# Capital Gain/Loss for US Currency Account used to trade US shares...



## kreyszig (Jan 16, 2013)

Hi,

I have a non-registered account in US currency with my broker that I use to trade US shares and I normally use Norbert's Gambit to convert currency. I am having difficulty to figure out how I should declare the capital gain/loss associated to the account itself (not the ACB for the shares) due to the exchange rate variation. According to the CRA website, it seems that only realized gains/losses should be declared for the account, but paper gains/losses have to be declared for shares. By paper gains/losses here I mean that I must compute the gain/losses using the effective exchange rates when the shares are bought and sold although the transactions are performed in US currency and are not actually converted in Canadian dollar. Also I am not sure of what a realized gain/loss consists for the US account since I would use Norbert's Gambit to convert the US currency back to CAD. Could someone please tell me how I should calculate this based on the following simplified example? Thanks!

Let say that the following transactions are performed:
1- Buy 1000 DLR shares @ 10.99 CAD when 1 CAD = 0.91 USD.
2- Convert the 1000 shares from DLR to DLR.U
3- Sell the 1000 DLR.U shares @ 10.00 USD with a fee of 5 USD when 1 CAD = 0.92 USD.
4- Buy 100 VTI shares @ 80 USD when 1 CAD = 0.93 USD.
5- Sell 50 of the VTI shares @ 100 USD with a transaction fee of 5 USD when 1 CAD = 0.94 USD.
6- Buy 200 DLR.U shares @ 10 USD when 1 CAD = 0.95 USD.
7- Convert the 200 DLR.U shares to DLR.
8- Sell the 20-0 DLR shares at 10.42 CAD with a transaction fee of 5 CAD when 1 CAD = 0.96 USD.

The result from these transactions is the following for each step:
1- ACB for DLR is 10 990 CAD
3- Selling of DLR.U generated 9 995 USD in the USD account. Generates a paper amount of 9 995/0.92 = 10 864.13 CAD for taxation, which corresponds to a capital loss of 10 990 - 10 864.13 = 125.87 CAD.
4- Purchase cost is 8 000 USD, so 8 000 / 0.93 = 8 602.15 CAD for the ACB of VTI. Account balance is 9 995 - 8 000 = 1 995 USD.
5- Selling of the 50 VTI shares generates 4 995 USD. The paper amount for taxation is thus 4 995 / 0.94 = 5 313.83 CAD. The capital gain for VTI is thus 5 313.83 - (8 602.15 * 50 / 100) = 1012.75 CAD. The ACB for VTI becomes 8 602.15 * 50/100 = 4301.07 CAD. The account balance is 1 995 USD + 4 995 USD = 6 990 USD.
6- The purchase cost of the 200 DLR.U shares is 2 000 USD, which corresponds to an ACB of 2 000 / 0.95 = 2 105.26 CAD for DLR.U. The account balance is 4 990 USD.
8- The selling of the 200 DLR shares generates 2 079.00 CAD. There is thus a capital loss of 2 105.26 - 2 079.00 = 26.26 CAD for DLR.U

Unless I am mistaken, I believe that the above capital gain and loss calculations for DLR and VTI are correct (supposing that the transactions are sufficiently spaced out in time). Now, here is what I would do for the calculation of the ACB for my USD account (the part that I am not sure):
3- ACB for the account is 10 864.13 CAD.
4- Correction of the ACB to consider the purchase of VTI: 0 864.13 - 8 602.15 = 2 261.98 CAD.
5- Correction of the ACB to consider the selling of VTI: 2 261.98 + 5 313.83 = 7 575.81 CAD.
6- Reduction of the ACB to consider the purchase of DLR.U: 7 575.81 - 2 105.26 = 5 470.55 CAD
8- There has been an "effective" conversion of 2 000 / 6 990 = 28.6123% of the USD cash into CAD. The ACB used for the capital gain/loss calculation is thus 575.81 * 0.286123 = 2 167.61 CAD and the capital loss is de 2 167.61 - 2 105.26 = 62.35 CAD. The account ACB thus becomes 5 470.55 - 62.35 = 5 408.20 CAD.

Performing the account ACB calculations using the above technique allows to correctly balance everything (that is the net capital gain for taxation purpose is the same as the real gain when the remaining VTI shares are sold and the remaining USD cash is converted into CAD). I have inferred the capital loss of 62.35 CAD in 8- as well as the resulting ACB correction. It seems logical to add this loss since it is effectively the technique I use to convert cash from USD to CAD. If I do not include this loss, I am effectively postponing indefinitely the realisation of the capital loss. The capital loss would not be realised otherwise, even if I converted all the USD cash into CAD through Norbert's Gambit.


