The disposition of capital property by an individual investor will generally result in a capital or loss. Commonly individuals will convert funds into U.S. dollars to travel or for investment purposes. Any gain or loss on the foreign exchange is normally treated as a capital gain. There is a general exclusion of $200 on the gross amount of the gain or loss and ½ half of the net gain is included in taxable income for the tax year.
Investors with accounts in both Canadian dollars and U.S. dollar may wonder how the foreign exchange impacts their investments.
Funds on Deposit
A individual taxpayer (who is not a speculator or business acquiring foreign funds for business purchases) deposits Canadian funds to a U.S. dollar account and at a later date converts the funds back into Canadian dollars for a gain will incur a taxable capital gain. For individuals the first $200 of the (gross) gain is excluded.
Example:
Jan 1, 20X1: An individual taxpayer deposits $130,000 Canadian dollars to a U.S. dollar brokerage account at a rate of $1USD = $1.30CDN.
Dec 31, 20X1: The funds are converted back into Canadian dollars at a rate of $1USD = $1.40CDN.
There will be a taxable capital gain of:
$4,900 = ½ x {[$130,000 x ($1.40 - $1.30)] – $200}
The same rules and $200 exclusion also apply to capital losses.
Transactions in Securities
The $200 exclusion on foreign exchange transaction does not apply to the acquisition and disposition of securities denominated in foreign currencies. The acquisition and disposition of securities must be converted into Canadian dollars at the rate in effect at the time the transaction took place for the purposes of determining the capital gain or loss.
The following example shows the application of foreign exchange gains and losses as they relate to the acquisition of securities.
Jan 1, 20X1 – An individual taxpayer deposits $130,000 CDN into a U.S. dollar account at a rate of $1USD = $1.30CDN.
May 1, 20X1 – The individual taxpayer purchases 10,000 shares of Amerco Ltd. at $10 USD per share from the U.S. dollar account. The rate in effect at the time of the purchase was $1USD = $1.32 CAD
Dec 15, 20X5 – The individual taxpayer sells 10,000 shares of Amerco Ltd. at $20 USD per share. The rate in effect at the time of the sale was $1USD = $1.35 CAD
June 30, 20X6 – The funds from the U.S. dollar account are transferred back into a Canadian dollar account. The rate in effect at the time of the purchase was $1USD = $1.40 CAD
Tax Implications
May 1, 20×1: There is a foreign currency gain of $2,000 CDN = [($1.32 - $1.30) x $100,000. The taxable amount of the gain included in income in 20X1 is:
$900 = [($2,000 - $200) x ½]
The adjusted cost base of Amerco Ltd. shares is $132,000 CDN = ($10 x 10,000 x $1.32)
Dec 15, 20X5: There is a taxable capital gain of $69,000CDN in 20X5 calculated as follows:
Proceeds of disposition: $270,000 = ($20 x 10,000 x $1.35)
Adjusted cost base: $132,000 = ($10 x 10,000 x $1.32)
Taxable capital gain: $69,000 = [½ x ($270,000 - $132,000)]
The proceeds in the U.S. dollar account following the sale is $200,000 USD and the rate in effect is $1.35.
June 30, 20X6: There is a foreign currency gain of $10,000 CDN = [($1.40 - $1.35) x $200,000]. The taxable amount of the gain included in income in 20X6 is:
$4,900 = [($10,000 - $200) x ½]
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Regarding http://blog.taxresource.ca/exchange-rates-investments-and-income-tax/ can you please let me know what tax publication is stating that the currency exchange US to C and back is generating a capital gain/loss?
Thank you
You can look at the CRA’s interpretation bulletin IT-95R which may be found at http://www.cra-arc.gc.ca/E/pub/tp/it95r/it95r-e.html. Like most CRA documents its not all that clear and lacks examples. You might check out Chapters.Indigo for Byrd & Chen’s Canadian Tax Principles. This is one of the best income tax references on the retail market. It is designed for professionalsbut if you are looking for an all around reference that is comprehensive, this book is a good buy: chapters.indigo.ca
The link to chapters.indigo.ca takes you to the Byrd & Chen book page at Chapters.
