Exchange rate creating artificially high capital gains(?)

[markitzero]

I keep a large portion of my life savings in each of USD and CAD (on account of having worked in both countries, but now I'm a Canadian tax resident.) Want to make sure my understanding of an exchange rate issue is correct, b/c I feel like I'm getting disproportionately screwed by it for my 2014 taxes.

If I take some of my USD cash balance and buy $10,000 of MSFT when it's trading at $30 (on a day when $1 US = $1.05 CAD), and then sell it later in the year when its price is unchanged at $30 (but now on a day when $1 USD = $1.20), am I correct that I have to factor in the exchange rate on each of the purchase & sale days to calculate capital gains? In other words, in the eyes of the CRA, I bought a stock for $10,500 CAD and sold it for $12,000 CAD...so in the preceding scenario, I actually have a $1,500 CAD capital gain that I have to pay tax on??

That seems crazy to me!...In that I bought and sold a stock that was UNCHANGED in value, and yet I end up with $9,700 in my pocket (after presumably paying ~$300 taxes on a $1,500 CAD capital gain). I mean...how can I actually have less than had I just kept it uninvested / in cash?

I guess it would be one thing if I actually converted Canadian dollars to USD in order to make the MSFT purchase, and then converted them back to CAD after I sold. But in this case, I am using funds that have ALWAYS been in USD, and remain so even after disposing of the stock(!)

Anyway, just wondering:
1) Is my understanding of the proper tax treatment correct (factoring in exchange rate on buy/sell dates to calculate capital gain)?
2) Are there any strategies or techniques that I can use to avoid paying taxes on what I consider to be artificial / phantom "gains"?

(And yes, this post was inspired by realizing that I would have large capital gains for 2014...but nearly HALF of those gains are due to the depreciating canadian dollar(!?))

[nelsona]

Yes, that is exactly how it works.

But, since you mentionned that you are "now a Cdn tax resident", make sure you have correctly applied the deemed acquisition rules when becoming a Cdn tax resident. All non-registered stocks etc that you owned on the day you arrived in canada are re-based to the FMV on that day.
So your equaition should use the value "when I moved (back) to canada" as your cost basis.

But, other than that, in the eyes of CRA, your US investments (and in fact you USD holdings) are gaining in value each day the CAD drops.

If you had bought the same stock denominated in CAD, it would have risen exactly that amount too, so there is not much you can do, other than buy stocks of firms that are actually based in canada.

The same situation was face 7-8 years ago, by US taxpayers living in when the CAD shot up, most notably on the gains incurred when selling Cdn property.