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## Jesse (Jan 21, 2012)

Just working on my taxes as well and ran into the same problem. Also, how do you know figure out what the exchange rate was the day that a trade was made?


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## Woz (Sep 5, 2013)

Here’s my stab at it (disclaimer, not a tax expert):

I agree with your first part, but I’m not sure about the second part. When selling, the ACB adjustments should be based on ACB/share, not the sale price. The sale price is used to determine capital gains. 

Your account balance is $9,995USD making your ACB $10,864.13CAD. Your ACB/share is $10,864.13CAD/$9,995USD=1.087.

When you buy VTI you’re selling shares of USD. Your new ACB becomes $10,864.13 - $8,000USD*1.087 = $2,168.48CAD and your ACB/share remains the same. Your capital gain becomes $8,000USD*(1/0.93-1.087)= -$93.50.

When you sell VTI you’re buying shares of USD. Your new ACB becomes $2,168.48CAD+$4,995USD/0.94=$7,482.31CAD. Your new ACB/share becomes $7,482.31CAD/$6,990USD=1.070.

When you buy DLR.U you’re selling shares of USD. Your new ACB becomes $7,482.31CAD - $2,000USD*1.070 = $5,341.45CAD and your ACB/share remains the same. Your capital gain becomes $2,000USD*(1/0.95-1.070)= -$35.60.

Your total capital loss due to currency is $129.10. There would’ve also been a capital loss due to currency built into your VTI capital gains calculation.

In section 39(1.1) of the income tax act it says for foreign currency dispositions you only claim the net gain/loss above $200, so for this example I don’t think you’d be able to claim a capital loss.

This seems like way more work than it needs to be. I'm sure someone has an easier way of handling it.


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## Woz (Sep 5, 2013)

@Jesse
You use the exchange rate on the bank of Canada website.

http://www.bankofcanada.ca/rates/exchange/10-year-lookup/


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## kreyszig (Jan 16, 2013)

Woz said:


> Here’s my stab at it (disclaimer, not a tax expert):
> 
> I agree with your first part, but I’m not sure about the second part. When selling, the ACB adjustments should be based on ACB/share, not the sale price. The sale price is used to determine capital gains.
> 
> ...


Thanks Woz,

yes, I think you are right with your calculations regarding the US currency. There is something else that I have found though. It seems that the total capital gain for VTI can be divided into gain due to fluctuation of the USD and the gain due to share transaction: http://www.cga-canada.org/en-ca/Abo...r-Apr/Pages/ca_2003_03-04_dp_taxstrategy.aspx . These calculations make perfect sense to me with such a fund, with the caveat that it seems arbitrary to use the purchase or selling price of the shares to get the gain due to foreign exchange calculation. Things become much less obvious to me when dealing with a fund that holds equity from compagnies that do business outside the US, or with interlisted stocks. For example, if one buys and sell VEA, how could it make sense to calculate a capital gain due to the fluctuation of the USD? Also, when dealing with DLR and DLR.U, the fluctuation of DLR is due to the flucutation of the exchange rate, even if it is traded in CAD. And there are so many correlations between all markets that it would easy to claim that some of the price fluctuations of US stocks are due to foreign currencies. So I am not sure how it is possible to effectively perform these calculations?


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## Spudd (Oct 11, 2011)

I don't think it matters at all the reason for your capital gain. The government is just interested in whether, when you sold the thing, was it worth more in CAD than when you bought it. For example, if you bought VTI and it went down by 5%, but the CAD went down by 10% during the same time, then your total capital gain would be 5% on the transaction. Just use the conversion rate for the day of the purchase/sale.


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## kreyszig (Jan 16, 2013)

Spudd said:


> I don't think it matters at all the reason for your capital gain. The government is just interested in whether, when you sold the thing, was it worth more in CAD than when you bought it. For example, if you bought VTI and it went down by 5%, but the CAD went down by 10% during the same time, then your total capital gain would be 5% on the transaction. Just use the conversion rate for the day of the purchase/sale.


Well, the difference is that if I claim that the capital gain is due to exchange rate fluctuation, then I can benefit from the $200 exemption. The difficulty is to determine the part that is due to exchange rate fluctuation for anything but funds that contain stocks for companies that purely depend on the trading currency...