The one part of the example I do not understand is where it states that:
“The proceeds in the U.S. dollar account following the sale (of the U.S. shares) is $200,000 USD and the rate in effect is $1.32″
Given that in the next part of the example, it indicates that when you convert the $US back into $Cdn, the foreign currency gain is calculated using the $1.35 rate that was in effect on the data of the share sale, I would have thought that rate in effect would have been the $1.35 rate.
Comments?
As a side note, I must admit that the treatment of currency gains and losses in my $US investment account and buying and selling US listed shares is the one thing that gives me the most grief in doing my taxes. Does anyone know of any personal financial software that tracks this explicitly? I have resorted to tracking it myself in a spreadsheet.
To R Prins:
Foreign exchange and investments can be confusing and admittedly I have to draw things out on paper to make sure I have it right. Always keep in mind that for tax purposes everything must be converted to Canadian dollars.
The thing to remember in the example is that the share was sold, the gain or loss on the share sale is the difference between the cost of the share and the proceeds. The buy must be converted to Canadian at the rate in effect at the time of the purchase and this is the adjusted cost base. The sell occurred inside the USD account but to calculate the gain or loss on the share sale, it must be converted into Canadian dollars.
Now the $200,000 USD cash from the sale is in the USD account. For tax purposes it has an adjusted cost base that must be recorded in Canadian dollars. The rate in effect at the time the share sale settled was 1.32 and this is used to determine the ACB.
Does this make sense?
What do you do about interest earned on a USD account? Lets say you convert and invest C$10000 into a US account (1USD=1CD) and earn 3% interest annually. At the end of the year you have U$10300. You now convert back to canadian dollars (1USD=1.2CD). How do you treat the U$300 dollars as there is no initial conversion rate to determine if a gain or loss has occured?
To John:
The interest earned in a USD account must be converted into Canadian dollars for tax purposes at the rate in effect at the time the interest was received.
Keep in mind that you have two components to keep track of: Income and Capital.
For the purposes of your example assume also that when you received the interest the rate was $1USD = $1.1CDN
Income Transaction
You received $300 USD interest. You include $300 CDN on your income tax in the year the interest became payable.
Capital Transactions:
Original conversion: Convert $100,000 CDN to USD at $1=$1
ACB is $100,000 CDN
Interest: Convert $300 USD to CDN = $330 (per above)
Your new ACB is $100,330 CDN
You convert the USD cash of $100,300 USD to CDN at $1 USD = $1.2 CDN.
Your proceeds are 120,360.
The gain is $20,300.
Note that we have included the receipt of the interest in income and then added it to the ACB.
Thank you for the answer.
I have a combination of two situations:
1. If there was no original purchase of USD because the money was given to you as a gift (in USD) or because you brought it with you when you immigrated to Canada,how do you treat this?
2. If you don’t have the actual conversion rate when you purchased the USD (as it was 4 years ago) how do you establish the conversion rate?
Thanks
To Tax Admin – thanks for the reply, but I guess I’m still confused because in the example it was specified that on
“Dec 15, 20X5 – The individual taxpayer sells 10,000 shares of Amerco Ltd. at $20 USD per share. The rate in effect at the time of the sale was $1USD = $1.35 CAD”
Which leads me back to the question why would you use the $1.32 CAD which is the FX on the date of the share purchase and not the $1.35 which is the rate in effect when the share sale was settled?
I tend to think of my transactions in my $US investment account as selling foreign currency and buying shares, and conversely selling shares and buying foreign currency. Thus I use the FX on the date of the trade/settlement to establish immplied $Cdn proceeds for capital gains on the shares, as well as to establish the implied $Cdn ACB for the purchase of the foreign currency, in this case $US.
In response to John’s question, for historical exchange rates, I would go to the U.S. Federal Reserve website where you can download daily historical FX well into the 1980s.
To R Prins:
Remember that the cost base for tax purposes is the price you originally paid in Canadian dollars “at the time you purchased the security.” The 1.32 was the rate in effect at the time of the original purchase.
The proceeds of disposition is the price you received translated in to Canadian dollars at the time of the sale, or 1.35.
When your transfer in funds to a US account, you are buying USD. When you transfer funds out “or” buy a security, you are considered to have sold the USD funds. Thus when you have funds in a USD account and buy a security it’s really two transactions: First, you have sold your USD and second you have bought a security.
