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Discussion Starter #1
- Struggling with this issue for last few weeks, without finding many references online;
- Trying to calculate capital losses for CRA purposes;
- Bought and sold shares and ETFS in USD account;
- Money and funds stayed in USD account;
- Realize that I have to convert to CAD for CRA purposes;
- However, interpretation bulletins seems vague as to which exchange rate to use (Daily, Monthly, or Average for the Year);
- Depending on the rate used, capital losses vary by up to 23%, as currency fluctuated greatly between 2006 and 2009.
- Would greatly appreciate advice as to which rate I'm expected to use - with reference to appropriate tax code, CRA interpretation, or published guidance.
 

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zoo, i'm sorry no expert has replied to you. I'm certainly no expert, but i'll have a go at it.

for myself, i run the numbers twice. This means that each 2009 sell transaction has 6 figures, 3 for its sell and another 3 for its buy.

it sounds gruesome but once you get the hang it's quite easy to do.

taxpayer can choose whether to use the bank of canada noon rate for each transaction on the day, or the week's average, of the transaction. Let's call this Method A. Or taxpayer can use official bank of canada exchange rate for the entire year of the transaction. Let's call this Method B. The catch is that taxpayer must be strictly consistent in all calculations for the 2009 capital gains report. Can use method A or method B, but cannot mix them up.

what i do is run both sets of numbers. Then i choose the one that is the more favourable. Since you mention you have losses, I would imagine that your goal would be to establish maximum losses. These can be carried forward indefinitely and applied to future capital gains.

the preliminary calculations for each 2009 sell transaction would include:

1) proceeds of disposition in 2009 in USD;

2) (a) proceeds of disposition in 2009 in CAD, exchanged at the rate on date of sale as in Method A; and also (b) exchanged at the annual rate for 2009 as in Method B. The CRA accepted annual exchange rate for 2009 is 1 USD = 1.142 CAD.

3) cost of security purchased in USD;

4) (a) cost of security purchased in CAD, exchanged at the rate on date of purchase as in Method A; and also (b) exchanged at the annual rate in force & effect for the year of the acquisition as in Method B.

add up all proceeds less costs for both Method A and Method B. The numbers will be different. If you have a total net loss, choose the method with the bigger loss. Edit the report to show only that method's numbers. This is the report for the tax authorities.

of course, when a taxpayer has gains, the choice would be the inverse. One could choose the method that produced the smaller gains.
 

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Discussion Starter #3
Many thanks

That's great news indeed, and it sounds logical to me, but I can't find a reference. Do you know where I might look? Digging through interpretation bulletins didn't yield any definitive answers but I might have missed something.

While the losses aren't much fun, at least maximizing them might lead to some benefit later on, always depending on the markets of course, if the last few days are any indication...

Thanks again.
 

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zoo i don't have any references for you, it's just how i do em.

you can easily find the reference that taxpayer may choose to report his dispositions EITHER on an exchange-rate-of-the-day basis (with acquisition of said security also being calculated on exch-rate-of-date-of-acquisition); OR taxpayer may choose to report his dispositions on the annual-cra-approved-exchange-rate basis (with acquisition of said security also being calculated on annual-approved-rate-of-year-of-acquisition.)

like, everybody knows this, right.

as for the fact that i do the calc both ways, ie method A and method B, in order to see which is more advantageous, that's what i figured out. So that's how i do em.
 

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http://www.cra-arc.gc.ca/E/pub/gl/p-222/p-222-e.html

To convert from foreign currency into Canadian currency for purposes of Part IX of the Excise Tax Act, a person may only use the rate of exchange from:

•the source used for an actual conversion (i.e. foreign currency is exchanged for Canadian dollars);
•the source the person typically uses for actual conversions;
•a Canadian chartered bank;
•the Bank of Canada; or
•the rate provided by the Customs Branch of the Department for purposes of converting the value for duty of imported goods.
When a source other than the source used for an actual transaction is selected, that source must be used consistently and for a reasonable period of time (such as one year).

If a person must pay a premium to obtain foreign currency from a particular source for a particular foreign currency denominated transaction, any additional costs incurred associated with obtaining that rate must be included when translating the foreign currency into Canadian currency.

The use of a particular exchange rate source must be supported with appropriate documentation.




http://csc.lexum.umontreal.ca/en/2006/2006scc46/2006scc46.html

39. . . .

