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How Snowbirds Save with GICs

Many Canadians go south in the winter to escape the Canadian cold. So-called “snowbirds” have been flocking to places like Florida for ages.

For most of the past decade, snowbirds have had the advantage of a strong Canadian dollar, meaning that the cost of living abroad for a number of months was contained. Between credit cards and cash (some of our banks have branches in the U.S.), snowbirds often just convert their Canadian dollars into U.S. when they need money for things like food, gas and clothes.

If you’ve been keeping an eye on the currency markets lately, you’ll know that it’s not just snowbirds going south, though: the loonie has also been going down, making trips to the U.S. far more expensive than they once were. Our dollar, which was at par against the U.S. currency back in 2013, now hovers around $0.83. Many observers believe this trend of a weakening loonie will go on for some time.

With this in mind, how should Canadian snowbirds protect themselves from the possibility that the loonie might stay weak for years?

One option to consider is the purchase of foreign currency GICs. Much like regular, Canadian dollar-based GICs, they both protect your principal (initial investment) and provide some interest as well. It’s a way of locking in the exchange rate for a large amount of money long before you’ll actually need it. Think of it as a strategy of guaranteeing your exchange rate ahead of time rather than being exposed to the whims of the currency markets in the future when you venture down south.

There is another potential benefit to buying a U.S. dollar GIC if you’re a Canadian who spends a lot of time (and money) down south: if the Canadian dollar does continue to go down against its American counterpart, you will save money when it comes time to go on your next trip.

Think of it this way: let’s say you are in Florida for 4 months of every year, and typically have $4,150 U.S. of expenses for every month ($16,600 total) you’re there. At the current exchange rate of $0.83, that means you would need $20,000 Canadian dollars to cover your expenses:

American Dollars / Exchange Rate = Canadian Dollars
$16,600 / $0.83 = $20,000

Imagine that by next year, though, the Canadian dollar has dropped to $0.70. Your $16,600 of Florida expenses would then require more Canadian dollars:

American Dollars / Exchange Rate = Canadian Dollars
$16,600 / $0.70 = $23,714

How many more? $3,714, to be exact ($23,714 – $20,000). So if you are worried that the Canadian dollar will continue to fall, buying U.S. dollars ahead of time is a smart strategy.

Before you purchase them, there are three things to keep in mind with U.S. dollar GICs. First, if the Canadian dollar unexpectedly rises, you will suffer something of an opportunity cost (i.e. you would’ve been better off just exchanging your money when you needed U.S. currency). Second, U.S. dollar GICs are not covered by deposit insurance. Finally, if you make money on the U.S. dollar GIC, you have to record that as a capital gain on your taxes.

These caveats aside, if you spend a lot of time and money in the U.S. as a snowbird, it’s not a bad idea to have some money in a U.S. dollar GIC in case the loonie continues to go south as well.