Currency cost base tracking, borrowing and taxes

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Currency cost base tracking, borrowing and taxes

Postby travesty » 09 Oct 2009 03:08

I know there are always questions on what kind of forex gains and losses must be reported around tax time, and I'm aware of the basic rules such as backing out the first $200 of gains or losses and that these are usually treated on capital account (if you aren't a professional forex trader or someone who looks like one).

I've got some additional quesitons though, so humour me and allow me this thread dedicated to the topic :).

Q1. If I get some money in USD (a cheque for my birthday, say) and spend it on something denominated on USD (an action figure from amazon.com, say) is this a acquisition and disposition of USD as far as the CRA is concerned? I never bought the USD, and I never converted it back into CAD or any other capital property, but do I still technically need to track the gain or loss over the period in which it was in my possession? If so, is it from the moment I get the cheque, or from the moment I deposit it?

Q2. When does a disposition of foreign currency occur? When I convert it back into CAD? When I buy a property with that currency denominated in that currency? When I buy a property with that currency denominated in another currency? When I convert it into another (non CAD) currency?

Q3. If I go on a trip and spend USD several times each day, over a period of months, is each expense a disposition, requiring calculation of gain/loss and ACB? Are such expenses eligible for the "one yearly rate to rule them all" treatment, or do I need to use the daily rate for each?

Q4. Exactly which types of currency conversions/transactions are eligible for the "one rate to rule them all" treatment:

Purchases and dispositions between foreign currency and CAD?
Purchases of property denominated in a foreign currency with CAD?
Purchases of property denominated in a foreign currency with a foreign currency?
Income (from investments or otherwise) in a foreign currency?

Q5. Some kind of consistency is required by the CRA when you choose between "daily rate" and "yearly rate" for the transactions that are eligible for both. Is this consistency only between transactions in a given year (all eligible transactions in a given year must use the same treatment) or does it also apply from year to year (once you've chosen one treatment you can't go back)?

Q6. How does borrowing in a foreign currency work? How do you calculate your ACB, and how do you adjust it given cash flows in and out of that currency? Of all the questions, this is probably the most confusing to me, so any enlightenment here would be greatly appreciated!
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Postby IdOp » 11 Oct 2009 21:41

Hi travesty, A great set of questions! I've also thought/worried about these kind of things at times. So I'm glad to share some thoughts on this below, to get things started, but also want to emphasize that I'm not an expert (nor accountant, etc.) and my "answers" below are just the results of internal reflections and reading related threads on this forum, and so on, rather than any real knowledge. (At the very least, anyone from CRA reading this might get a jolly good laugh out of it.)

travesty wrote: Q1. If I get some money in USD (a cheque for my birthday, say) andspend it on something denominated on USD (an action figure from amazon.com, say) is this a acquisition and disposition of USD as
far as the CRA is concerned? I never bought the USD, and I never
converted it back into CAD or any other capital property, but do I
still technically need to track the gain or loss over the period in
which it was in my possession? If so, is it from the moment I get
the cheque, or from the moment I deposit it?

I would think the answer is *technically* yes, you should account for it. You acquired a capital property (the foreign currency), even if it was a gift, and you disposed of it (doesn't matter on what). As for the starting moment, I don't know, but consistency may be helpful. [ADDED: If it were me, I might go for date of cheque deposit, since this is documented and might appear less "gaming".]

Q2. When does a disposition of foreign currency occur? When I
convert it back into CAD? When I buy a property with that currency
denominated in that currency? When I buy a property with that
currency denominated in another currency? When I convert it into
another (non CAD) currency?

I'd say the disposition occurs when you dispose of it :) . There are infinitely various ways to dispose of it. You could convert to another currency, CAD or other, or you could buy something with it. (In the former case, you are also in fact buying: some amount of another currency.) What you buy with it may or may not be capital property (e.g., a currency or a stock is, but food isn't), but that shouldn't matter; all that matters is you disposed of a capital property. To answer your final four sub-questions in order, my sense is:

* Yes
* Yes
* Not sure how that happens without doing the final sub-question.
* Yes

Two further comments:

(a) If you buy a capital property (that isn't CAD) then proceeds of currency sold should = costbase of property bought ... seems fair to me.

(b) If you dispose of foreign currency without converting it to CAD (you buy anything else), then you need some notional exchange rate of currency-to-CAD to value the transaction. Whereas if you convert directly to CAD then you know what the value was, it's what you got.

Q3. If I go on a trip and spend USD several times each day, over a
period of months, is each expense a disposition, requiring
calculation of gain/loss and ACB? Are such expenses eligible for
the "one yearly rate to rule them all" treatment, or do I need to
use the daily rate for each?

I think *technically*, yes, these should be tracked. Whether anyone does it for small purchases is doubtful. Whether CRA cares would probably depend on whether you're buying a pack of gum or a condo. :) (Lawyers and priests can argue over the dividing line.)