(2) Notwithstanding subsection (1), where, by virtue of any fluctuation after 1971 in the value of the currency or currencies of one or more countries other than Canada relative to Canadian currency, a taxpayer has made a gain or sustained a loss in a taxation year, the following rules apply:

(a) the amount, if any, by which

(i) the total of all such gains made by the taxpayer in the year (to the extent of the amounts thereof that would not, if section 3 were read in the manner described in paragraph (1)(a) of this section, be included in computing the taxpayer’s income for the year or any other taxation year)

exceeds

(ii) the total of all such losses sustained by the taxpayer in the year (to the extent of the amounts thereof that would not, if section 3 were read in the manner described in paragraph (1)(a) of this section, be deductible in computing the taxpayer’s income for the year or any other taxation year), and

(iii) if the taxpayer is an individual, $200,

shall be deemed to be a capital gain of the taxpayer for the year from the disposition of currency of a country other than Canada, the amount of which capital gain is the amount determined under this paragraph; and

(b) the amount, if any, by which

(i) the total determined under subparagraph (a)(ii),

exceeds

(ii) the total determined under subparagraph (a)(i), and

(iii) if the taxpayer is an individual, $200,

shall be deemed to be a capital loss of the taxpayer for the year from the disposition of currency of a country other than Canada, the amount of which capital loss is the amount determined under this paragraph.


IT Bulletin IT-95R can take it from there.

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

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I posted an issue in the wrong forum looking into this myself, but decided to do my own research.

As you can see, there is an annual $200 exemption on exchange gains and losses, which most people seem to generally ignore.

Also, there is a monetary exchange gain/loss on USD funds left in your trading account being used during the year to purchase and sell stocks. Each time you buy a stock using USD, you have a taxable disposition of USD cash, and each time you purchase USD (including from the sale of stock), you have a cost base that must be added to your average cost base for USD.

The calculation of the capital gain/loss (assuming you have the time) should include separation of exchange gain/loss:

Where:
a = Cost converted to CAD at rate on date of purchase
b = Proceeds of disposition converted to CAD at rate on date of purchase
c = Proceeds of disposition converted to CAD at rate on date of sale

Capital Gain = b - a
Exchange Gain = c - b (less $200 annual exemption for both gains and losses)

In the case of monetary exchange gain/loss, the USD value would not change, so it would only leave the exchange gain.

Because of this, there is a good argument for using the average exchange rate for the year to greatly simplify these calculations. Also, using a TFSA would help to avoid these issues.

As long as the exchange gain is in respect of funds used to earn capital gains, it can be considered a capital gain itself. However, if the funds are used to earn income, there is the risk the exchange gain will also be considered income for tax purposes!
 

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I posted an issue in the wrong forum looking into this myself, but decided to do my own research.

As you can see, there is an annual $200 exemption on exchange gains and losses, which most people seem to generally ignore.

Also, there is a monetary exchange gain/loss on USD funds left in your trading account being used during the year to purchase and sell stocks. Each time you buy a stock using USD, you have a taxable disposition of USD cash, and each time you purchase USD (including from the sale of stock), you have a cost base that must be added to your average cost base for USD.

The calculation of the capital gain/loss (assuming you have the time) should include separation of exchange gain/loss:

Where:
a = Cost converted to CAD at rate on date of purchase
b = Proceeds of disposition converted to CAD at rate on date of purchase
c = Proceeds of disposition converted to CAD at rate on date of sale

Capital Gain = b - a
Exchange Gain = c - b (less $200 annual exemption for both gains and losses)

In the case of monetary exchange gain/loss, the USD value would not change, so it would only leave the exchange gain.

Because of this, there is a good argument for using the average exchange rate for the year to greatly simplify these calculations. Also, using a TFSA would help to avoid these issues.

As long as the exchange gain is in respect of funds used to earn capital gains, it can be considered a capital gain itself. However, if the funds are used to earn income, there is the risk the exchange gain will also be considered income for tax purposes!
Hi Max,

Thanks for this detailed explanation as I was looking for the same answer. However I'm a bit confused about the separation of Capital Gain and Exch Gain.

Please look at this example:

Jan 1 (rate = 1US:1.2CAD): 120CAD -> 100US

Feb 1 (rate = 1US:1.3CAD): 100US -> 100 Shares of ABC (a US Company), so now we should realize $10CAD gain because we "disposed" the US by buying the stock

Mar 1 (rate = 1US:1.5CAD): 100shares -> 200US (Share price doubled),
now, because the stock value went up, we have a gain. But why would we seperate a portion as Exchange gain? We didn't really have US currency at hand, instead we had Asset that is located in US. Should we really separate this? Please advise...

Thanks!
York
 
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