# Foreign Exchange Tax Implications



## bnsmith (Jul 21, 2018)

I am wondering how to account for foreign exchange fluctuations when converting USD to CAD. I have money in a USD from when I worked in the US several years ago. At the time, the USD was not as strong and I paid Canadian and US income taxes on the income. Since then, the money has sat in a savings account and earned a bit of interest. I've claimed that interest as income each year on my taxes. Now I am looking to close out the USD account and convert it to CAD. Will I have a capital gain? How do I figure out my adjusted cost base?


----------



## AltaRed (Jun 8, 2009)

Unless you kept track of the exchange rate on the date of re-entry to Canada, you won't know what your ACB in CAD equivalent is. But you have it easier than others who stayed in Canada all their lives and didn't keep track. You at least have a re-entry date (even if approximate) to then look up historical data from any one of a few websites such as Bank of Canada, to find an exchange rate applicable for your cost base. I doubt CRA is going to get torqued with decimal accuracy. Reasonable effort would be good enough.

While you are supposed to report cap gains on more than $200 of forex gains, unless it is a fairly large sum of money with a huge difference in forex rate, I don't think converting a few $10k here or there is worth worrying about (reporting). Consider 'forgetting' about it and plead ignorance in the remote chance CRA comes calling [Not a recommendation, only a suggestion].


----------



## kcowan (Jul 1, 2010)

Just remember that the FX was 1.065 to the USD in December 2007 (when we purchased our condo). So you have to come up with one number which is your ACB and then use the official exchange as AR has suggested. I am willing to bet you will hear nothing, although they may call but it will just be to hear your rationale. They will not question it because they do not have the resources to chase such items. Many people forget about the rate in 2007.


----------



## humble_pie (Jun 7, 2009)

bnsmith said:


> I am wondering how to account for foreign exchange fluctuations when converting USD to CAD. I have money in a USD from when I worked in the US several years ago. At the time, the USD was not as strong and _*I paid Canadian and US income taxes on the income*_ ...
> 
> Will I have a capital gain (on the USD currency holding)? How do I figure out my adjusted cost base?




from the fact that you continuously paid canadian income tax while working in the US & also paying US income taxes, it appears that you never severed your taxation or financial ties to canada. IE you never became a totally foreign-based ex-pat.

this means that finding out & keeping track of the USD/CAD FX spot rate on the day you re-entered canada as a resident probably does not apply to you. Instead what matters is the FX rate in effect on the day or days on which you acquired the greenbacks in the first place.

(note that a canadian taxpayer resident at all times in canada but speculating in USD currency, would be calculating his capital gain in exactly the same manner)

i second those who say Don't Sweat the exact day or days too much. If you have records, that would be awesome. But if you don't have any records, me i would look at the years i was building up that USD bank account (hopefully not too many years.)

i'd look up the official Bank of Canada FX rate for each of those years & i'd work out a mean average - trying to take account of a year when i might have doubled or tripled the contribution as well as a year when i might have contributed nothing - & thus i'd arrive at some reasonable kind of cost base figure in CAD.

best of luck, hoping you don't have too many years of USD accumulation to account for


----------



## AltaRed (Jun 8, 2009)

humble_pie said:


> from the fact that you continuously paid canadian income tax while working in the US & also paying US income taxes, it appears that you never severed your taxation or financial ties to canada. IE you never became a totally foreign-based ex-pat.


Good catch, but we would need to know more about that the OP meant in paying US and Cdn income taxes. I did the same EXCEPT it was Part XIII (non-resident) withholding taxes that I paid in Canada (as a tax resident of the USA) with my primary income taxes paid to Uncle Sam. IF the OP never switched tax residency to the USA, I agree with your approach.


----------



## luckyone (Apr 23, 2016)

Is is ok to use a mean average number? I'd done some research on this subject and it seemed apparent that the correct way is to calculate a weighted average exchange rate. It may well make a difference to the final number that any capital taxes may be payable?


----------



## AltaRed (Jun 8, 2009)

luckyone said:


> Is is ok to use a mean average number? I'd done some research on this subject and it seemed apparent that the correct way is to calculate a weighted average exchange rate. It may well make a difference to the final number that any capital taxes may be payable?


If you mean periodic payments during any given year, CRA is not going to argue if you use the average annual rate published by Bank of Canada. Now if you are talking about weighted average over several years vs an arithmetic average of all the exposed years, that is different.... but I suspect CRA will still accept an arithmetic average if the data simply isn't available.


----------



## luckyone (Apr 23, 2016)

AltaRed said:


> If you mean periodic payments during any given year, CRA is not going to argue if you use the average annual rate published by Bank of Canada. Now if you are talking about weighted average over several years vs an arithmetic average of all the exposed years, that is different.... but I suspect CRA will still accept an arithmetic average if the data simply isn't available.


I expect you're correct re periodic payments, but the OP was asking about US funds held over a number of years, the same issue I'd looked at myself. I've had a GBP pension paid into a UK bank for several years and in order to bring the funds into Canada it's best if one understands how to calculate the weighted average rate.....I've found it difficult to find an idiots guide of how to do this.


----------



## AltaRed (Jun 8, 2009)

My suggestion was to use arithmetic average of the annual rates over the years in question, if account value is overly complex to calculate. OR the way I might do it is to simply apply the Bank of Canada annual forex rate to the changes in account balance at the end of each year.

