Two years ago, I converted about 100k from Canadian currency to U.S currency and set it aside (held) it US cash for about two years for a purchase that didn't materialize. Both the US cash and US securities were held in Canadian banks/brokerage.
After realizing that the purchase would not go through I used the US cash to buy US securities. In the meantime the value of the US dollar has gone up.
Do I need to report this as a "deemed" exchange rate appreciation on my CA tax?
If so what form do I use?
I also file US tax a USC resident in Canada. Would this lead to any filing requirement on the US side?
Thanks very much.
Deemed Appreciation on US Cash for CRA reporting?
Moderator: Mark T Serbinski CA CPA
Only the gain between the time you "bought" the US cash, and you "sold" the US cash to but something else -- anything else -- would be considered a cap gain/loss of your Cdn return.
Once you buy the US security, then you only only trigger cap gains when you sell it. The gain for Cdn purpose is based on the Cdn value at the time you bought vs. the Cdn value at the time you sell. So, in your example, even a US stock that didn't change US value will ahve a cap gain.
For US cap gains, the 2 values are in USD.
What happens when Cdn $ drops, is that your gains for Cdn purposes ids larger than for US puposes.
When Cdn value rises, the converse is true.
Quick example
You buy $100 US for $100 CDn 2 years ago. After 2 months its worth $105 Cdn when you put it all on $100 of USCo stock. You then sell it today for $200US, which is $240Cdn.
So, 2 years ago, you got a $5 cap agin when you sold your USD's to buy USco stock. Reportable to CRA. Nothing to report to IRS.
Now, with the sale, you made $100 US gain on USCo, reportable to IRS; this gain is $135 Cdn (240-105 you paid for it) reportable on Cdn return.
Once you buy the US security, then you only only trigger cap gains when you sell it. The gain for Cdn purpose is based on the Cdn value at the time you bought vs. the Cdn value at the time you sell. So, in your example, even a US stock that didn't change US value will ahve a cap gain.
For US cap gains, the 2 values are in USD.
What happens when Cdn $ drops, is that your gains for Cdn purposes ids larger than for US puposes.
When Cdn value rises, the converse is true.
Quick example
You buy $100 US for $100 CDn 2 years ago. After 2 months its worth $105 Cdn when you put it all on $100 of USCo stock. You then sell it today for $200US, which is $240Cdn.
So, 2 years ago, you got a $5 cap agin when you sold your USD's to buy USco stock. Reportable to CRA. Nothing to report to IRS.
Now, with the sale, you made $100 US gain on USCo, reportable to IRS; this gain is $135 Cdn (240-105 you paid for it) reportable on Cdn return.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
Thank you Nelsona! This helps a lot.
Since my USD holdings are simple I can report that with out too much trouble.
Alos. I see -- right now the US side is a not an issue because the CDN has been falling.
What happens when/if CDN rises again?
I have salary paid to me every two weeks in CDN dollars. Would I be deemed by IRS to have been paid in US dollars and purchased CND dollars.
I have daily/weekly/monthly expenses in CDN. Would IRS deem these as sales of CDN dollars that generate profits?
Taking it that literally it would be a nightmare to keep track of, but I can't imagine we have to be that literal. Where do we draw the line between functional use of currency and investment use?
Would keep low cash balances in both currencies avoid this issue? How low? (I don't want to start bouncing checks either)
Since my USD holdings are simple I can report that with out too much trouble.
Alos. I see -- right now the US side is a not an issue because the CDN has been falling.
What happens when/if CDN rises again?
I have salary paid to me every two weeks in CDN dollars. Would I be deemed by IRS to have been paid in US dollars and purchased CND dollars.
I have daily/weekly/monthly expenses in CDN. Would IRS deem these as sales of CDN dollars that generate profits?
Taking it that literally it would be a nightmare to keep track of, but I can't imagine we have to be that literal. Where do we draw the line between functional use of currency and investment use?
Would keep low cash balances in both currencies avoid this issue? How low? (I don't want to start bouncing checks either)
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MovedToCanada
- Posts: 3
- Joined: Sat Feb 21, 2015 12:47 pm
My situation is a bit more complicated than the original poster.
Since moving from US to Canada I have kept US cash balances: sometimes small, sometimes large.
