Foreign Currency Gains?

This is our main tax information forum which deals with topics concerning Canadians living and working in the U.S., U.S. citizens contemplating working in Canada, and all aspects of Canadian and U.S. income tax and related adminstrative issues.

Moderator: Mark T Serbinski CA CPA

Post Reply
SAM19
Posts: 9
Joined: Wed Dec 16, 2015 4:50 pm

Foreign Currency Gains?

Post by SAM19 »

I’m a Canadian citizen and resident of Canada with a US $ brokerage account. I’m looking for some help understanding foreign exchange gains/losses. I sold over 30 stocks sporadically in 2015 at various times throughout the year and I’m trying to figure out the gains and losses.
I read on CRA’s website that under subsection 39(2) only the amount of the NET foreign exchange gain or loss for the year in excess of $200 is taxable or deductible as a capital gain or loss.

I’ve kept very good records and have the purchase and sale date and prices of all the stocks converted to CDN $. I suppose I can explain this best with a quick example:

Acquire 100 IBM shares at $10 USD when the exchange rate was $1.50 and subsequently sold the shares at $20 USD, when the exchange rate was $1.667.

Proceeds: 100 x $20 x $1.667 = $ 3,334
ACB: 100 x $10 x $1.50 = 1,500
Capital gain = $ 1,834

I suppose the transaction consists of two elements, the share transaction and the foreign currency transaction. The gain on the share transaction is $1,500, calculated as 100 x ($20 – $10) x $1.50. The exchange gain on the foreign currency transaction is $334, calculated as $20 x ($1.667 – $1.50) x 100. While the overall gain remains the same at $1,834 ($1,500 + $334), I assume you must need to split the two amounts to account for the $200? So I suppose the real gain would only be $1,634 not $1,834 correct?

There is no place on Schedule 3 of the T1 to report the exchange gain exclusion. I suppose I could either increase the adjusted cost base of the shares by $200 and report one "net" transaction, or report the exchange gain as a separate transaction with proceeds of $334 and an ACB of $200? Does it matter what way I do this?

This leads me to my next question. Do I have to do this same calculation for each of the 30 transactions; (which means I would get the benefit of the $200 exemption for each transaction), or do I lump them all together and only get the $200 exemption once? If I lump them all together can I use an average exchange rate for the sale price exchange rate because they were all sold in the same year? Sorry for all the questions, but this seems like a reporting nightmare! Any help would be very much appreciated.
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

When determining capital gains and losses in a currency other than that of the taxing authority (in other words, USD on your CRA returns, and CAD on your IRS returns), one must ALWAYS determine the COST using using the exchange rate(s) when the cost was incurred, and determining the PROCEEDS using the exchange rate at the time of disposition.

One CANNOT simply convert the overall gain or loss from one currency to another.

there are not 2 elements, there is one capital gain or loss.

In your (correct example) , the gain is 1834.

You are misinterpreting the $200 rule, it only applies to currency (cash) not investments. It is put there so that one does not have to worry about minor currency gains and losses when exchanging MONEY, not when buying foreign investments.

So, if you bought US$1000 for CAD $1000 and later sold it for CAD$1300, there would be a $300 reportable gain. If however you had sold it for CAD$1195, there would be a non-reported gain of $195.

You don't have a foreign exchange gain, you have a capital gain.

This was actually made clearer by 39(2).
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
SAM19
Posts: 9
Joined: Wed Dec 16, 2015 4:50 pm

Post by SAM19 »

Oh wow, thank you so much for pointing this out to me, I interpreted this completely wrong. Was it ever calculated this way in the past? I just did some follow-up research based on your response and it looks like the rules may have changed in 2012? Does that sound about right or has it always been calculated this way?

Also just to confirm, even know I sold all of the stocks in the same year, if I read your post correctly I CAN’T just use the average exchange rate to convert all of the selling prices; I have to calculate them all individually based on the exchange rate on the date of the sale correct?
Thanks again!
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

Correct, date of sale and date(s) of cost, each separately.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

by the way, this US$ brokerage account is based in Canada, correct? US brokers are not allowed to have non-retirement investment accounts with Cdn residents.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

It has always been calculated this way for gains, 39(2) revision only made it clearer that cap LOSSES also applied.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
SAM19
Posts: 9
Joined: Wed Dec 16, 2015 4:50 pm

Post by SAM19 »

Ok thanks for taking the time to explain this further.

Yes correct, I have a TD Waterhouse account in Canada with a Canadian $ account and US $ account.

If I move to the US do the same rules apply to this account on the Canadian side? In other words, can I keep this account in Canada or do I have to close it before I leave?
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

You will have to close it just after , transferring the stocks to a US broker, and selling off mutual funds.

You will also have departure tax on all your assets.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
Post Reply