Q4. Exactly which types of currency conversions/transactions are
eligible for the "one rate to rule them all" treatment:

Purchases and dispositions between foreign currency and CAD?
Purchases of property denominated in a foreign currency with CAD?
Purchases of property denominated in a foreign currency with a foreign currency?
Income (from investments or otherwise) in a foreign currency?

I don't see why it would depend on "what become of the money after you disposed of it" ... but this is just what makes sense to me, I'm not an expert. My sense would be that if transactions happened with some regularity (perhaps just statistical) over a period of time it would seem reasonable to apply the average rate to them. But if for example you already were applying daily rates to your investments, and then wanted to apply an average rate to out-of-country purchases on trips, I don't know if that would be considered inconsistent or not. It's a good question.

Q5. Some kind of consistency is required by the CRA when you choose
between "daily rate" and "yearly rate" for the transactions that
are eligible for both. Is this consistency only between
transactions in a given year (all eligible transactions in a given
year must use the same treatment) or does it also apply from year
to year (once you've chosen one treatment you can't go back)?

I'm going to flat out dodge this one :) :) for lack of knowledge, except to say the obvious that doing the same year-after-year seems more consistent to me. Cue Norbert. ;)

Q6. How does borrowing in a foreign currency work? How do you
calculate your ACB, and how do you adjust it given cash flows in
and out of that currency? Of all the questions, this is probably
the most confusing to me, so any enlightenment here would be
greatly appreciated!

This can be confusing. I don't have a margin account (let alone in a foreign currency), so have never had to report, or study, anything official to do with foreign borrowing. So I'll just sketch my view of how it seems it *ought to* work to me, assuming it's treated on capital account. Basically, the arithmetic should reflect what makes sense. Let's take a simple isolated example:

You borrow U$ 1,000 when the exchange rate is 1.2000 C$/U$. So what you owe is worth C$ 1,200. The exchange rate moves to 1.1500, so you can now pay off the debt with C$ 1,150 (and let's say you do that). This is C$ 50 better for you than when you started, so you have gained. There should be a capital gain of C$ 50 coming out of this, so let's make the arithmetic reflect that.

Suppose <insert prescience here> you look at this as acquiring a foreign debt of U$ 1000, with a "costbase" of -C$1200 (that's a negative cost base), and in paying it off you disposed of this debt for a "proceeds" of -C$1150 (again negative), then your "capital gain" would be

"proceeds" - "costbase" = -1150 - (-1200) = + 50

This gives the right/sensible answer, and suggests in this circumstance the "costbase" should be minus the value of the loan (in C$) and the "proceeds" should be minus the amount needed to pay it off (also in C$). If this seems a little weird, just consider it a definition, so there's something to work with. (To say it all another way: the "gain", or "benefit", equals the amount of the debt created [1200] minus what it costs to eliminate the debt [1150].)

If you make a series of borrowings and partial pay-backs, you could use this prescription to average your costbase on the "units" (which are U$ owed). At least, this is what makes sense to me as a systematic way to do it. Don't know if CRA would agree.

Finally, a comment about the $200 exemption. This seems like a really well-meaning olive branch from CRA, in recognition of the fact that, say, on-holiday purchases would be incredibly tedious to track, many people couldn't do it if they had to, etc., so they're saying if it's small potatoes don't worry about it. (I'm grateful that CRA won't come after me asking for a receipt of my [s]Moby[/s] Alexander The Grape candy purchase of 1988.) OTOH, there's still a sticky logical problem: how do you know the capital gain is less than $200, so you don't have to track and report it, if you don't go ahead and track it first?

Did I mention that I'm not an expert?
Last edited by IdOp on 12 Oct 2009 11:40, edited 2 times in total.
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Re: Currency cost base tracking, borrowing and taxes

Postby DenisD » 11 Oct 2009 22:03

travesty wrote:Q6. How does borrowing in a foreign currency work?

I was tempted to borrow US$ in my IB account earlier this year to fund some purchases. But I gave up on the idea after spending some time thinking about how to account for it at tax time. The value of the loan would change frequently as dividends decrease it and interest payments increase it. And, in addition to tracking the ACB of the loan, you have to calculate the sum of the interest payments in C$ to claim the interest expense at tax time.
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Postby newguy » 12 Oct 2009 09:16

I have thousands of currency transactions, and sometimes between other currencies than CAD. For each transaction I have a buy and a sell, it could be CAD for XIU or CAD for USD etc.. Each line in my spreadsheet has a cost base in CAD. At the end of the year I do a 'fake' transaction pretending I zero'd out all non CAD currencies. Now my cost base in that currency is the negative of my profit. This is real easy in excel, especially with filtering. Don't forget every trade in US futures gives me a +/- in USD so I had to come up with something.

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Re: Currency cost base tracking, borrowing and taxes

Postby Norbert Schlenker » 12 Oct 2009 14:16

travesty wrote:Q4. Exactly which types of currency conversions/transactions are eligible for the "one rate to rule them all" treatment:

Purchases and dispositions between foreign currency and CAD?
Purchases of property denominated in a foreign currency with CAD?
Purchases of property denominated in a foreign currency with a foreign currency?
Income (from investments or otherwise) in a foreign currency?

