Currency exchange mess

ggvozden · Post by **ggvozden** » Wed Oct 22, 2008 3:24 am

Moved to US Aug 2007, filed 1040NR & 540NR for 2007.
Have USD & CAD NR accounts in Canadian bank.

After move, did small CAD2USD during settle-in period(2007) and major one in 2008; and USD2CAD recently :( I've got puzzled how to do taxes on gain/loss on all of this mess I made. Reading through the posts helped me understand what are taxable events - thanks Nelsona ! However, I'm still puzzled with cost basis of my inital CAD for FED and STATE tax ?

FED1) Since 1040NR was filed for 2007, CAD2USD currency conversion gain/loss from 2007 (above U$200) was not reported on 1040NR,
as well as Can bank's interest (foreign income) - OK, or I made a mistake ?

FED2) Is my cost basis of CAD for TY2008 CAD2USD conversion to use exchange rate on Jan 1 2008 (date of becoming RA) ?
I've also collapsed RRSP in 2008, do I calculate cost basis of RRSP in USD using Jan 1 rate ?

CAL1) Now, CAL treats foreign income of NR differently, and I did account for interest and currency conv gain/loss of foreign income (Canadian accounts) on 2007 return. Am I wrong assuming that for CAL TAX of 2008 my CAD cost basis is exchange rate on AUG 18 2007 ?

Thanks a lot for any insight,
Goran

nelsona · Post by **nelsona** » Wed Oct 22, 2008 5:37 am

Your cost basis for your RRSP is the BOOK Value on january 1 2008. That BOOK value will be determined by the costs of each investment in USD valuated on the day you bought each of them. So if you bought XYZ in 2006 in your RRSP, the book value for US purposes is the price you paid in 2006-value USDs regardless of its value on jan 01 2008

nelsona · Post by **nelsona** » Wed Oct 22, 2008 8:14 am

As to any exchange gains. Like any other investment you need to know the cost (in USD) at which you bought these Cdn dollars, and then the price at which you changed them into anything else, including another currency, a car, whatever (in USD).

Its not easy, anbd IRS and CRA are only intersted in BIG transactions, that is whey there is a $200 dollar threshold. Otherwise every time you bought a stick of gum with Cdn dollars, you would need to calculate the gain/loss on that dollar for the IRS.

nelsona · Post by **nelsona** » Wed Oct 22, 2008 8:17 am

And your excange gains and losses are NOT foreign income for either IRS nor Cal.

Foreign income would be wages earned in canada and income from Cdn Real estate and resources (oil gas, mining). Stocks etc are considered as being sourced where you live.

ggvozden · Post by **ggvozden** » Wed Oct 22, 2008 9:48 am

Thanks for the reply.

1) CAD2 USD
You're confusing me a bit when you say "you need to know the cost (in USD) at which you bought these Cdn dollars". These inital CAD were never bought, they are native CAD :) I guess it realy does not matter, or it does ?

If it doesn't how do I get to their BOOK value since I did exchange them into USD in 2008. Would'n it be the same as with RRSP, using Jan 1 2008 exchange rate and not on the date of move-in to US Aug 2007. If I had room for RRSP to readjust my BOOK value until Dec 31 2007 (sell all than buy again so BOOK value is readjusted ) in my mind CAD would readjust itself on its own to exchange rate on Jan 1 ?

Goran

nelsona · Post by **nelsona** » Wed Oct 22, 2008 10:03 am

You 'got' these Cdn dollars at some point. You were either paid, or you sold something to get them (your house,some stock, an old couch) . The day you were paid these C$, they had a value in US$. That is your cost basis for determining if you made any profit when you made the exchange. As I said, exchanging into USD is only one of the things that would trigger this calculation. Buying a car with the Cdn cash is the same thing. You are taking a commodity and changing it into something else. That is ia sale.

If you DID shuffle your RRSP on DEc 31, 2007, then indeed your book value and cost basis would be the same.

But if not, then you didn't bump up your book value. You need to go back to when you bought the investments that made up your RRSP on Jan 01, 2008. If you bought XXY at $3US and it was $6US on dec 31, you book value is $3. If you bought XYZ at $3US and then swapped it for $^US worth of ABC on dec 31 2007, then your book value is $6.

What you did in your mind doesn't matter. Its what you did on paper.

ggvozden · Post by **ggvozden** » Wed Oct 22, 2008 10:37 am

Wow, this opens can of worms. What if my CAD amount used to buy US in 2008 has origins spaning back last 10 years ? For example accumulated savings invested each month from my monthly sallary ? Whould I use than average exchange rate for last 10 years ?