I really appreciate you asking these questions. They are very good questions.
Does this make sense?
To John:
1. The date you received the gift or moved to Canada is the date at which you must translate the funds into Canadian dollars for tax purposes. The rate in effect at that date is used.
2. The Bank of Canada published historical rates and the CRA will use those rates for tax purposes.
Does this help?
Thanks
I now understand what the example is referring to in terms of the 1.32 and the what the 1.35 is used for.
When I immigrated to Canada I brought US Dollars with me. When converted into to Canadian Dollars I sufferred losses, which I am sure is a capital loss. Can I offset the loss against my employment income while filing tax return?
Capital losses can only be used to offset capital gains in the current year. Any unused losses can be then be used against capital gains in the prior three years or carried forward indefinately.
What about the following situation?
I invest in a US stock that offers automatic dividend reinvestment.
Keep tracking of the Canadian dollar ACB for my US dollar purchases is straightforward, but what about the re-invested dividends?
Should I be using the nominal exchange rate listed by the Bank of Canada for the date the dividends were re-invested when recalculating my ACB?
Thanks!
Each time the dividend is re-invested is treated as a purchase of shares. Each re-investment must be converted into Canadian dollars at the time of the re-investment. Using the Bank of Canada’s exchange rates for the date of the re-investment is appropriate.
Thank you for your responses
If I were to give my son (20yrs old) a gift of U$10000 from my USD savings account, and he would hold the money in his USD savings account, would there be any tax on this?
Your son is an adult child and therefore future income from the gift does not result in income being taxed in your hands. Similarly, there are no tax implications to your son for receiving the gift.
However, the gift may result in a taxable capital gain or allowable capital loss at the time you make the gift. Subject to the rules above you would have a capital gain or capital loss on the U.S. dollars at the time of the gift.
If the intent was not to give funds to your son, but rather have your son “hold” the funds in his account, then there is no gift and no capital gain or capital loss. Similarly, you are still responsible for reporting and paying tax on the income earned on that $10,000.
Help Tax Admin! Hopefully you still receive notifications of responses to this old post. Anyhow, 2 questions:
1) How do you determine the foreign exchange rates to use (I know I can get the rate from the BOC website)? In other words, can I pick and choose (to my advantage) from the high/low/noon/close rates of the day of the transaction (purchase/sale of US equities, for example) as I see fit?
2) Can the yearly average rate be thrown into “selection” too, or is it A) use the yearly rate on all your transactions *OR* B) use the various daily rates on all your transactions?
Typically this doesn’t matter very much, but the extreme volatility in daily forex rates of the past little while has made this a factor.
@ John Normally you use the rate that was used to settle the transaction. With income receipts (interest & dividends), you have the choice of using the average annual rate or the rate on the date the funds were received.
The CRA uses the noon rate for conversions and that would be the rate you would use.
Thanks for the response Tax Guy. Just got off the phone with CRA, and their official stance is to be “consistent”. The phone rep explained this as being able to pick from open, noon, close, but using that same measure during all of your reporting. IMO there’s probably an arguable case against even being “consistent”, as the phone rep simply said that a lack of consistency would simply be suspicious and *not* necessarily an offense/violation…..
That being said, since CRA uses noon as you’ve stated, and messing with governmental tax agencies is a habit I don’t want to start, I’ll stick with noon.
Thanks for your ultra-quick response on this.
@ John
To be clear, it was the Bank of Canad’s site showing the noon rates that stated that the CRA accepts their rates as gospel. I was unable to find any real evidence of which rate to use.
I would think that the amount of the investment and the rate change would have to be huge to have any real tax implications.
How to calculate restricted stock earnings (in US dollar or Canadian dollar?) when the exchange rate is different on the date of stock vesting and stock sales?
For example, company vests 1000 shares of restricted stock at $10US per share to employee as direct income, these stock values are automatically converted to Canadian dollars using vesting day exchange rate 1USD = 1.4CDN. That is total $14000CDN, and tax is charged accordingly, say $7000CDN.