It's all a gray area. For me - and I believe CRA would agree with this just to simplify bookkeeping - it makes sense to use specific daily rates for the first three and an average rate for the fourth. However, I believe most people could get away with almost any combination, as long as they are consistent over time.

Q5. Some kind of consistency is required by the CRA when you choose between "daily rate" and "yearly rate" for the transactions that are eligible for both. Is this consistency only between transactions in a given year (all eligible transactions in a given year must use the same treatment) or does it also apply from year to year (once you've chosen one treatment you can't go back)?

I think the consistency requirement applies across years. If you're going to modify your treatment of FX from year to year, and I were CRA, I would wonder if you were doing it to advantage yourself. If you were - and it's not a terribly complex thing to verify - then CRA would likely argue before a court that doing things in exactly the opposite way from what you did would be equally valid, even though it would cost you more. Picking one method - even if it mixes specific and average rates depending on transaction type - and sticking with it immunizes you from this argument.

Q6. How does borrowing in a foreign currency work? How do you calculate your ACB, and how do you adjust it given cash flows in and out of that currency? Of all the questions, this is probably the most confusing to me, so any enlightenment here would be greatly appreciated!

IdOp's suggestion to treat the loan as a negative asset (converted to C$ at time of borrowing) and repayments as dispositions (also converted at time of payment) seems plausible to me. In the case of something like a USD mortgage on a piece of US real estate, I would be tempted to convert the monthly payments at an average annual rate just to simplify the bookkeeping. I also think CRA would consider that reasonable.

As for newguy's "thousands of currency transactions", he has my sympathies. ;)
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Re: Currency cost base tracking, borrowing and taxes

Postby newguy » 12 Oct 2009 19:48

Norbert Schlenker wrote:As for newguy's "thousands of currency transactions", he has my sympathies. ;)

The good thing is IB has a file called executions.txt that I wrote an excel macro to import. Most of the transactions are futures profs/losses and not exactly currency trades, but they still have to be calculated.

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Re: Currency cost base tracking, borrowing and taxes

Postby travesty » 13 Oct 2009 06:11

DenisD wrote:
travesty wrote:Q6. How does borrowing in a foreign currency work?

I was tempted to borrow US$ in my IB account earlier this year to fund some purchases. But I gave up on the idea after spending some time thinking about how to account for it at tax time. The value of the loan would change frequently as dividends decrease it and interest payments increase it. And, in addition to tracking the ACB of the loan, you have to calculate the sum of the interest payments in C$ to claim the interest expense at tax time.


Yup, this is exactly what I did. The nearly 0% benchmark rate offered by IB was too tempting to pass up (of course they add their own spread to that), in addition to the currency hedging effect of borrowing in USD when holding USD-denominated assets (strictly speaking the denomination of the assets isn't what is important - it is the currency of the underlying earnings, but you get the idea). Avoiding FX by borrowing directly in the currency of the asserts you are investing in is a secondary benefit (although minor in the case of IB, where the FX rates are already excellent).

For a long time I had to accept that every time I updated my portfolio in Quicken, the FX changes (up or down) would nearly always overwhelm any movement in my underlying holdings, unless CAD.USD was almost unchanged that day. After borrowing in USD this stopped :).

For translating my margin costs into CAD for the purposes of taxation, I relied on Quicken, so I hope it is reasonably accurate.

The second part of the issue - how to track cap gains implied by movements in the currencies underlying my margin debt, is what part of what I'm getting at here, sigh...
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Postby travesty » 13 Oct 2009 06:14

newguy wrote:
Norbert Schlenker wrote:As for newguy's "thousands of currency transactions", he has my sympathies. ;)

The good thing is IB has a file called executions.txt that I wrote an excel macro to import. Most of the transactions are futures profs/losses and not exactly currency trades, but they still have to be calculated.
newguy


Good to know, I will look into this file. Any interest in sharing your macro?

newguy wrote:I have thousands of currency transactions, and sometimes between other currencies than CAD. For each transaction I have a buy and a sell, it could be CAD for XIU or CAD for USD etc.. Each line in my spreadsheet has a cost base in CAD. At the end of the year I do a 'fake' transaction pretending I zero'd out all non CAD currencies. Now my cost base in that currency is the negative of my profit. This is real easy in excel, especially with filtering. Don't forget every trade in US futures gives me a +/- in USD so I had to come up with something.


I didn't get that part about the fake transaction. Do you really hold balances (positive or negative) in other currencies? What then is the purpose of this fake transaction if the actual balances are maintained? If this transaction incurs a gain or loss, you shouldn't really report it yet since the gain/loss hasn't really been realized yet, right?
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Postby newguy » 13 Oct 2009 06:41

travesty wrote:Good to know, I will look into this file. Any interest in sharing your macro?