The sources of the cash balances include:
1. currency exchange (Use CDN to purchase USD)
2. USD that moved to Canada with me
3. Earnings in USD from temporary assignment in US (several years ago)
4. gifts from US parents in USD
5. Interest on US assets.
I have used US cash to purchase both US investments and cover US-based expenses. I never purchased CDN with USD, so I didn't realize that any of this would be reportable.
My questions are:
1. Can I use average cost accounting to report my earnings?
2. Should I include only actual currency exchanges when calculating average cost or do I need to consider the other sources of US dollars listed above?
3. Do I need to report exchange rate earnings only when using US dollars to buy investments (stock) in US or also for regular consumer purchases?
Thanks!
Since moving from US to Canada I have kept US cash balances: sometimes small, sometimes large.
The sources of the cash balances include:
1. currency exchange (Use CDN to purchase USD)
2. USD that moved to Canada with me
3. Earnings in USD from temporary assignment in US (several years ago)
4. gifts from US parents in USD
5. Interest on US assets.
I have used US cash to purchase both US investments and cover US-based expenses. I never purchased CDN with USD, so I didn't realize that any of this would be reportable.
My questions are:
1. Can I use average cost accounting to report my earnings?
2. Should I include only actual currency exchanges when calculating average cost or do I need to consider the other sources of US dollars listed above?
3. Do I need to report exchange rate earnings only when using US dollars to buy investments (stock) in US or also for regular consumer purchases?
Thanks!
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MovedToCanada
- Posts: 3
- Joined: Sat Feb 21, 2015 12:47 pm
As a follow up question. now I am wondering about back year-filings.
The last time that I made large purchases with US cash in 2011, which is expired (almost expired)? This year I had some USD big purchases too. As a practical matter, does it make most sense to:
1. Going forward: get this year right, but not amend any past CA tax years.
2. Amend unexpired CA tax years
3. Amend unexpired CA tax years only if there were exchange profits
4. Amend further back?
I am leaning towards (1) or (3). Does this seem reasonable?
Also, when does timely filed 2011 CA tax year expire?
Thanks again!
The last time that I made large purchases with US cash in 2011, which is expired (almost expired)? This year I had some USD big purchases too. As a practical matter, does it make most sense to:
1. Going forward: get this year right, but not amend any past CA tax years.
2. Amend unexpired CA tax years
3. Amend unexpired CA tax years only if there were exchange profits
4. Amend further back?
I am leaning towards (1) or (3). Does this seem reasonable?
Also, when does timely filed 2011 CA tax year expire?
Thanks again!
I think the example I gave is sufficient. For Cdn purposes, each time you buy US cash dollars, and each time you use those dollars to buy ANYTHING else, inlcuding US securites, Cdn cash, toothpaste., this is a capital transaction.
For any SINGLE transaction that incurs a gain of Cdn $200 or more, you need to report it.
That is really all I will say on this.
For any SINGLE transaction that incurs a gain of Cdn $200 or more, you need to report it.
That is really all I will say on this.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
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MovedToCanada
- Posts: 3
- Joined: Sat Feb 21, 2015 12:47 pm
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nohairleft
- Posts: 32
- Joined: Tue Mar 04, 2014 12:16 am
Linking to some older forum posts with specific examples and advice related to this topic that may be helpful:
Examples of FX gain/loss calculations:
* http://forums.serbinski.com/viewtopic.php?p=13683#13683
Cost basis for foreign currency (IRS):
* Talking about IRS rules, I think (says can use LIFO, average, etc): http://forums.serbinski.com/viewtopic.php?p=12908#12908
Cost basis for foreign currency (CRA):
* CRA requires average cost basis only: http://forums.serbinski.com/viewtopic.php?p=10117#10117
I do, however, have some confusion about the aspect of the Canadian cost basis of US$ (in, say, a US$ bank account) that were acquired before moving to Canada:
* This post suggests that the dollars are valued at their "original" cost on the date the US$ were themselves acquired (even if prior to the move), not the day residency began (2008): http://forums.serbinski.com/viewtopic.php?p=12949#12949
* This post says that the dollars are valued when you move to Canada (2007): http://forums.serbinski.com/viewtopic.php?p=9879#9879
* But this post also says that foreign currency is subject to deemed disposition upon emigating (2012): http://forums.serbinski.com/viewtopic.php?p=27475#27475
The above advice seems conflicting (and lots of time has admittedly passed since they were written). My gut feeling based on all of the above is that the US$ should probably have a deemed acquisition on the date of arrival in Canada, since they are also subject to a deemed disposition on departure.
