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Discussion Starter #1
The following question applies to personal taxation on a non-registered portfolio.

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

According to the enclosed CRA IT Bulletin, I understand that exchange gain/loss on cash converted from a CAD discount brokerage account to a USD discount brokerage account can be taxed/deducted if it is in respect of an amount used for trading. It seems such a common situation that I have to expect someone out there has an answer.

Scenario:
-CAD$ 1,000 converted into USD$ 909 (bank of Canada rate is 1.09 CAD/USD, discount brokerage rate is 1.10 CAD/USD).
-Stock is purchased for USD$ 909, and sold for USD$ 1,000.
-USD$ 1,000 is converted back to CAD$ 1,000 (bank of Canada rate is 1.00), discount brokerage rate is 1.00).

Questions:
1) Can I deduct the spread of 0.01 CAD/USD charged by the bank during the first exchange transaction from CAD to USD as an exchange loss? If so, is this deductible immediately, upon purchase of the stock, or upon conversion back to CAD.

2) What are my options for recording the USD capital gain in CAD? I believe I am allowed to use the average rate for the year? I can also use the rate on the date of each transaction. Are there any other alternatives?

3) How is the exchange loss recorded? Is it part of my cost in determining the capital gain, or is it considered a stand alone transaction?

Thanks,

Max
 

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hello Max,

capital gains/loss transactions are reported in CAD only.

they are to be shown as:

(net proceeds in CAD) - (net cost in CAD) = taxable gain (loss)

for US transactions, there are 4 figures to consider:

1. (cost in USD + commission in USD) = net cost in USD.
2. multiply by exchange rate for that day, week or month's average = net cost in CAD.
3. (proceeds in USD - commission in USD) = net proceeds in USD.
4. multiply by exchange rate for that day, week or month's average = net proceeds in CAD.

using the above approach, i believe you will have a slight capital loss in CAD once the commissions are factored in.

alternatively, you can report using the bank of canada average for the year 2009, which is 1.142.
you would apply this rate to numbers on both sides of the equation.

using the BOC average approach, i believe you would have a larger capital loss in CAD.

notice that if you have more than 1 transaction, you will have to choose either the date-related exchange rate, or the annual BOC rate, but you cannot mix them up in the same year.

notice also that, if this is your sole gain/'loss transaction, you can carry the loss forward indefinitely, because it can only be applied to capital gains and not to ordinary income. Hint: if this is your sole transaction, use the BOC rate so as to capture a bigger loss to be carried forward.

lastly, next time please remember to post tax questions to this forum under "taxation" ...
 

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Discussion Starter #3
Thanks for the response and sorry for crossing forums (is there any way to change the forum?). I have been doing some serious googling on the subject and as I am beginning to piece together, the foreign currency capital gain should be broken into the components of capital gain and exchange gain. Have you heard anything about this?

Capital Gain
Proceeds in USD converted to CAD using rate from date of purchase - Cost in USD converted to CAD using rate from date of purchase.

Exchange Gain
Proceeds in USD converted to CAD using rate from date of sale - Proceeds in USD converted to CAD using rate from date of purchase.

The reason for this is to take advantage of the $200 exemption specified in the original link I provided below from the CRA IT Bulletin.

However, what is not clear from my search is:

1) whether this $200 exemption applies to each transaction or is in respect of all transactions during the taxation year.
2) Whether I can deduct the spread charged when converting cash from CAD to USD (or do I just use the rate including the spread when I calculate my cost basis).

It gets trickier still when there is a residual cash balance that I have to track the exchange gain on. I think the best method would be to treat any US cash in the a non-registered portfolio like its own stock with an average cost, proceeds of disposition and everything.

Advice in the $200 exchange gain/loss exemption would be particularly useful and appreciated.

Thanks!

Max
 
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