No problem, but give me a day or two to clean up the spreadsheet to make me look like a genius :wink:

travesty wrote:I didn't get that part about the fake transaction. Do you really hold balances (positive or negative) in other currencies? What then is the purpose of this fake transaction if the actual balances are maintained? If this transaction incurs a gain or loss, you shouldn't really report it yet since the gain/loss hasn't really been realized yet, right?


I usually have balances in everything I trade in, eg SPI futs = AUD, HSI futs = HKD, K200 etc... At the end of the year I clean up all the 'strange' currencies. If I keep a balance in another currency I just pretend I sold it on Dec 31 and bought it on Jan 1 at the same price. You could say I use mark to market reporting for currencies. All will become clear when you see the spreadsheet.

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Postby newguy » 15 Oct 2009 12:43

newguy wrote:
travesty wrote:Good to know, I will look into this file. Any interest in sharing your macro?

No problem, but give me a day or two to clean up the spreadsheet to make me look like a genius :wink:


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Postby newguy » 17 Oct 2009 11:09

As promised. I hope you know how to program macro's, I'm not known for my commenting.

Sheet2 has some instructions.

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Postby travesty » 17 Oct 2009 22:46

Thanks so much, I will take a look when I get a chance (and respond to the other answers here - I've been meaning to, but just haven't found the uninterrupted time to do it).

I've not used Excel macros before, but I'm literate in programming, so I don't think a bit of VB will kill me.
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Postby travesty » 18 Oct 2009 04:36

IdOp wrote:Hi travesty, A great set of questions! I've also thought/worried about these kind of things at times. So I'm glad to share some thoughts on this below, to get things started, but also want to emphasize that I'm not an expert (nor accountant, etc.) and my "answers" below are just the results of internal reflections and reading related threads on this forum, and so on, rather than any real knowledge. (At the very least, anyone from CRA reading this might get a jolly good laugh out of it.)


Thanks IdOp - I appreciate your lengthy and comprehensive response!

IdOp wrote:[Q1] I would think the answer is *technically* yes, you should account for it. You acquired a capital property (the foreign currency), even if it was a gift, and you disposed of it (doesn't matter on what). As for the starting moment, I don't know, but consistency may be helpful. [ADDED: If it were me, I might go for date of cheque deposit, since this is documented and might appear less "gaming".]


Yes, my thoughts were along the same lines. Interestingly enough though, this would only seem to apply if you had a personal zero or positive balance across cash in USD. If you had a negative balance (owed money in USD) then I guess receiving the cheque would be a disposition, and spending it would be an acquisition!

IdOp wrote:
Q2. When does a disposition of foreign currency occur? When I
convert it back into CAD? When I buy a property with that currency
denominated in that currency? When I buy a property with that
currency denominated in another currency? When I convert it into
another (non CAD) currency?

I'd say the disposition occurs when you dispose of it :) . There are infinitely various ways to dispose of it. You could convert to another currency, CAD or other, or you could buy something with it. (In the former case, you are also in fact buying: some amount of another currency.) What you buy with it may or may not be capital property (e.g., a currency or a stock is, but food isn't), but that shouldn't matter; all that matters is you disposed of a capital property. To answer your final four sub-questions in order, my sense is:

* Yes
* Yes
* Not sure how that happens without doing the final sub-question.
* Yes


Thanks. So basically, any time cash in a given currency is used for any purpose and as such you have less cash in that currency. For the 3rd sub-question (Not sure how that happens without doing the final sub-question) I guess it can arise when you buy something in one currency which is denominated in one currency, but can still be bought in another, or which is equally denominated in many currencies. For example of the latter, you could buy a bar of gold from a Canadian dealer in CAD, or from an American dealer in USD, but what you are left with is the same in both case (gold) and can probably be valued directly in CAD. Not totally relevant though since all these scenarios appear to be dispositions regardless.

Two further comments:

(a) If you buy a capital property (that isn't CAD) then proceeds of currency sold should = costbase of property bought ... seems fair to me.

(b) If you dispose of foreign currency without converting it to CAD (you buy anything else), then you need some notional exchange rate of currency-to-CAD to value the transaction. Whereas if you convert directly to CAD then you know what the value was, it's what you got.

Yeah, where no conversion occurs I will typically use the nominal rate from the BoC website (or a yearly rate if this is allowed per other questions).

I guess it is more complicated when you spend currency A to buy something in currency B, and a conversion between A and B occurs, and neither A nor B are CAD. In this case, you want to use your "actual" A to B ratio to set your cost base, since you are probably paying some kind of spread, but all cost bases must be in CAD so that ration alone isn't enough - normally, you could look up the B to CAD nominal ratio and use that, since there is no explicit B-CAD ration involved in the transaction, but then you'll understate your acquisition cost because you missed the spread. I guess a good way to do it would be to convert the amount of A you spent to acquire the property in currency B, using the A-CAD nominal rate - this would catch the spread you paid, and would be better (both in terms of accuracy, and for your bottom line) than using the B-CAD rate, which is more natural.

IdOp wrote:
Q3. If I go on a trip and spend USD several times each day, over a
period of months, is each expense a disposition, requiring
calculation of gain/loss and ACB? Are such expenses eligible for
the "one yearly rate to rule them all" treatment, or do I need to
use the daily rate for each?

