Foreign Exchange Question

[otto]

I'm a US citizen and in March of 2008 I became a Permanent Resident of Canada. I have been moving funds to Canada as the US dollar became stronger recently. I understand that all of my US assets were deemed to be acquired as of my entry date in March in Canadian dollars. At that time the US and CAD were close to par and so now I have sustantial foreign exchange gains in the eyes of Canada because I bought the Canadian dollars after my entry date. My question is:

1) Whether I also owe the US anything. I figured I didn't but I wanted to make sure. I don't plan on converting these canadian dollars back to US ever.

2) Can foreign exchange gains/losses be applied against capital gains/losses or are they accounted for separately?

Thanks for your help.

[nelsona]

You owe nothing to IRS.

For Cdn purposes, be careful when you say that your uS account were deemed acquired when you moved, since there is no deemed acuisition on 'cash', these may not be subject to that deeming rule. I'll look into this a little closer.....

[otto]

Thanks for the IRS clarification. I am definitely interested in what you find out about cash.

On a related topic, I also assummed that a 'cash' held in a money market fund at my brokerage account would have to be considered acquired upon my entry into canada. I always consided Money Market Funds (that are keep a stable $1 value to be the same as cash and now I am betting that Canada doesn't see it that way. Do you know?

Thanks again.

[nelsona]

According to the last paragraph of IT-451

http://www.cra-arc.gc.ca/E/pub/tp/it451r/it451r-e.html

26. Subsection 48(3) may apply to property that is cash located in a country where foreign exchange restrictions are in effect. Where this is so, it is the Department's view that in determining the fair market value of such blocked currency, the currency should be valued at its Canadian dollar equivalent at the normal exchange rate prevailing at the time the taxpayer becomes resident in Canada, discounted by a factor for premiums or other amounts which would be payable on conversion at that time even though the currency is, in fact, not converted.


Earlier in the bulletin in limits these deemed rules to "capital" property, which cash ordinarily is not. the paragraph above would seem to indicate the same thing, only allowing that 'blocked' currencies may have such treatment.

This would seem to indicate that US cash is NOT subject to deemed acquisition, since it is not subject to deemed disposition, nor is it a blocked currency, and thus currency gains and losses would still apply based on the original cost , and not the arrival-date cost.

[nelsona]

Toi add to the mix:

http://www.cra-arc.gc.ca/E/pub/tp/it95r/it95r-e.html

would seem to indicate that the source of the money (ie. your salary) would also make these funds a non-capital , but also categorizes 'sundry' occasional transactions as capital transactions.

So, if I were you, I would be reporting the gains./losses from original cost and not as a deemed acquisition.

There would seem to be room for interpretation, and unless you transferred HUGE sums of money, it wouldn't matter enough to get a legal opinion.

[otto]

Thank you.

So...please tell me if I understand the example below correctly.

1) On my Perm Res entry date, say March 15, 08, I held $50,000 USD in a Money Market Mutual Fund in the USA when the USD and CAD were on Par. This would have been deemed $50,000 CAD at this time.

2) Then in October 2008 I sold the money market mutual fund when the USD to CAD was at $1.25 so I incurred a $12,500 CAD Capital Gain. ($50,000 x 1.25 = $62,500 CND - $50000 CND =$12,500 CAD). These proceeds where put into a checking account in the US and then the same day were converted to CND in Canadian bank.

My understanding is that there was no foreign exchange gain but just the capital gain because this was done on the same day. Right?

Now if I had left those proceeds in the checking account for a period of time and the exchange rates changed before I tranferred the money to canada I would have also incurred a foreign exchange gain or loss in addition to the capital gain. If this was the case can I offset capital gains with foreign exchange losses or vice versa?

[nelsona]

1) as i said, there was no deeming on your arrival, so you need to come up with some other figure for your cost basis, ie. the true cost based on when you obtained these US doillars. did you not read my posts?

2) your math is right (except of course that your cost has not been determinied correctly).

However, you seem to be distinquishing between a foreign exchange gain and a capital gain. They are the same thing. The timing and what you did with the money had nothing to do with it.

When you change US dollars into ANYTHING, you trigger a cap gain or loss for Cdn purpuses (which is a currency gain or loss). It doesn't matter where you do this, which bank, or even in a bank( since you could have simply bought a car and faced the same gain/loss calculation)

[otto]

I did read the posts but maybe I am slow....thanks for the clarification that foreign exchange gains are the same as capital gains.

I guess my question is whether cash (as you've defined it) is the same as a Money Market Mutual Fund. A money market [u]account[/u] might be a deposit account at a bank but a Money Market [u]Mutual Fund [/u] contains securities that would be subject to the deemed acquisition just like any stock or bond funds I would think.

[nelsona]

That would be a stretch.

[otto]

Okay, now I am totally confused. Humor me with one more response and then I will drop it if I don't get it.


Yes or no, would the Money Market Mutual Fund below be part of my deemed acquisition upon my entry.

https://personal.vanguard.com/us/JSP/Fu ... #hist::tab

Thanks and the help. Your site is great.

[nelsona]

Money markets are cash.

[andied]

I am not sure money market funds are considered cash; they are negotiable and in theory, could fluctuate in price. I have avoided purchasing them outside of my registered account.

A few years ago I got a ruling from the CRA Re exchange rates and capital gains, which confirmed the bulletin "IT95R - Foreign exchange gains and losses", which dates from 1980. Cash on deposit is not subject to Cap Gains as long as it remains on deposit.

From the bulletin:
"Foreign currency funds on deposit are not considered to be disposed of until
they are converted into another currency or are used to purchase a negotiable
instrument or some other asset, i.e. foreign funds on deposit may be moved
from one form of deposit to another as long as such funds can continue to be
viewed as "on deposit". Term deposits, guaranteed investment certificates and
other similar deposits which are in fact not negotiable, are considered funds on
deposit. Transactions in which foreign currency funds are invested in negotiable
instruments such as notes, bonds mortgages, debentures, U.S. government
treasury bills and notes and U.S. commercial paper, will require a foreign
exchange gain or loss calculation at the time the foreign currency funds are
used to purchase these investments and as well, each time such investments
mature or are otherwise disposed of, whether or not the funds are rolled over
into like securities."

[nelsona]

Note that this means remaining on deposit IN THE SAME CURRENCY, of course.