Foreign exchange gain

[jeffwa]

Hi,

I'm currently working in the US under H1B but moving back to Canada in mid-september of this year.

Because of the current high $CAD and considerable US$ cash on hand, I thought about transfering my US$ into a US-dominated canadian bank account (ex: ING Direct Canada US Account).

The reason is I'd like to transfer money in $CAD only when the exchange rate will be more favorable (ex: in 2 years).

Now the question I have is: Will I get taxed on some kind of foreign currency exchange gain by doing this?

Thanks a lot,

jeff

[nelsona]

Yes. For Cdn tax purposes, a US dollar account is subject to 'gains' tax if the US dollar goes up (and you then sell, of course).

There is a limit of course, as in theory you could trigger a gain or loss every time you take funds out of this account to go shopping in the US. CRA puts a floor of $200 on such gains or losses.

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

[nelsona]

A similar philosophy is in place at the IRS, on non-US accounts. So any who have a Cdn bank account with substantiual holdings, could see themselves making a good dela of currency gains should they ever 'sell' those funds, even by spending it.

These would be subject to reporting as ordinary gains, again with a $200 waiver.

[jeffwa]

Thanks for the info.

However, what would be the "cost basis" of that gain? The exchange rate of the day I moved back to Canada?

What if I transfer everything in CAD$ the day I move back to Canada? Would I get hit from any tax consequence?

[nelsona]

The cost basis for Cdn purposes (for any US$ accounts) would be on the day you moved back. If your Us account gained C$200 between that day and the day you converted, it would be taxable in Canada. Of course you could do it in such a way that you do not generate $200 in gains on any one transaction.

For US purposes, the cost basis for non-US accounts would be the day you 'bought' the Cdn dollars.

[jeffwa]

Interesting...

Are you saying that when moving in the US and keeping money in a Canadian bank account and converting that money into US fund later, if there is exchange gain at that moment, that wouldn't be taxed in the US?

Thanks for the info again!

[nelsona]

I didn't address this new scenario you presented.

If you moved TO the US, exactly the same situation would occur as when you moved FROM US. Your Cdn dollar accounts would be subject to currency gain, based on the value the Cdn dollar had when you 'bought' the dollars (ie. funded the account) and the value fof the Cdn dollar whne you brought it down.

So, in concrete terms. If you currently have a Cdn dollar acount in canada, that you had C$10,000 in 5 years ago and still have that same C$10,000, if you spend that money in one shot (like on a house or car), or change it to another currency (like US$ or Euro), while a US taxpayer, you will owe tax on about $3000 of currency gain.

For US purposes, you have to view every Cdn dollar you own as a 'share'. A share which changes value daily (in relation to the US$) and that can be 'sold' be either spending or switching to another currency.

The exact analoguos situation is true from CRA's point of view for any non-Cdn currency, when you are a Cdn tax resident.


Just something to think about.

[stewak2]

I don't suppose there is a provision to claim losses in the reverse scenario?
I'm also curious about RRSP implications. I'm dual US/CDN citizen, living in Canada working in US, commuting. RRSP has been funded over the years, at many different exchange rates. When I begin withdrawing funds, is the IRS going to include currency appreciation as gain ( income )? What if it turns out I would have showed a loss ( does not seem likely at present, but you never know )?

[nelsona]

A loss (if more than $200) is also reportable.

Of course curency gains/losses are reflected in your RRSP! That is why it is so important to establish what the the BOOK Value in US dollars was in your account when you came to US. That is the number you need.

If it was US$85,365.33, you know that, eventually, when your RRSP is completely gone, you will have had US$85,365.33 of income which was not to be taxed by IRS. Currency fluctuations are built in, just like when you sell stock within your RRSP. if over the years you end up with less than $85,365.33 withdrawn, you will have a terminal loss that you can clim in the last year.

I hope you weren't thinking of 'tracking' each transaction you make in your RRSP (converting to US$) to determine what was my gain or loss on each of these. You would only do this if you were NOT going to use the deferral election. Once you elected to defer, your RRSP simply becomes a pot that cotains a mixture of tax-free broth (what you brought down) to which you have since added taxable noodles.

All you need to do is know "What ammount in US$ am I going to be allowed to say is tax-free" The answerto that is your arrival book-value.

[nelsona]

Its like a isaid above: If you mved to US with an RRSP that consited only of Cdn cash, say C$10,000. That had a book value of US$6500. Today, your RRSP is $10,500. If you collapse it, it is worth US$9500.

You would report a gross withdrawl of $9500 and a taxable ammount of $3000 (9500-6500).

So while your RRSP only made C$500, you owe IRS tax on the $3000 you made in currecy gain.

IRS doesn't care about c$, they care about US$. Everthing has a value in US dollars and only US dollars.

[stewak2]

I never moved to the US. I'm a USC by birth, but have resided in Canada since I was a small child. The RRSP was opened years and years ago and has been funded by annual contributions.
I can easily track growth ( market value - contributions ) but it will be more
difficult to determine what is currency growth. Wouldn't I have to know the exchange rate for every year I made a contribution? I suppose the information is available somewhere, but yikes...
How would I calculate the currency gain on the growth? A weighted average?

[nelsona]

So, what I said before remains, except that your tax-free basis is your contributions, in those US dollars (so, yes, you will need to determine what you contributed in US dollars each year).

The currency gains will be accounted for when you begin taking future payments. The tax-free portion will be based on a proportion of what you put in (in US$) and what you have in the RRSP (In US$).


If you put in over the years US$100,000 and in 2020 it's worth US$300,000. How it grew really doesn't matter to IRS (nor to CRA by the way). "Currency gain" is merely wrapped up in the total value of your RRSP.

You take out US$6000 at that time (1/3rds is not taxable [100,000/300,000]): $4000 will be taxable in US and $2000 will not. This will leave your account with $98,000 basis and $294,000 value.

So the next year your RRSP grows back to $310,000 (again, how the growth happens is immaterial), you take out US$10,000 .The tax free portion becomes (98,000/310,000). US$3161 is not taxable i n US, $6839 is taxable

You would repet this calculation every year until collapse, with less and less and less non-taxable.

If, in the final year, your tax-free portion actuallly is less than the fianl amount you take out (say you have a tax-free ammount of $5000 but only $3000 in your RRSP, you report 0 taxable, and you get to claim a terminal loss of $2000.

[nelsona]

The last sentnce should have read:
e
If, in the final year, your tax-free portion actuallly is MORE than the final amount you take out (say you have a tax-free ammount of $5000 but only $3000 in your RRSP, you report 0 taxable, and you get to claim a terminal loss of $2000.

[nelsona]

IRS Rev proc 89-45 a full 18 years ago advised US citizens that they would need to keep track of their contributions.