Dual citizen - capital gain reporting - effect of exchange rate

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MsTunnelCoin762
Posts: 4
Joined: Fri Jan 01, 2021 2:02 pm

Dual citizen - capital gain reporting - effect of exchange rate

Post by MsTunnelCoin762 »

Happy New Year all,

A hopefully simple inquiry, informed by some reading of prior forum posts but with some gaps in my understanding remaining. Basic background:

-Dual citizen (Canada and US) filer, living in Canada with US dollar-denominated and Canadian dollar-denominated non-registered brokerage accounts in Canada. Contemplating disposition of a US stock in the former and a Canadian stock in the latter (I have always been a buyer to date, never a seller, and want to make sure I report fully and accurately).

Assuming a US stock sale (US sourced gain, but Canada treats as Canadian sourced)- For purposes of calculating capital gains for reporting to CRA, I understand the need to apply exchange rates at time of acquisition and disposition of shares of US stock to determine adjusted cost basis and the capital gain, and that there is no tax credit in Canada for US taxes payable on the gain (any relief would be by way of re-sourcing on Form 1116) - to the extent there is CRA-reportable capital gain attributable to a difference in exchange rate at the time of purchase and sale, such gain would not be reportable to the IRS, correct?

For example, say 100 shares of US company were bought at $20 US (USD-to-CAD exchange rate 1.30; total purchase cost $2,600 CAD) and sold at $25 US (1.50 exchange rate; total sale proceeds $3,750 CAD). Am I correct that the gain reportable to IRS is $500 US and gain reportable to CRA is $575 CAD (50% of $1,150), with the effect of the Treaty being a credit via Form 1116 for the taxes paid in Canada but only up to the US tax amount...?

The other side of the coin - Assuming a sale of Canadian company stock (any capital gains are thus Canadian-sourced) - For purposes of calculating capital gains for reporting to IRS, I again understand the need to apply exchange rates at time of acquisition and disposition of shares of Canadian stock to determine adjusted cost basis and the capital gain, and that there is no tax credit in Canada for US taxes payable on the gain (any relief would be on the US side by way of Form 1116) - to the extent there is IRS-reportable capital gain attributable to a difference in exchange rate at the time of purchase and sale, such gain would not be reportable to the CRA, correct?

And, assuming the effect of the exchange rates at purchase and disposition was a capital gain reportable in county A and a capital loss in country B, taxes would be payable in country A on the full amount of the realized gain with no offset due to the loss reportable to country B?

Many thanks to all who can help,
nelsona
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Joined: Wed Oct 27, 2004 2:33 pm
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Re: Dual citizen - capital gain reporting - effect of exchange rate

Post by nelsona »

Without delving tto much into your lengthy post, the cap gains are calculated in the currency of the agency you are filing (USD for 1040, and CAD for T1), based on the exchange rate at the time of each event in the life of that investment. IT is quite common and likely that there will be a mismatch when currencies fluctuate greatly, even resulting in a loss in one country and a gain in the other.

You should report all gains and losses when they occur. Losses my be useful at some point. Whether you will get a foreign tax credit (be it as a passive foreign investement, or a re-zources US investment) doesn;t change that requiremnt.

Btw, for cap gains tax purposes, only resource and real-estate investments are sourced in the country where the investment is located. All others are sourced where you live, regardless of where those firms are located.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D
MsTunnelCoin762
Posts: 4
Joined: Fri Jan 01, 2021 2:02 pm

Re: Dual citizen - capital gain reporting - effect of exchange rate

Post by MsTunnelCoin762 »

Thank you for taking the time to provide the informative response to my inquiry (which, in hindsight, should 've/could've been much more streamlined on my part), it is very helpful indeed and very much appreciated...
ND
Posts: 173
Joined: Thu Feb 21, 2013 5:28 pm

Re: Dual citizen - capital gain reporting - effect of exchange rate

Post by ND »

FYI The buzz word you want to use in your search for info on topic is 'phantom' as in foreign exchange based phantom capital gains
MsTunnelCoin762
Posts: 4
Joined: Fri Jan 01, 2021 2:02 pm

Re: Dual citizen - capital gain reporting - effect of exchange rate

Post by MsTunnelCoin762 »

Thank you, I appreciate the FYI...!
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