Examples of FX gain/loss calculations:
* http://forums.serbinski.com/viewtopic.php?p=13683#13683
Cost basis for foreign currency (IRS):
* Talking about IRS rules, I think (says can use LIFO, average, etc): http://forums.serbinski.com/viewtopic.php?p=12908#12908
Cost basis for foreign currency (CRA):
* CRA requires average cost basis only: http://forums.serbinski.com/viewtopic.php?p=10117#10117
I do, however, have some confusion about the aspect of the Canadian cost basis of US$ (in, say, a US$ bank account) that were acquired before moving to Canada:
* This post suggests that the dollars are valued at their "original" cost on the date the US$ were themselves acquired (even if prior to the move), not the day residency began (2008): http://forums.serbinski.com/viewtopic.php?p=12949#12949
* This post says that the dollars are valued when you move to Canada (2007): http://forums.serbinski.com/viewtopic.php?p=9879#9879
* But this post also says that foreign currency is subject to deemed disposition upon emigating (2012): http://forums.serbinski.com/viewtopic.php?p=27475#27475
The above advice seems conflicting (and lots of time has admittedly passed since they were written). My gut feeling based on all of the above is that the US$ should probably have a deemed acquisition on the date of arrival in Canada, since they are also subject to a deemed disposition on departure.
nelsona: "For Cdn purposes, each time you buy US cash dollars, and each time you use those dollars to buy ANYTHING else, inlcuding US securites, Cdn cash, toothpaste., this is a capital transaction."
I thought I understood this stuff, but maybe not. For example, my US pension is paid into a US checking account. Either I may wire some of it to Canada (where I live), a few days later or a few weeks later, or I may take a trip to the US and spend it on toothpaste and hamburgers. Do I have a trackable capital gain in currency (for Canada) each time I buy the hamburger, or for the few days the money lay in the account before a wire? What I have been doing so far is using an average exchange rate for a given year, which would mean there is no capital gain for the money pension amounts, nor for any other minor expenditures throughout the year.
I do use the day rate for all stock purchases, large IRA withdrawals, any large special purchase or sale. But I have never tracked, say the difference between the ending balance of the US checking account at the end of one year (with its average exchange rate) vs. net expenditures the next year with a possibly different exchange rate. I'm not sure it is possible.
I thought I understood this stuff, but maybe not. For example, my US pension is paid into a US checking account. Either I may wire some of it to Canada (where I live), a few days later or a few weeks later, or I may take a trip to the US and spend it on toothpaste and hamburgers. Do I have a trackable capital gain in currency (for Canada) each time I buy the hamburger, or for the few days the money lay in the account before a wire? What I have been doing so far is using an average exchange rate for a given year, which would mean there is no capital gain for the money pension amounts, nor for any other minor expenditures throughout the year.
I do use the day rate for all stock purchases, large IRA withdrawals, any large special purchase or sale. But I have never tracked, say the difference between the ending balance of the US checking account at the end of one year (with its average exchange rate) vs. net expenditures the next year with a possibly different exchange rate. I'm not sure it is possible.
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nohairleft
- Posts: 32
- Joined: Tue Mar 04, 2014 12:16 am
@rlb, it's possible and I'm trying to do it--with the help of software and already having had an electronic record of all of my financial transactions--it's just a serious pain in the ass.
I believe nelsona previously wrote (correct me if I'm wrong!) that all of your US$ need to be pooled together across all accounts in terms of calculating the ACB, as opposed to calculating a US$ cost basis for each separate account.
Splitting hairs on that topic, how should one treat US$ transactions that are spent on a US$ credit card and eventually paid off in US$?
For example, I could argue that the $ are spent at the time of the transaction, so my realized gain occurs on the transaction date. However, this seems a little problematic in that I could (in theory) have US$0 in assets to my name but still charge US$5,000 to the card, which leaves me scratching my head in terms of the cost basis of those dollars and what gain I'd realize at that point. This method also seems to get funny if you don't pay off the card right away.
