that is why I put it in quotes. They could get more $US or less $US but there is never really a loss if they have not previously moved $US to Canada.

If you bought a stock at $15 and held if for 10 years. During that time it got as high as $30, but now it is worth $20. When you sell it you made $5. You never lost the $10 because you never had it to begin with. It will feel like it though.