Example: At the end of 2003, balance was $10,000USD. Apply the annual 2003 forex rate to that. At the end of 2004, balance was $12,000USD. Apply the 2004 annual forex rate to the incremental $2000. Rinse and repeat for every year after that. CRA should be doing 'Snoopy dances' with that approximation.


----------



## kcowan (Jul 1, 2010)

AltaRed said:


> CRA should be doing 'Snoopy dances' with that approximation.


:smiley_simmons:


----------



## humble_pie (Jun 7, 2009)

AltaRed said:


> My suggestion was to use arithmetic average of the annual rates over the years in question, if account value is overly complex to calculate. *OR the way I might do it is to simply apply the Bank of Canada annual forex rate to the changes in account balance at the end of each year.
> *
> Example: At the end of 2003, balance was $10,000USD. Apply the annual 2003 forex rate to that. At the end of 2004, balance was $12,000USD. Apply the 2004 annual forex rate to the incremental $2000. Rinse and repeat for every year after that. CRA should be doing 'Snoopy dances' with that approximation.



snoopy variation: do we really like this approach? it will include any interest paid in each end-of-year balance. Except he said he declared the interest each year & paid tax on it. This dance manoeuvre means that the interest payments will be taxed twice, once as straight interest & the 2nd time as capital gains.

ottomh it didn't sound to me like he had a whole lot of years living stateside. It shouldn't be too daunting to Snoopy up a capital gains/loss wiggle through those years.


----------



## AltaRed (Jun 8, 2009)

Any interest accrued is simply part of the ACB calculation. All we are doing is calculating CAD equivalent. How is that taxed twice?


----------



## luckyone (Apr 23, 2016)

Is there a reason why one would use a mean average instead of a weighted average rate of exchange? I assume one is considered correct by CRA and one 'near enough'?


----------



## kcowan (Jul 1, 2010)

luckyone said:


> Is there a reason why one would use a mean average instead of a weighted average rate of exchange? I assume one is considered correct by CRA and one 'near enough'?


The CRA is more concerned about consistency. I use the June 30th FX for past years. Sometimes it wins and sometimes it doesn't. They don't want you switching back and forth.


----------



## humble_pie (Jun 7, 2009)

AltaRed said:


> Any interest accrued is simply part of the ACB calculation. All we are doing is calculating CAD equivalent. How is that taxed twice?



u are so right, my bad


----------



## luckyone (Apr 23, 2016)

kcowan said:


> The CRA is more concerned about consistency. I use the June 30th FX for past years. Sometimes it wins and sometimes it doesn't. They don't want you switching back and forth.


I'm sure you're right about the CRA wanting consistency, I just thought it best to use a weighted average as this is the considered correct way used by accountants, who do these calculations for a living. In my current situation, where I've had a bunch of GBP's deposited in the UK for a couple of decades, the FX has varied from 2.38 to 1.58 and the mean average is nearer $1.94 whilst the weighted average is $1.77. This can make a whole lot of difference to any gains or losses. I was just asking if there was a reason to use a mean average rather than a weighted average?


----------



## AltaRed (Jun 8, 2009)

The reason to use a mean average over a weighted average would be due to lack of accurate data. That would not be my first choice but sometimes that is all one has to work with.

Even for a weighted average, it is reasonable, per my example, to use annualized numbers because CRA permits (suggests) that anyway on periodic* income each calendar year. Hence why a simplified weighted average could be the Bank of Canadd annual forex rate applied to year end numbers. Weight averaging within a calendar year is more accurate but is diminishing returns and would go beyond what CRA would likely expect.

* We do that already for interest and dividend streams in our non-reg investment accounts. We apply the annual forex rate to the annual income stream.


----------



## luckyone (Apr 23, 2016)

AltaRed said:


> The reason to use a mean average over a weighted average would be due to lack of accurate data. That would not be my first choice but sometimes that is all one has to work with.
> 
> Even for a weighted average, it is reasonable, per my example, to use annualized numbers because CRA permits (suggests) that anyway on periodic* income each calendar year. Hence why a simplified weighted average could be the Bank of Canadd annual forex rate applied to year end numbers. Weight averaging within a calendar year is more accurate but is diminishing returns and would go beyond what CRA would likely expect.
> 
> * We do that already for interest and dividend streams in our non-reg investment accounts. We apply the annual forex rate to the annual income stream.


That makes sense if documentation is lacking. In my scenario i have also used the year end amounts of GBP and each years annual average FX. I add all the year end GBP amounts up, then add the dollar amounts,for each year using the respective FX rate for each year, then divide the total dollar number by the total GBP number and this gives me a true weighted average.

I'm sure there's some wonderful formula that works all this out but this was how an accountant explained it to me....in a manner I can almost work out ;o)


----------



## kcowan (Jul 1, 2010)

luckyone said:


> I'm sure there's some wonderful formula that works all this out but this was how an accountant explained it to me....in a manner I can almost work out ;o)


As long as you can explain what you did, you will be fine.


----------



## gardner (Feb 13, 2014)

AltaRed said:


> mean average over a weighted average


I think if the data about which amounts were saved in which years is not known and the amount is simply evenly divided, then overall mean vs weighted yields the same amount.
If I have U$50k accumulated over 10 years, and calculate using U$5k/year then it doesn't matter which way I calculate the ACB.
But if I know I saved U$4,500 this year and U$6,400 that year, it is more accurate to go year-by-year.
It may be a reasonable methodology to assume that you saved more quickly in later years, so assign amounts to years on an increasing scale and calculate year-by-year -- say ~U$2k in the earliest year and U$8k in the latest.

A spreadsheet is going to be the best way to go.


----------