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## humble_pie (Jun 7, 2009)

krey i don't think taxpayer can claim the $200 ceiling desiged for small casual FX gains when one is reporting capital gais & losses from securities transactions.

i read the CRA bulletin on foreign exchange profits a few years ago & it was transparently clear that the $200 exemption is for small casual tourist-type transactions. Travel, purchases, personal expenses.

the bulletin was clear & lucid about how to report securities gains/losses. Like Spudd said. Every dollar gets included, alas each:


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## kreyszig (Jan 16, 2013)

humble_pie said:


> krey i don't think taxpayer can claim the $200 ceiling desiged for small casual FX gains when one is reporting capital gais & losses from securities transactions.
> 
> i read the CRA bulletin on foreign exchange profits a few years ago & it was transparently clear that the $200 exemption is for small casual tourist-type transactions. Travel, purchases, personal expenses.
> 
> the bulletin was clear & lucid about how to report securities gains/losses. Like Spudd said. Every dollar gets included, alas each:


Hi humble_pie,

according to the canadian certified general accountants, the $200 exemption can be used for this purpose (c.f. the link I gave). Also a CRA agent told me the $200 applied for my USD cash in my brokerage account...


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## humble_pie (Jun 7, 2009)

krey i read your cga link & you are right, CGA macAllum is crystal clear about being allowed to apply the $200 exclusion in forex trades to a USD capital gains transaction.

in fact, he goes further than you do & he applies the $200 deduction straight off to an ordinary stock buy/sell report. You, on the other hand, seem to be restricting yourself to forex gains in the actual account itself, which are difficult to calculate because the broker provides no clue upon statements.

what i find baffling is that no other authority - certainly no one in the loftier orders of chartered accountants - is advocating this. One would think that something so helpful to so many taxpayers would be loudly bruited about. One would think that everybody is being advised, by CAs & CGAs alike, to do this. Just remove $200 in capital gains from your gains total for US trades, every single year, the tax professionals should be advising.

but taxpayers are not being so advised. This is mysterious.


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## kreyszig (Jan 16, 2013)

humble_pie said:


> krey i read your cga link & you are right, CGA macAllum is crystal clear about being allowed to apply the $200 exclusion in forex trades to a USD capital gains transaction.
> 
> in fact, he goes further than you do & he applies the $200 deduction straight off to an ordinary stock buy/sell report. You, on the other hand, seem to be restricting yourself to forex gains in the actual account itself, which are difficult to calculate because the broker provides no clue upon statements.
> 
> ...


I think in the article they add the $200 to the ACB because in that particular example they determine that there is a gain larger than $200 due to foreign exchange fluctuations. The same $200 exclusion applies for losses, so I don't think that one could blindly add $200 to the ACB every year. The difficulty of analyzing funds for foreign exchange gains remain: if I sell VTI shares it is easy to calculate, but it is difficult when dealing with DLR/DLR.U and practically impossible with international funds like VEA....


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## Woz (Sep 5, 2013)

I'd expect you'd need to be consistent year to year in applying the $200 exemption. You'd pay less taxes in years the currency appreciates, but you'd pay more in taxes in years the currency depreciates. I doubt they'd let you apply the $200 exemption in years when it benefits you but ignore it when it doesn't.


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## kreyszig (Jan 16, 2013)

kreyszig said:


> I think in the article they add the $200 to the ACB because in that particular example they determine that there is a gain larger than $200 due to foreign exchange fluctuations. The same $200 exclusion applies for losses, so I don't think that one could blindly add $200 to the ACB every year. The difficulty of analyzing funds for foreign exchange gains remain: if I sell VTI shares it is easy to calculate, but it is difficult when dealing with DLR/DLR.U and practically impossible with international funds like VEA....


Yes of course (http://www.cra-arc.gc.ca/E/pub/tp/it95r/it95r-e.html):
"7. The Department will accept any method used to determine foreign exchange gains or losses on income transactions provided that method is, under the circumstances, in accordance with generally accepted accounting principles. Further the method used should be the same for both financial statement and income tax purposes. In the Department's view a determination of foreign exchange gains and losses cannot be properly made under section 9 if the taxpayer is inconsistent in his approach from year to year and, once he has chosen one method, the taxpayer should, in subsequent years, use the same method. However, the Department will accept a change in method, provided it is shown in the circumstances to be a more appropriate method to compute the taxpayer's income in the taxation year in which the change occurs, but it is expected that the new method will be used for financial reporting purposes by the taxpayer and thereafter will be consistently used."


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## kreyszig (Jan 16, 2013)

So I just spoke with another CRA agent and she told me that I have the choice to use or not the $200 capital gain and loss exemption for foreign exchange fluctuations, but I have to be consistent from one year to the other. Since this exemption applies for either a gain or a loss and that it really complicates tax calculations, I think I might calculate the total capital gains for everything (cash and equity)...


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