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!
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:
* Not sure how that happens without doing the final sub-question.
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.
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.
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.
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).