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 $1.32.
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]
{ 30 comments… read them below or add one }
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.
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 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?
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.