Later the employee sells all 1000 shares at $12US per share, the exchange rate on the day of sales is 1USD = 1CND. That’s total 12000CDN.
So there is $2000 gain if calculated in US dollar, but actually a 2000CDN total loss calculated in Canadian dollar for tax purpose.
In such case, how to calculate ACB, earning per share and capital gain / loss? What about the tax the employee have paid?
Thanks!
@RS:
The Canada Revenue Agency and the Government of Canada will not accept a taxpayer’s investment or foreign exchange risks. That being said, all transactions’ must be converted into Canadian dollars at the rate in effect at the time the transaction took place.
While this taxpayer has a gain in USD, but is in fact a loss in CAD. The ACB is the amount paid in USD and translated into CAD at the rate in effect at the date of vesting. Similarly, the POD is converted into CAD at the rate in effect at the date of disposition.
The gain or loss is treated as capital or income depending on the taxpayer’s personal situation.
@ TG
Thanks for your reply!
So as you said, all transaction values should be converted to CAD for tax. That means this employee has $2000CDN loss, right? Because he has already paid tax for $14000CDN as direct income.
what I don’t understand here is whether this kind of situation is treated as a gain or a loss.
There is a $2,000 loss.
Whether a gain or loss is capital or not depends on the individual circumstances. There are a number of factors the CRA considerers when looking at whether a taxpayer can claim a gain or loss as a capital gain or loss or as a regular income/loss.
The issue of whether a transaction of account of income or capital is really the subject of an article in and of itself. For most people, trading securities is capital.
If you’d like more info, please take a look at http://www.cra-arc.gc.ca/E/pub/tp/it479r/it479r-e.html
What happens with holiday spending of USD from a USD account? Is each purchase treated separately so that the $200 exclusion limit would preclude the need to report almost anything?
@ CanadianInvestor – The $200 limit applies to the total dispositions of cash over the course of a tax year.
A few questions and thoughts.
1) Your first exemple on funds on deposits….your gain is 4900$, but your equation i believe is wrong…in order to get 4900$, 100,000$ rather than 130,000$ should be used in the equation.
2) why did you not have to calculate the fx gain/loss when you sold the stock Dec15,20×5…as you did when you bought.
3) How would you reflect gains or loss in schedule3. would you make it seperate transactions (stock and fx) or would you just change the proceeds of disposition to reflect both (stock g/l and fx g/l)
@JB: The puchase of securities is a disposition for tax purposes. The 1.3 FX rate was dealth with May 1. The FX gain/loss is built into the Eec 15th transaction.
On schedule 3, report the stock and FX gains and losses separately.
Dear Tax Guy,
Thanks for the clear/valuable info re Exchange Rates, Investments and Income Tax (dated October 27, 2008). The examples are great.
Could there be a typo re the rate in effect in the statement “The proceeds in the U.S. dollar account following the sale is $200,000 USD and the rate in effect is $1.32″ under Dec 15, 20X5 of Tax Implications for Transactions in Securities. From the initial information and the rates used for calculating the gain in 20×6, it appears that the rate in effect in the above statement should be 1.35 instead of 1.32. Could you please clarify.
Thanks,
OH
@OH: Yes, the rate is 1.35.
What would happen in a case where only a portion of the $US funds were invested and the rest just sat in the $US account until the total of US funds were converted back to Canadian funds ?
And thanks in advance.
Hi LC:
Cash is considered an investment asset that has an ACB. When the cash is originally converted to USD or received it deemed to be acquired at it’s value in CAD at the time converted or received.
When the cash is subsequently used to acquire new investments or is converted back to CAD it is a deemed disposition subject to the $200 exclusion.
Thanks for helping navigate the foreign currency swamps.
I received 15,000 US in 1998 as a gift. It was used to purchase (poorly performing!) mutual funds denominated in USD. In 2009 I sold these funds and received proceeds of 14,000 USD. My naive interpretation is that I have a 1000 USD loss, which I could convert to CAD (x1.06). However, reading your site I now think I should be converting all amounts to CAD. I.e., 15000 x 1.4 – 14,000 x 1.06. Which is much more than before.
This seems reasonable, but I’m wondering if the CRA wants me to declare capital gains on the original USD. My understanding is that gifts are not taxable.
thanks!
