# USD/CAD Conversion: Tax Implications For Income and Capital Gains



## hyeloaqfmz (Aug 21, 2013)

I'm self-employed and earn income in USD. Right now, when I deposit USD cheques I keep the funds in a USD account instead of taking the bank's currency conversion rate to deposit in CAD. I then transfer the USD to my USD investment account at Questrade. Once there, I convert the funds at Questrade's rate and I am looking at gambitting instead to save more money. Before that, I would deposit the funds into my CAD account at the bank, the bank would take a cut on the currency conversion and the funds would be deposited as CAD.

When it comes to tax time:

In the case where I deposit the USD cheque into my CAD account, I believe the correct way to do it is to report as income the final amount in CAD that was deposited to my bank account (which takes into account the approx. 3% currency spread).

Q: If I deposit the USD and keep it in USD, then later convert it at Questrade at 2% spread can I deduct that 2% that I paid on the currency conversion as an expense? Or can I report the final amount in CAD after the currency conversion as income? (Presumably not.) Because when I report the USD income without taking into account the conversion, I can choose to use the exchange rate at the date of the transaction or averaged over the whole year, but that exchange rate is the spot rate which doesn't take into account the extra amount that I pay to get that money into CAD.

Q: Also, what are the capital gains implications on either converting the money via Questrade or gambitting? There's the $200 annual exemption on currency conversion but do I end up paying capital gains on any amount over that in addition to the income tax that I will end up paying? If I gambit, then that's a straight stock sale and there's no exemption and I end up paying capital gains on the full amount, correct?

Basically the way I see it, I earn the money in USD, keep it in USD and then convert it, paying the 2% to convert and potentially capital gains on top of that but I'm paying tax on the initial USD amount plus or minus whatever spot rate I use (either that day's or the yearly average) and I'm paying the extra income tax on money that I never had (unless I hold on to the money and hope to convert it when the rate is more favorable, but that's starting to turn into timing the market and currency trading). Maybe I'm confused or asking too much.

So in effect, if I'm going to end up paying 2% to convert and then let's say about 15% capital gains on the total gain (30% divided by half) which is approx. 3.5% worth of costs to start with and I'm paying tax on the higher pre-cost amount then maybe I should just take the money in CAD if I can find a decent spread and then pay tax only on what I actually have in my pocket. If I gambit and the spread is say, 0.4% then that makes it about 2% or so worth of costs which changes the cost-benefit calculation a bit.

I asked my accountant about how capital gains would work in this situation and he said that I wouldn't pay any because I've already been taxed on the amount as income but somehow the logistics don't seem to make sense to me - presumably Questrade would generate a tax slip saying I earned X on currency conversion and I don't know where on your return you would specify that you should be exempt from that.

Is there somewhere that my assumptions are not correct or I'm missing something?


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## liquidfinance (Jan 28, 2011)

I posted a similar thread as it related in terms of holding and receiving money in a foreign account. 

http://canadianmoneyforum.com/showt...n-Interest-Income-Dividends-and-Capital-Gains

It can actually get quite complex. 

In theory if you get paid and move it in the same year and use the annual average rate then it should all be quite simple. 

The CRA deem that you have converted the money when you get paid. So if you were reporting the income based on the rate at the time then you would use the noon rate the day you get paid. 

I guess being as the CRA see it as a deemed conversion when you receive the money the price you get when you physically convert should be irrelevant you are converting money which is supposedly already in CAD.

If the above is true then you should only have the gain/loss when you do a round trip conversion CAD-USD-CAD


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