I think *technically*, yes, these should be tracked. Whether anyone does it for small purchases is doubtful. Whether CRA cares would probably depend on whether you're buying a pack of gum or a condo. :) (Lawyers and priests can argue over the dividing line.)


Yes, in practice, uh, people I know, have not tracked nor reported this type of thing, yet I suspect many have exceeded the $200 FX threshold due to investments or otherwise. Hopefully the CRA continues to overlook this based on the fact that unless you do it carefully and willfully, the effects are likely to be a wash over all tax payers, over a some period of time (actually, the CRA would probably actually lose, since the FX spread always tends to increase the loss or reduce the gain).

As below though, it seems that it is only a disposition if you have a net positive or zero USD balance. If you owe USD on a net basis, these purchases are actually acquisitions of "USD debt"? Not that this scenario reduces the amount of book keeping required, but it should be noted (if you have many small purchases, but relatively few large inflows of USD, it means that you have fewer taxable events, though).

Q4. Exactly which types of currency conversions/transactions are
eligible for the "one rate to rule them all" treatment:

Purchases and dispositions between foreign currency and CAD?
Purchases of property denominated in a foreign currency with CAD?
Purchases of property denominated in a foreign currency with a foreign currency?
Income (from investments or otherwise) in a foreign currency?

I don't see why it would depend on "what become of the money after you disposed of it" ... but this is just what makes sense to me, I'm not an expert. My sense would be that if transactions happened with some regularity (perhaps just statistical) over a period of time it would seem reasonable to apply the average rate to them. But if for example you already were applying daily rates to your investments, and then wanted to apply an average rate to out-of-country purchases on trips, I don't know if that would be considered inconsistent or not. It's a good question.


Yeah, sorry, this question may have been a bit unclear. It wasn't necessarily about dispositions of foreign currency, but rather about foreign currency transactions in general (including things like foreign dividend income and purchases of foreign denominated assets where no conversion takes place since you already have foreign currency). It is my impression from earlier threads and discussions that CRA ITs identify some types of transactions (among them, capital purchases and dispositions, IIRC) which should use the daily rate and make no provision for using a yearly rate, while other types of foreign denominated "things" could use a yearly rate at the taxpayers option.

In any case, Norbert gave some advice there, so I will respond further there.

[Q6]
This can be confusing. I don't have a margin account (let alone in a foreign currency), so have never had to report, or study, anything official to do with foreign borrowing. So I'll just sketch my view of how it seems it *ought to* work to me, assuming it's treated on capital account. Basically, the arithmetic should reflect what makes sense. Let's take a simple isolated example:

You borrow U$ 1,000 when the exchange rate is 1.2000 C$/U$. So what you owe is worth C$ 1,200. The exchange rate moves to 1.1500, so you can now pay off the debt with C$ 1,150 (and let's say you do that). This is C$ 50 better for you than when you started, so you have gained. There should be a capital gain of C$ 50 coming out of this, so let's make the arithmetic reflect that.
<snip>


Yup, OK, that's what I was looking for, and pretty much what I had decided myself - I just needed to see someone else say it!

Basically the formulas are all the same in the "positive" case, except that you apply the disposition formula when the amount of property increases (gets closer to positive infinity) and the acquisition formula when the amount of property decreases (gets closer to negative infinity) - which is the exact opposite of the positive case. Other than that, it seems like the normal ACB formulas can be used.

Two odd effects:

1) There is a discontinuity at zero. That is, if you complete a transaction that causes you to go from a negative to positive USD balance, or vice-versa, you need to apply both the acquisition and disposition formulas - so a single transaction is both a purchase and a sale! Basically treat it as two transactions - the first being large enough to bring your balance to zero, and the second bringing being the remaining increase or decrease beyond zero.

2) This treatment leads to the cases alluded to above where purchases in USD should not be treated as dispositions, but as aquisitions, since you have a net USD debt. It also means that receiving USD, in any form, now necessarily is treated as a (potentially taxable) disposition. This is somewhat unfortunate since the timing and circumstance of a typical disposition is under your control (selling something you own), but the receipt of income or a gift or whatever, typically isn't - but isn't usually taxable. In this case, though, even receiving a USD gift (the aforementioned cheque from your grandmother) now triggers a tax liability if you have net negative USD since you are moving towards positive infinity on the negative side of zero... sigh...

I guess one way to avoid all that would be to treat positive USD balances or cash as different property than USD margin debt. This would make the situation (1) above clear - it has to be two transactions since it involves types of properties, and reverts situation (2) to the usual understanding of getting something being an acquisition and getting rid of it is a disposition (and you can explicitly take some of your USD positive balance and cancel it out with negative balance (i.e., transfer money to your margin account) resulting in a disposition of both positive and negative USD amounts. Not sure if this acceptable or even useful though.