On the flip side, I can see how the credit card could be treated as a loan since the dollars aren't really mine yet, so I only realize a gain when I pay off the card. But this too seems rife with loopholes: I could, for example, decide to pay off my $5,000 balance by making multiple $199 payments to avoid taking any capital gain hits. (But hey, is that the IRS Structuring Enforcement Department calling me on the other line?!) Or I could also pre-load the card with a $10,000 credit when the exchange rate is good, and then spend off it in the future without ever having to pay capital gains.
If we want to go "all in", perhaps we have to treat the credit card as a separate entity with its own cost basis and value every single transaction in CAD at the time of purchase (ie. the card builds an effective ACB in CAD of the cost of the goods purchased, which is distinct from the ACB of my US$-in-hand). When it comes time to pay off $1,000 on the card, I realize a gain of $1000*(card ACB - my ACB). This feels like the "more correct" way, but it seems like there would still be the $200 loophole (and it's also a further huge PITA to calculate).
I believe nelsona previously wrote (correct me if I'm wrong!) that all of your US$ need to be pooled together across all accounts in terms of calculating the ACB, as opposed to calculating a US$ cost basis for each separate account.
Splitting hairs on that topic, how should one treat US$ transactions that are spent on a US$ credit card and eventually paid off in US$?
For example, I could argue that the $ are spent at the time of the transaction, so my realized gain occurs on the transaction date. However, this seems a little problematic in that I could (in theory) have US$0 in assets to my name but still charge US$5,000 to the card, which leaves me scratching my head in terms of the cost basis of those dollars and what gain I'd realize at that point. This method also seems to get funny if you don't pay off the card right away.
On the flip side, I can see how the credit card could be treated as a loan since the dollars aren't really mine yet, so I only realize a gain when I pay off the card. But this too seems rife with loopholes: I could, for example, decide to pay off my $5,000 balance by making multiple $199 payments to avoid taking any capital gain hits. (But hey, is that the IRS Structuring Enforcement Department calling me on the other line?!) Or I could also pre-load the card with a $10,000 credit when the exchange rate is good, and then spend off it in the future without ever having to pay capital gains.
If we want to go "all in", perhaps we have to treat the credit card as a separate entity with its own cost basis and value every single transaction in CAD at the time of purchase (ie. the card builds an effective ACB in CAD of the cost of the goods purchased, which is distinct from the ACB of my US$-in-hand). When it comes time to pay off $1,000 on the card, I realize a gain of $1000*(card ACB - my ACB). This feels like the "more correct" way, but it seems like there would still be the $200 loophole (and it's also a further huge PITA to calculate).
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nohairleft
- Posts: 32
- Joined: Tue Mar 04, 2014 12:16 am
After reading the ITA 39(1.1) itself, it looks like the credit card ACB of payment-vs-individual-charge question becomes mostly irrelevant:
My reading of the tax act section above is that the $200 is a per-YEAR exemption and not a per-transaction exemption, so if you have over $200 of gains or losses in a given year, then the theoretically-correct procedure appears to be to report the net gain/loss on every single other transaction in the currency (even if it's that proverbial stick of gum) and add them all up at the end.
If there is any good news, I think the tax act above is also saying that you get a "free" $200 worth of capital gains on currencies every year. So, if you have a $500 FX capital gain in 2014, it looks like you only report $500-200 = 300 of it.
On the flip side, it looks like the IRS specifically recognizes that gains of under $200 on a per-transaction basis are exempt (26 USC 988), so their treatment appears more generous.
(Note: I'm not an accountant or a tax attorney!)
My reading of the tax act section above is that the $200 is a per-YEAR exemption and not a per-transaction exemption, so if you have over $200 of gains or losses in a given year, then the theoretically-correct procedure appears to be to report the net gain/loss on every single other transaction in the currency (even if it's that proverbial stick of gum) and add them all up at the end.
If there is any good news, I think the tax act above is also saying that you get a "free" $200 worth of capital gains on currencies every year. So, if you have a $500 FX capital gain in 2014, it looks like you only report $500-200 = 300 of it.
On the flip side, it looks like the IRS specifically recognizes that gains of under $200 on a per-transaction basis are exempt (26 USC 988), so their treatment appears more generous.
(Note: I'm not an accountant or a tax attorney!)