foreign exchange gain tax

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igold
Posts: 4
Joined: Thu Nov 18, 2021 5:51 pm

foreign exchange gain tax

Post by igold »

I have a very large loan from a Canadian bank (taken to buy a new house). I now have funds to pay it off (from selling the previous house), and I would like to pay it off as soon as possible to minimize interest charges. However, paying it off in a single lump sum would trigger substantial US currency exchange gain since Canadian dollar has fell with respect to USD since I took the loan. My understanding is that I can eliminate the US tax on the currency exchange gain if I pay off the loan in many small transactions each having currency exchange gain under $200, instead of paying it off in a single lump sum. Is this correct?
nelsona
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Re: foreign exchange gain tax

Post by nelsona »

The exchange gain from transferring the money to pay for the mortgage is minimal, as it only based on the period from when you got the US money and change it to Cdn, which seems to be a very short period.

What you may be thinking of is the gain that is determined from paying off a foreign mortgage when the currency has dropped vs. US dollar since inception. That is something completely differnent, and does not have to do with who much/little to pay at one time.

I;s complicated, but you can start at this site :

https://www.ustaxfs.com/foreign-mortgag ... rate-gain/
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
igold
Posts: 4
Joined: Thu Nov 18, 2021 5:51 pm

Re: foreign exchange gain tax

Post by igold »

The situation is a bit different than in this article. In my initial posting, I was not clear enough. Here is the question in concrete (simplified) terms: Suppose that I borrowed 500,000 CAD from a Canadian bank (I live in Canada) when the exchange rate was 1CAD=0.82USD (in line of credit), and want to pay it back when the exchange rate is 1CAD=0.80USD. If I pay it back in a single lump sum, there is an exchange rate gain of 10,000 USD, and I would have to pay US tax on it. However, if I pay it back in 50 separate transactions of 10,000CAD each, then each of these transactions is a separate tax event with less than 200USD exchange rate gain which is excluded under the de minimis rule, and no US tax is due. (Similar to why monthly payments on a Canadian mortgage do not have sufficient currency exchange gain to incur US tax.) Isn't this correct?
nelsona
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Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: foreign exchange gain tax

Post by nelsona »

Not quite.

The first thing to deal with is: How long ago did you get the USDs you are going to use to pay the mortgage, and when will you or did you transfwr it to CAD? That is the only things that matter when it comes to TRANSACTION exchange gain. How many payments you then make to the mortgage doesn't matter: the exchange from US to Cdn has already happened.

'The NEXT thing, which you probably didn't know about, but you are kind of on the right track, is that paying off mortgae that is held in non-US currency that has lost value at the time of final payout, incurs a capital gain on the change in value of the whole mortgage. Again, the times of ammounts you pay before the end doesn;t really matter. The gain is based on the entirety of the contract: When you got the mortgage and when you pay it off.

So there are TWO different events that trigger a cap gain calculation. ONE is the moment you convert USD to CAD, and is based on when you got those USD and when you convert it. If you wish to CONVERT is small chunks to avoid the gains tax, so be it, but it's not about the mortgage payments its about the conversions. The actual mortgage payments are being made with existing CAD, no currency exchange is taking place when you make a mortgage payment.

The OTHER is the moment you payoff the mortgage, which is the sitiation I point to above. There are probably other websites that explain THAT. Most US citizens living abroad are unaware of this possible gain. You are on the right track, but it the final payment that will bring this about, not each installment.

So, the simple question is : When did you get the USD (and what was the exchage rate that day) and when did/will you convert it to CAD, and what was the exchange rate that day. Worry about the mortgae later, there is nothing you can do to avoid the capo gains on that.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
igold
Posts: 4
Joined: Thu Nov 18, 2021 5:51 pm

Re: foreign exchange gain tax

Post by igold »

Thank you Nelsona. I never had USD and never converted them to CAD. I live in Canada, and all transactions were in CAD, without any currency conversions. So, I do not worry about transaction exchange gain, only about the change of value of the debt because of decrease of CAD vs USD.

What you said about mortgage is very useful, and I did not realize this. If I understand you correctly, only the final payment that results in the full payoff is a taxable event, and its time determines the overall gain. In my case it is not a mortgage but a line of credit (HELOC) where I can borrow/re-pay at any time. Hence, I understand that I can eliminate US tax by the following simple strategy: re-pay 99.9% of the debt immediately (if I understand you correctly this will not be a taxable event since not the whole debt is re-paid), and wait with repayment of the remaining 0.1% until the time when the exchange rate is favorable (or indefinitely). Is this correct?

Also, this triggers another question: perhaps in case of a Canadian line of credit, where one can take/re-pay money at any time, and there are no currency conversions, one does not have to worry at all about US tax issues?
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