How does it work for shorting stocks? If you hold a stock in one account, and short it another, does the shorting count as a disposition? Normally (if you didn't hold the stock) it wouldn't - it would be an acquisition. If it continues to be an acquisition when you also hold it, this lends support to the "non-identical property" argument.

Finally, a comment about the $200 exemption. This seems like a really well-meaning olive branch from CRA, in recognition of the fact that, say, on-holiday purchases would be incredibly tedious to track, many people couldn't do it if they had to, etc., so they're saying if it's small potatoes don't worry about it. (I'm grateful that CRA won't come after me asking for a receipt of my [s]Moby[/s] Alexander The Grape candy purchase of 1988.) OTOH, there's still a sticky logical problem: how do you know the capital gain is less than $200, so you don't have to track and report it, if you don't go ahead and track it first?


Yeah, it's like the signs that say they'll only check your ID to verify your age (for alcohol or cigarette purchases, say) if you're under 25. So how do you determine that someone is under 25...

The $200 exception is open to gaming. If you are in an overall (unrealized) FX gain position for the year, you might as well realize it up to $200 since you can crystallize that much without tax. If you are in a loss position, don't. If you hold several currencies, you only need to find one which you are in a gain position each year to realize. Granted, the gaming isn't buying you much - $40 a year with capital gains treatment, $80 with income treatment, so pretty small potatoes. The "choose your own adventure regarding daily or yearly average" provision is potentially much more lucrative, which is why I suspect that the CRA explicitly requires you to be consistent here (will elaborate more on this later).
Last edited by travesty on 18 Oct 2009 04:57, edited 1 time in total.
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Re: Currency cost base tracking, borrowing and taxes

Postby travesty » 18 Oct 2009 04:44

DenisD wrote:
travesty wrote:Q6. How does borrowing in a foreign currency work?

I was tempted to borrow US$ in my IB account earlier this year to fund some purchases. But I gave up on the idea after spending some time thinking about how to account for it at tax time. The value of the loan would change frequently as dividends decrease it and interest payments increase it. And, in addition to tracking the ACB of the loan, you have to calculate the sum of the interest payments in C$ to claim the interest expense at tax time.


I am in this boat. I borrowed in USD starting last year, keeping records in quicken, and when tax time rolled around I realized that I needed to convert it to CAD. Well Quicken had a report that allowed me to report the USD margin costs in CAD, and I double checked the numbers against the average exchange rate for the year, and it wasn't way out of whack so I went with that. At least I have a good record to point to if the CRA asks, and it wasn't a lot of work. The total margin expense was in the low four figures, so we aren't talking a big change for a few bps change in the rate.

However, I haven't gotten to point of reducing my margin balance which brings up the other issue with margin borrowing - since the balance here was around six figures, a few bps makes a bigger difference and I want to get it right!
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Re: Currency cost base tracking, borrowing and taxes

Postby travesty » 18 Oct 2009 05:33

Thanks Norbert for your reply!

Norbert Schlenker wrote:It's all a gray area. For me - and I believe CRA would agree with this just to simplify bookkeeping - it makes sense to use specific daily rates for the first three and an average rate for the fourth. However, I believe most people could get away with almost any combination, as long as they are consistent over time.


Right... I think that was consistent with the language in the ITs. As I recall, the language regarding the allowability of the annual rate appears in only specific places, dealing with FX conversion of income, but not in other places dealing with FX conversion for capital gains and currency gains and losses. I should double check at some point though...

If you could use average rates for all purchases, it would simplify book-keeping enormously though, if you always brought your foreign cash holdings to zero at EOY, since all transactions in currencies (other than dispositions of capital property held more than a year) would be at the same rate, so there would be no FX gain or loss on cash, removing the theoretical need to track all sorts of little purchases and other inflows or outflows.

I think the consistency requirement applies across years. If you're going to modify your treatment of FX from year to year, and I were CRA, I would wonder if you were doing it to advantage yourself. If you were - and it's not a terribly complex thing to verify - then CRA would likely argue before a court that doing things in exactly the opposite way from what you did would be equally valid, even though it would cost you more. Picking one method - even if it mixes specific and average rates depending on transaction type - and sticking with it immunizes you from this argument.


Yes, I suspect that if push comes to shove you'd be better off if you were consistent across years. It is definitely true that you can advantage yourself with inconsistent treatment. In any case, you still get a one time chance to advantage yourself, the first time you choose :).

It seems that you can continue to advantage yourself if you choose the "annual average" option, and you can apply this to all types of currency gains and losses, as suggested above. To wit, each year in December, you should take a look at the spot rates for FX, versus the annual average rates. Typically these won't be the same, and in recent years the different has sometimes been large, I believe (for example, the recent climb of the Canadian dollar, if it holds, means that the sport rate EOY 2009 will be much higher than the average rate).

