Taxes on interest of devalued US term deposit

[bmozaffari]

Hi everyone,

I have a US dollar term deposit that has yielded some interest over the past year. However, the value of the US dollar has decreases considerably during this period of time resulting in a net loss as opposed to a gain. Additionally, I have borrowed money for this investment and paid interest on the borrowed money.

May any of the two losses mentioned above be used to offset the interest income of the deposit? If so, which one and how should I declare that in my tax return?

TIA, Babak

[nelsona]

The currency loss would be a capital loss which *could* be used against capital gains, not against interest income, but only when you sell some of the US cash.

Treat your US cash like a mutual fund; the interest (taxable yearly as interest) is like a mutual fund distribution adding to the cost basis. Only when you 'sell' the US cash (by buying something with it, or converting it to another currency) will you trigger the capital loss or gain (subject to limits) and only then will you be able to claim any loss against other gains.


The interest you paid to earn income is tax dedcutible.

[bmozaffari]

Thanks Nelsona, could you just confirm that I got it right?

So my savings interest will be 2005 "ordinary" income and has to be reported as such. The interest I paid for the investment is expense and can be deducted from it. What if the interest paid is more than the one realized by the investment?

I will keep my USD till I move to the US some time in 2006, at which time it will be "deemed" disposed of, and I can use the portantial capital loss from it (based on the day's exchage rate) to offset capital gains from an unrelated stock transaction?

Thanks again, Babak

[nelsona]

Your report the interest you recieve as interst income.

You report your interest expenses as interest expense on a different line.

It doesn't matter which is more or less: they aren't combined.

Be aware however, that CRA could deny your expense claim, as they don't usually buy the notion of borrowing money for a term-deposit, since it is unlikley that your interst income would exceed your interest expense, otherwise banks would go broke, and we would all be millionaires by borrowing money and buying a term deposit. They may smell something fishy about your scheme (maybe, just an aside).

Your description of how you will handle the deemed disposition is correct. You will need to have a 'loss' of at least $200 to claim this.

[bmozaffari]

Thanks Nelsona, you helped tremendously!

[bmozaffari]

I don't know how or why I missed the italic part the first time I read your reply! I understand your point, the interest off the term deposit was not supposed to make money, appreciation of the USD was... The exchange rate was very low then, though it's even lower now.

Are you saying that I risk an audit? I've never been audited and wouldn't particularly like to, I hear it's a lot of trouble and expenses to deal with... am I better off deducting just enough interest to zero out the earning off it, or not deducting anything at all (though it sucks having to pay taxes when there is a net loss!)?? I know I have to decide, but I'd appreciate input.

Thanks, Babak

Your report the interest you recieve as interst income.

You report your interest expenses as interest expense on a different line.

It doesn't matter which is more or less: they aren't combined.

Be aware however, that CRA could deny your expense claim, as they don't usually buy the notion of borrowing money for a term-deposit, since it is unlikley that your interst income would exceed your interest expense, otherwise banks would go broke, and we would all be millionaires by borrowing money and buying a term deposit. They may smell something fishy about your scheme (maybe, just an aside).

Your description of how you will handle the deemed disposition is correct. You will need to have a 'loss' of at least $200 to claim this.

[nelsona]

You won't get audited, you may just have to explain your interst expense, and then have it denied.

I'm not saying that is what will happen, just that its possible. There has to be an expaectation of profit. Now if you borrowed money for a year, to buy a 5 year term deposit, that would definitely be OK, but if you are merely paying interst on your investment loan...

If you have a legit expense, why would you under report it? Reporting 'just enough' expenses to cancel out income smells funny.

Your evewntual loss is a capital loss, and the interest you are receiving is actually making that loss bigger (because it is increasing your Adjusted cost basis), so if you have some other cap gains, either in the recent past or in the near future (before or as you leave Canada) you will get this back.

[Rickerbucks]

if you INVEST in $USD and BORROW in $USD to buy a term deposit, that is not exposing yourself to capital appreciation potential from currency moves and as nelsona suggests, the CRA is going to ask why you would possibly be doing that. You COULD try and argue that you are borrowing with short term money and investing long term but.........

If you were BORROWING in Canada and investing in the US in a term, then that we an easier argument for your to make. Affectively you are not only trading on interest rate spread risk (short to long term) but also on currency exchange risk. (Not that i would generally recommend that strategy) There are better ways to execute that investment opinion. Just my humble opinion.