It sounds much simpler if BOOK VALUE can be determined by exchange rate on date when US residency was established ( MOVE-IN date or date of becoming RA if 1040NR was filed )

nelsona · Post by **nelsona** » Wed Oct 22, 2008 12:16 pm

You can use a weighted average if you wish. You can also use the lifo (last in first out) method, and simply say that the cost of $XXXX you are withdrawing is determined from the cost of the last $XXXX you put in, and work your way back from there.

As to it being easier to say that the RRSP book value was the market value on Jan 01. Of course it would be easier, but it would be wrong. And that is why all cross-border types ALWAYS encourage their clients to shuffle ALL their RRSP before leaving for US, especially items that have risen in value. Not only does it make determining the book value easy, it also results in less US tax being owed when you withdraw or collapse the RRSP.

BOOK value = MARKET value is only true on the day you buy and investment. After that the book value never changes, unless you buy or reinvest more of the same.

Note, that if this was an unsheltered investment account and not an RRSP, you would have been tracking book value very closely, as you would need it for cap gains/loss purposes, and, if leaving US, for deemed disposition tax calculation. So the exercise for an RRSP is no more or less cumbersome than maintaining good records of an investment account.

ggvozden · Post by **ggvozden** » Thu Oct 23, 2008 3:50 am

1) Regarding RRSP. I'm clear on the RRSP thanks to your earlier posts about RRSP. I was just not sure that "new" BOOK value created on Nov 2007 by reshufling RRSP to new funds, would be recognized since I moved in to U.S. in Aug 2007. How come they are allowing for this gap - is it only because I've filed 1040NR for 2007 ?

2) All of my other questions were not related to RRSP, but toward how to figure out USD value of my CAD money from my ordinary bank saving account that I've owned before entering U.S. and used in 2008 to purchase USD. I still cannot understand why is not possible to determine value of this CADs in USD by using exchange rate on the date I entered the US (Aug 2007). Well I was hopping for Jan 1 2008 since they allowed it for RRSP :) I can understand that CADs acquired after move in date to U.S. must be converted to USD on the date received but it is hard for me to comprehend your suggested way how to come up with USD value of CADs that has pure Canadian origin and was acquired during Canadian residency. Is it possible you were talking about the RRSP ?

Thanks a lot for you help !
Goran

nelsona · Post by **nelsona** » Thu Oct 23, 2008 4:45 am

1) yes. if you had elected to file full year 1040 in 2007, the date would have been jan 01 2007 -- before you even moved.

2. The reason you need to 'cost' the Cdn dollar is the same reason you need to 'value' 1000 shares in ABC that you held before moving to US. In the eyes of IRS, Cdn dollara are an investement vehicle, which goes up and down vs. the USD. It would be incorrect to say that your cost in ABC was the market value on the day you moved, since that was not the price you PAID for it. Origin and residence have nothing to do with it.

I'm pretty sure you understand what I'm saying. Your bucking at the difficulty in doing it. How much money are we talking here? It would seem pretty simple to come up with an average cost for your money based on how long you've had the account, plus any special huge deposits. Bank of Canada website can spit out the number pretty easily. Besides, its now in your interest to come up with a good figure, since the CAD has dropped and you could get yourself some cap loss if you convert now.

dbinontario · Post by **dbinontario** » Sun Mar 08, 2009 11:38 am

I'm in a similar boat with respect to my non-investment USD/CAD transactions.

I have a USD account that I use for non-investing purposes. I borrowed $CAD and bought $USD, then bought a car in the US, sold the car at a loss, then transferred back to $CAD to pay off the loan. There will be a capital gain on the forex but a capital loss from buying/selling the car. Can I offset the two?

Thanks; this forum has been a great help!

nelsona · Post by **nelsona** » Sun Mar 08, 2009 3:10 pm

You don't get capital loss on cars, unles it was a bugati.

How was any currency gain made, you exchaged cad for usd and then bought a car. No gain or loss there. You had the currency for what, 2 days?

Then you sold the car and reconverted. Again, no loss/gain ther. You only have loss or gain while you hold the actual currency.

dbinontario · Post by **dbinontario** » Sun Mar 08, 2009 5:17 pm

Ok, so my non-investment USD account balance fluctuated throughout the year because of money in/money out via currency exchange and living expenses while in the US. I can track everything in and out of my account. Obviously currency exchange is a realizable transaction, but what personal expenses (i.e. purchasing a car) constitute a realizable transaction?

nelsona · Post by **nelsona** » Sun Mar 08, 2009 6:14 pm

I'm not explaining currency gains and losses any further. Thanks.

nelsona · Post by **nelsona** » Sun Mar 08, 2009 6:19 pm

other that to say that unless you held onto a substantial amount of USD, and did not use it, and then transferred it back to canada, you did noy incur any loss or gain. Everytime you used it, even to by groceries, you were in effect cancelling any losses.