Now, if you are long some currency, and the spot rate is higher than the average rate (i.e., the spot rate implies a bigger gain or a smaller loss in that currency) then you should definitely crystallize any loss/gain in that currency before EOY (simply buy/sell a stock, or change to another currency if you have good FX rates), since you effectively gain the difference between the spot and average rates free from the CRA, although if you disposed of the currency by buying another property, then I supposed you have a correspondingly lower ACB, negating your benefit later when you sell, so maybe moving to CAD is ideal (you have no ACB for CAD, after all). Of course, such transparent gaming of the system could be rejected under GAAR, I imagine - and this is perhaps why the CRA requires actual rates to be used for all but periodic income transactions (which you can't really game since you typically don't control the schedule of such payments).

IdOp's suggestion to treat the loan as a negative asset (converted to C$ at time of borrowing) and repayments as dispositions (also converted at time of payment) seems plausible to me. In the case of something like a USD mortgage on a piece of US real estate, I would be tempted to convert the monthly payments at an average annual rate just to simplify the bookkeeping. I also think CRA would consider that reasonable.


What is the corresponding guidance for selling stocks short? For selling (writing) options, at least, there are a series of specific rules, but they aren't exactly applicable here because options have their own taxation peculiarities surrounding the fact that they may result in the delivery of some physical underlying, so they don't really apply here.
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Postby travesty » 18 Oct 2009 05:57

Q7. Does the superficial loss rule apply to pure currency transactions? That is, exchange transactions between one currency and another (rather than the purchase of a capital asset). I hope beyond hope the answer is no...
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Postby IdOp » 18 Oct 2009 22:35

travesty wrote:Interestingly enough though, this would only seem to
apply if you had a personal zero or positive balance across cash in
USD. If you had a negative balance (owed money in USD) then I guess
receiving the cheque would be a disposition, and spending it would
be an acquisition!

Good point; that could be a PITA as you point out later on.

For the 3rd sub-question (Not sure how that happens without doing the
final sub-question) I guess it can arise when you buy something in
one currency which is denominated in one currency, but can still be
bought in another, or which is equally denominated in many
currencies. For example of the latter, you could buy a bar of gold
from a Canadian dealer in CAD, or from an American dealer in USD,
but what you are left with is the same in both case (gold) and can
probably be valued directly in CAD.

My guess is that what ought to matter is the currency that you agree to pay for something in. In that sense how the thing is usually denominated (or whether it had multiple easily available denominations) wouldn't really matter, except to the extent that you followed usual custom. E.g., suppose your friend has 1 share of (the fictional) Canux-R-Us Corp., which trades only on the TSX with C$ denomination. You could still write a private contract with your friend to buy their share for so many Euros. When you deliver the Euros to fulfill the contract, your personal Euro account gets hit for a capital gain (and/or initiates a Euro debt position). Now if you're dealing with a broker and trading on the usual exchanges, the currency you agree to pay for stocks in would be tacitly agreed on in the usual way.

A correction: In my reply to your Q2 I implied that foreign currency is a capital property. This is probably not always correct. Just looking quickly at IT-95R and it seems it may or may not be depending on the circumstances.

I guess a good way to do it would be to convert the amount of
A you spent to acquire the property in currency B, using the A-CAD
nominal rate - this would catch the spread you paid, and would be
better (both in terms of accuracy, and for your bottom line) than
using the B-CAD rate, which is more natural.

I agree this would be a good way to do it.

As below though, it seems that it is only a disposition if you
have a net positive or zero USD balance. If you owe USD on a net
basis, these purchases are actually acquisitions of "USD
debt"?

That was the wording I've used, but it may be semantically a bit unclear so it's worth clarifying. I guess often the word "debt" is used with bonds. When you buy a bond you're buying the debt of a government or company. If it was a U$-pay bond it would be U$ debt. Though this isn't what I meant when using the term. I meant it more like it is your own debt, rather than someone else's. You are taking on debt ... in that sense I used "acquiring"; possibly "creating" would be better english.

Yup, OK, that's what I was looking for, and pretty much what I
had decided myself - I just needed to see someone else say
it!

Hopefully we can team up to out-vote the CRA if ever needed! :)

Basically the formulas are all the same in the "positive" case, except that you apply the disposition formula when the amount
of property increases (gets closer to positive infinity) and the
acquisition formula when the amount of property decreases (gets
closer to negative infinity) - which is the exact opposite of the
positive case.

Exactly. For that reason I looked at it as "acquiring" (one's own!) debt when taking the loan, and "disposing" of it when paying it back.

Basically treat it as two transactions - the first being large
enough to bring your balance to zero, and the second bringing being
the remaining increase or decrease beyond zero.

Sounds reasonable to me at the moment.

How does it work for shorting stocks? If you hold a stock in
one account, and short it another, does the shorting count as a
disposition? Normally (if you didn't hold the stock) it wouldn't -
it would be an acquisition. If it continues to be an acquisition
when you also hold it, this lends support to the "non-identical
property" argument.