Your ACB on the gift was its value on the date received and is converted to CAD on the rate in effect on the date received. The cash is deemed sold when you bought the MF. The ACB is converted at the rate in effect at time of purchase. And so on.
Remeber everything is converted to CAD.
Hey,
1. I’m still unclear as to which exchange rate I need to use when receiving interest & dividends. Is that the date listed on the dividend cheuqe I’ve received, or the date I’ve deposited that cheuqe in the bank?
2. Also, can I simply use the final amount in CAD I got when I deposited in the bank? For example, on day X I’ve deposited $10 USD dividend cheuqe. If my band rate was 1.2 can I report $12 income or should I use the BOC (e.g. 1.1) and report $11?
Thanks for your help!
Guy
Hello Guy,
Strict interpretation is that you use the rate in effect the date you received the cheque. However, you can use the average rate for the tax year if value a series of periodic payments. The link to the average rate is on the CRA website here: http://www.cra-arc.gc.ca/tx/ndvdls/fq/xchng_rt-eng.html
Thanks a lot TAX GUY for the detailed article. Believe it or not, your blog entry was the only online free resource that I could find dealing with the topic of reporting capital gain/loss from foreign publicly traded stocks with detailed examples and prompt feedback. I had a question regarding capital loss as a result of US to CAD exchange rate going down as is the case since year 2000. If I immigrated to Canada in 2000 with $10,000 US money (USD to CAD 1.5 exchange rate) and invested it in GIC that was renewed for 8 years and then exchanged the total amount in 2008 for CAD dollars (at 1.05). Is it possible to book this capital loss from declining foreign exchange rate when filling taxes for 2009 or 2010 although the transaction happened in 2008.
Thanks
Freddy
Assuming you purchased the GIC at the same time you became a resident of Canada, the cost of the GIC would have been $15,000 CAD. The POD at maturity would have been $10,500. The loss is $4,500 of which $2,250 is an allowable capital loss that can be applied to capital gains. If the transaction occurred in 2008, then the loss occurred in 2008: The loss must first be applied to and capital gains in 2008 and the excess carried back to any capital gains in any of the prior three years or carried forward indefinitely.
Just a very simple question: Do I use the nominal rate or cash rate 4% on Bank of Canada website for the purpose of calculating foreign transaction?
Hi Enguss:
You would use the foreign exchange rates listed on the BoC site here http://www.bankofcanada.ca/en/rates/exchange.html
Which rate you use depends on the transaction you are converting.
You can also use the rates posted by the CRA: http://www.cra-arc.gc.ca/tx/ndvdls/fq/xchng_rt-eng.html
I disagree with your calculation of the foreign exchange gain and loss with respect to the US investment account.
On Jan 1/01 CDN $130,000 was converted into US$ and subsequently invested.
On June 30/06, when the US account was closed, the investor received CDN $280,000 (US $200,000 X 1.40).
The investor has made CDN $150,000 in capital gains, or $75,000 in taxable capital gains (i.e., 50%).
The question then becomes, what portion of the $150,000 represents capital gain on the sale of Amerco and what portion is a capital gain on the foreign exchange?
I contend that there is no capital gain, as your example shows, on May 1st. This is because IT-95R states that CRA considers a foreign exchange transaction to have taken place “at the time of conversion of funds in a foreign currency into another
foreign currency or into Canadian dollars”. On May 1st there is no conversion of the US$ into either Canadian dollars or another currency. The May 1st “gain” is unrealized until such time as the funds are converted into Canadian dollars.
On December 15th the sale of Amerco triggers a capital gain. The amount of the gain is equal to the proceeds from the sale US $200,000, at the FX rate of $1.35, or CDN $270,000, less the Aramco cost of US $ 100,000 (at the FX rate on the purchase date of 1.32), or CDN $132,000. The capital gain is therefore $138,000 and the taxable portion is $68,000.
On June 30th the investment funds (US $200,000) are repatriated, producing (@1.40) CDN $280,000. Since the initial investment was CDN $130,000, the total capital gain is $150,000.
HOWEVER, since $138,000 (above) was reported as gain on the sale of Amerco, the foreign exchange gain is ($150,000 – 138,000) $12,000, of which 50% (6,000) is taxable.
