Exchange on US stock portfolios
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Exchange on US stock portfolios
Max Thu Jul 01, 2010 9:53 pm
http://www.cra-arc.gc.ca/E/pub/gl/p-222/p-222-e.html
To convert from foreign currency into Canadian currency for purposes of Part IX of the Excise Tax Act, a person may only use the rate of exchange from:
•the source used for an actual conversion (i.e. foreign currency is exchanged for Canadian dollars);
•the source the person typically uses for actual conversions;
•a Canadian chartered bank;
•the Bank of Canada; or
•the rate provided by the Customs Branch of the Department for purposes of converting the value for duty of imported goods.
When a source other than the source used for an actual transaction is selected, that source must be used consistently and for a reasonable period of time (such as one year).
If a person must pay a premium to obtain foreign currency from a particular source for a particular foreign currency denominated transaction, any additional costs incurred associated with obtaining that rate must be included when translating the foreign currency into Canadian currency.
The use of a particular exchange rate source must be supported with appropriate documentation.
http://csc.lexum.umontreal.ca/en/200...2006scc46.html
39. . . .
(2) Notwithstanding subsection (1), where, by virtue of any fluctuation after 1971 in the value of the currency or currencies of one or more countries other than Canada relative to Canadian currency, a taxpayer has made a gain or sustained a loss in a taxation year, the following rules apply:
(a) the amount, if any, by which
(i) the total of all such gains made by the taxpayer in the year (to the extent of the amounts thereof that would not, if section 3 were read in the manner described in paragraph (1)(a) of this section, be included in computing the taxpayer’s income for the year or any other taxation year)
exceeds
(ii) the total of all such losses sustained by the taxpayer in the year (to the extent of the amounts thereof that would not, if section 3 were read in the manner described in paragraph (1)(a) of this section, be deductible in computing the taxpayer’s income for the year or any other taxation year), and
(iii) if the taxpayer is an individual, $200,
shall be deemed to be a capital gain of the taxpayer for the year from the disposition of currency of a country other than Canada, the amount of which capital gain is the amount determined under this paragraph; and
(b) the amount, if any, by which
(i) the total determined under subparagraph (a)(ii),
exceeds
(ii) the total determined under subparagraph (a)(i), and
(iii) if the taxpayer is an individual, $200,
shall be deemed to be a capital loss of the taxpayer for the year from the disposition of currency of a country other than Canada, the amount of which capital loss is the amount determined under this paragraph.
IT Bulletin IT-95R can take it from there.
http://www.cra-arc.gc.ca/E/pub/tp/it95r/it95r-e.html
As you can see, there is an annual $200 exemption on exchange gains and losses, which most people seem to generally ignore.
Also, there is a monetary exchange gain/loss on USD funds left in your trading account being used during the year to purchase and sell stocks. Each time you buy a stock using USD, you have a taxable disposition of USD cash, and each time you purchase USD (including from the sale of stock), you have a cost base that must be added to your average cost base for USD.
The calculation of the capital gain/loss (assuming you have the time) should include separation of exchange gain/loss:
Where:
a = Cost converted to CAD at rate on date of purchase
b = Proceeds of disposition converted to CAD at rate on date of purchase
c = Proceeds of disposition converted to CAD at rate on date of sale
Capital Gain = b - a
Exchange Gain = c - b (less $200 annual exemption for both gains and losses)
In the case of monetary exchange gain/loss, the USD value would not change, so it would only leave the exchange gain.
Because of this, there is a good argument for using the average exchange rate for the year to greatly simplify these calculations. Also, using a TFSA would help to avoid these issues.
As long as the exchange gain is in respect of funds used to earn capital gains, it can be considered a capital gain itself. However, if the funds are used to earn income, there is the risk the exchange gain will also be considered income for tax purposes!
To convert from foreign currency into Canadian currency for purposes of Part IX of the Excise Tax Act, a person may only use the rate of exchange from:
•the source used for an actual conversion (i.e. foreign currency is exchanged for Canadian dollars);
•the source the person typically uses for actual conversions;
•a Canadian chartered bank;
•the Bank of Canada; or
•the rate provided by the Customs Branch of the Department for purposes of converting the value for duty of imported goods.
When a source other than the source used for an actual transaction is selected, that source must be used consistently and for a reasonable period of time (such as one year).
If a person must pay a premium to obtain foreign currency from a particular source for a particular foreign currency denominated transaction, any additional costs incurred associated with obtaining that rate must be included when translating the foreign currency into Canadian currency.
The use of a particular exchange rate source must be supported with appropriate documentation.
http://csc.lexum.umontreal.ca/en/200...2006scc46.html
39. . . .
(2) Notwithstanding subsection (1), where, by virtue of any fluctuation after 1971 in the value of the currency or currencies of one or more countries other than Canada relative to Canadian currency, a taxpayer has made a gain or sustained a loss in a taxation year, the following rules apply:
(a) the amount, if any, by which
(i) the total of all such gains made by the taxpayer in the year (to the extent of the amounts thereof that would not, if section 3 were read in the manner described in paragraph (1)(a) of this section, be included in computing the taxpayer’s income for the year or any other taxation year)
exceeds
(ii) the total of all such losses sustained by the taxpayer in the year (to the extent of the amounts thereof that would not, if section 3 were read in the manner described in paragraph (1)(a) of this section, be deductible in computing the taxpayer’s income for the year or any other taxation year), and
(iii) if the taxpayer is an individual, $200,
shall be deemed to be a capital gain of the taxpayer for the year from the disposition of currency of a country other than Canada, the amount of which capital gain is the amount determined under this paragraph; and
(b) the amount, if any, by which
(i) the total determined under subparagraph (a)(ii),
exceeds
(ii) the total determined under subparagraph (a)(i), and
(iii) if the taxpayer is an individual, $200,
shall be deemed to be a capital loss of the taxpayer for the year from the disposition of currency of a country other than Canada, the amount of which capital loss is the amount determined under this paragraph.
IT Bulletin IT-95R can take it from there.
http://www.cra-arc.gc.ca/E/pub/tp/it95r/it95r-e.html
As you can see, there is an annual $200 exemption on exchange gains and losses, which most people seem to generally ignore.
Also, there is a monetary exchange gain/loss on USD funds left in your trading account being used during the year to purchase and sell stocks. Each time you buy a stock using USD, you have a taxable disposition of USD cash, and each time you purchase USD (including from the sale of stock), you have a cost base that must be added to your average cost base for USD.
The calculation of the capital gain/loss (assuming you have the time) should include separation of exchange gain/loss:
Where:
a = Cost converted to CAD at rate on date of purchase
b = Proceeds of disposition converted to CAD at rate on date of purchase
c = Proceeds of disposition converted to CAD at rate on date of sale
Capital Gain = b - a
Exchange Gain = c - b (less $200 annual exemption for both gains and losses)
In the case of monetary exchange gain/loss, the USD value would not change, so it would only leave the exchange gain.
Because of this, there is a good argument for using the average exchange rate for the year to greatly simplify these calculations. Also, using a TFSA would help to avoid these issues.
As long as the exchange gain is in respect of funds used to earn capital gains, it can be considered a capital gain itself. However, if the funds are used to earn income, there is the risk the exchange gain will also be considered income for tax purposes!
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