I don't really know much about this (having no margin account). But I recall from discussion in the Norbert Gambit threads, where in the usual technique you short and then buy back, if you own the stock already then a broker may complain about the shorting attempt. (Something called "shorting the box", apparantly.) This suggests to me that if you got away with it, it might really be considered like selling from your long position, and it is identical property with two kinds of position. This is very speculative, hopefully someone who knows what's going on can say more.
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Postby SoninlawofGus » 05 Nov 2009 10:29

So, this will be my first year of doing any significant US dollar stock transactions. How would something like this work:
1. I convert $115 Canadian to $100 US and buy stock X at $10 US.
2. Stock X mushrooms up to $15 US.
3. I sell, take $50 US in profit.
4. In the meantime, $100 US now equals $130 Canadian.

If I understand correctly, if I convert back to Canadian dollars, I have two reporting options:
1. Use the daily exchange: $80 Cdn gain
--> 1.30 x $150 US = $195 Cdn - $115 Cdn = $80
2. Use the yearly exchange, assuming an average of 1.22 = $68 Cdn gain
--> 1.22 x $150 US = $183 Cdn - $115 Cdn = $68

If I don't convert the dollars back to Canadian, but rather keep them as US dollars, can I assume one of the two options would still be reported (understanding that CRA wants a consistent annual exchange rate approach)? If so, and the currency just sits there in my account after the sale, would that represent a new "purchase" of US dollars at 1.30?

On a more practical level, assume you withdraw say $3000 US cash to go a trip somewhere (maybe doing this months in advance of the trip, and the exchange happens to go in your favor by 30%), then you dispose of that cash during the trip on normal stuff, is anyone really reporting these kinds of individual cash dispositions?
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Postby Norbert Schlenker » 05 Nov 2009 13:47

SoninlawofGus wrote:If I understand correctly, if I convert back to Canadian dollars, I have two reporting options:

Yup.

If I don't convert the dollars back to Canadian, but rather keep them as US dollars, can I assume one of the two options would still be reported (understanding that CRA wants a consistent annual exchange rate approach)? If so, and the currency just sits there in my account after the sale, would that represent a new "purchase" of US dollars at 1.30?

Yup.

On a more practical level, assume you withdraw say $3000 US cash to go a trip somewhere (maybe doing this months in advance of the trip, and the exchange happens to go in your favor by 30%), then you dispose of that cash during the trip on normal stuff, is anyone really reporting these kinds of individual cash dispositions?

Probably three in all of Canada. I'm not one of them.
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Postby SoninlawofGus » 05 Nov 2009 15:07

Thanks Norbert. I have American relatives, and I'd never given a thought to receiving American cash as a "capital property" before reading this thread. I'll never look at a greenback the same way again...
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Postby travesty » 05 Nov 2009 18:47

Does the superficial loss rule apply to currency transactions?
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Re: Currency cost base tracking, borrowing and taxes

Postby newguy » 02 Jan 2010 23:26

I don't know if anyone tried to import IB's executions.txt file using my macro. They changed the way forex transactions are listed from "CAD" to "CAD.USD" for example. I changed my code like this.
Code: Select all
Case "CASH"
      Contract = (Left(Contract, 3)) 'ib changed reporting to CAD.USD
      InsCASH

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Re: Currency cost base tracking, borrowing and taxes

Postby peter » 02 Jan 2010 23:49

This may be naive, but why not just use the numbers IB reports on their tax slips? If you have CAD as base currency they'll give both US and CAD numbers (and EUR, Hong Kong etc) as well as CAD totals for everything, including margin interest paid in both currencies and income/dividend/interest/Canadian dividends etc. I know people have issues with their tax slips but that seems mostly related to the unfortunate companies that have dividend payment dates around Dec. 31st. I have negative USD and CAD amounts at IB as well but figured as long as I reported the interest paid/income received using IB's conversion factors it was ok.

Their transaction overview and monthly and yearly statements should give all the details you would need to calculate whatever you want, which for some people wouldn't be too hard (either because they have few transactions or because they have a spreadsheet to calculate the details of thousands of transactions), but if I can avoid that ...

I frequently give talks in the US, pay my own trip, and afterwards get reimbursed in USD, which I may or may not change back to CAD. Basically this amounts to a USD account with a fluctuating balance between 0 and $5000, with no net income due to these trips. I understand from posts above that strictly speaking this may give taxable events, but that seems a real pain. Next time I am going to vote for a unified currency.
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Re: Currency cost base tracking, borrowing and taxes

Postby newguy » 02 Jan 2010 23:56

I agree and I do. However IB doesnt report interest you paid to them nor any currency transactions. Also I like to keep track of investments vs. trades. They also make mistakes.

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Re: Currency cost base tracking, borrowing and taxes

Postby peter » 03 Jan 2010 00:19

They do report interest paid on the annual activity statement (not a T slip), e.g. 'Broker Interest Paid' and 'Interest Accruals'. They also appear to report forex trades, under 'Trades' (below stocks).

I guess I'll have to look more closely at forex trades. I'm surprised if this isn't caught in various T slips and trade overview though, as the same problem arises with margin accounts at CIBC/TD etc in two currencies.

Outside brokerage accounts, there would also be some weirdness with buying euros to pay back a loan originally in euros, or with my running USD account. Hmm. Maybe vote for euro as currency of North America.
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