Hi Brian:
The acquistion of Amerco May 1 is a dispositon of an asset (cash) which triggers a gain or loss on the cash position. Otherwise, the government is assuming part of the risk of holding cash.
Hey, great discussion. Trying to understand the following for my filing…
What about if you deposit multiple rounds of CAD into your US account, at various times, at various exchange rates.
Then you buy multiple different securities, at various times, at various exchange rates.
How do you track which exchange rate is applicable to the cash you’re using to purchase a given security?
Hello Craig,
Each time you deposit funds, transfer funds to another currency, or use funds to acquire investments is considered a disposition at fair market value.
In this case, each time you deposit funds to the US account, your ACB is calculated on the value of the deposit. For example, if you deposit $1,000 when the rate is 1.3 and another $1,000 when the rate is 1.05, the ACB of the cash is $2,000 CAD.
When you convert back, the amount you receive, less $200 is your capital gain.
The Bank of Canada website actually shows 2 rates, the nominal rate, and the cash rate (4%). The cash rate is closer to what the brokers would charge us for doing an exchange. It’s most beneficial to us if we use the cash rate all the time, but are we allowed to do that?
For example, let’s say the dollar is at par. If I buy a US stock and need to convert from Cdn dollars, the exchange will cost about 1.04. Later, when I sell, if I convert back to Cdn dollars, I’ll only get about 0.96 on the exchange. In this case, it makes sense to use the cash rate. But if I never convert back to Cdn, then future trades with that US money makes sense to use the nominal rate. But then it starts getting really confusing for taxes if I need to use nominal rate for some trades and cash rate for others.
Hello JL:
do have a couple of thoughts:
1) The nominal rate reflects the market for currency.
2) The cash rate reflects the retail rate for currency.
If you have purchased US securities with Canadian dollars, your FX rate is pre-determined. If you have acquired them using pre-converted US funds, I would be inclined to use the nominal rate as the average rate is derived from this rate.
With respect to interest or dividends received, I may choose to either use the cash rate or the average rate, depending on which one was better.
Hi there,
I have a question here. I have several US stocks, bought and sold several times during the year. How can I calculate the exchange rate loss occurred through out 2009?
ex: I bought 1000 shares ABC at ex rate was 1us=1.27cdn, sold in the year. I received bank statement to us 1.14197729 for all transactions I made in year 2009. How to calculate?
Appreciate your help.
Hello VV:
When you bought the stock, it’s price is converted to CAD for the ACB and the proceeds of sales are converted into CAD. The FX gain/loss is then included in the stock price.
See the CRA or Bank of Canada sites for the appropriate rates. For each transaction the rate to use is the rate in effect on the settlement date.
I purchased US Stocks several times in different years and kept track of the ACB in USdollars. How do I calculate the Capital gain and the Foreign exchange gains/losses? Do I have to keep track the ACB in Cad$ each time I made a purchase?
AH,
Yes you should keep tack of your ACB in Canadian dollars. You can obtain the rate in effect at the date your purchases settled from the Bank of Canada’s website (this is the source the CRA is most likely to accept).
A FOREX Canadian tax question.
My $5000.00 CDN trading account (Alpari-UK) is in Britain.
This account is converted and held in USD.
I do not trade Canadian dollars.
I trade EUR/USD, GBP/USD, USD/JPY.
My account grows to $100000.00 USD.
I understand I am taxed as either income or capital gains when I convert back to CDN and withdraw some funds.
I am contemplating using this account as a holiday account. I only withdraw funds in Europe and never in CDN currency.
I never make any Canadian capital or income gains, so where is my Canadian tax liability?
jdw:
If you are a resident of Canada then all transactions are valued in Canadian dollars. A movement from one currency to another or an buy/sell is a disposition for tax purposes.
You deposit CAD to GBP and buy a stock –> You have a currency gain/loss based on the value of the CAD on the date you transferred to GBP and the date you bought.
You sell and you have a gain or loss on the stock in CAD, plus a currency gain or loss based on the value of the currency on the date of the buy and the date of the sell — the stock gain loss is the gain or loss based on the value of buy sell in the buy FX rate.