Though I am a CA, I have never been able to understand one seemingly simple aspect of taxation and seek advise from fellow professionals or others who have faced similar situations (and I am sure there are many).
Most of us, including me, have invested some part of our savings in foreign currecies, mostly USD. In last few years USD has constantly been depreciating against CAD.
Now if I had invested say USD10,000 in January 2007 into a GIC or a term deposit (FCNR/monthly rollover deposits in some other foreign banks etc. etc.) and I received interest of about $400 during the whole year on this deposit, I am required to report this $400 earnings (at an average yearly rate of conversion into CAD) on my tax return.
When I invested the USD10,000, the fx rate was 1.16, and so I actually invested CAD 11,600. As of Dec 31, my USD 10,400 (10,000 principal and 400 interest) was worth CAD 10,192 at the year end rate of 0.9800.
Can I now claim this principal loss of CAD1,408 ($11,600 initial investment less value of my investment as on Dec 31), if I reconvert that deposit into CAD?? I think I might not be able to claim the loss if I physically did not convert back the USD into CAD since the loss is not realised, but I wonder if I can claim the loss if I actually convert back into my original CAD?
Opinions welcome - both based on undertanding of tax law as well as personal experiences.
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Chandresh
Advice is free – lessons I charge for!!
Hi Chandresh
If you had reconverted to C$ and realized the forex loss, then you can claim it as a capital gain loss (I am assuming the investment is not incidental to any business you are doing) . In addition , please note that
1) You must net all forex gain and loss during the year.
2) $200 should be deducted from capital gain and loss so determined.
Quote:
Originally posted by vsamdani
Hi Chandresh
If you had reconverted to C$ and realized the forex loss, then you can claim it as a capital gain loss (I am assuming the investment is not incidental to any business you are doing) . In addition , please note that
1) You must net all forex gain and loss during the year.
2) $200 should be deducted from capital gain and loss so determined.
Thanks for the above. I have few more related questions:
1. What does you point number 2 mean? If I have a loss of say 1,100 then should I increase it to $1,300 or decrease it to $900 (and same in the case of a forex gain)? Secondly, what is this figure of $200?
2. I trade in foreign currencies and it can be termed as a self employed business. However, in trading for forex and the buy and sells are in millions of $ - how do we report it on the personal tax form?
3. Trading in forex should be termed as regular income or capital gains?
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Chandresh
Advice is free – lessons I charge for!!
Quote:
Originally posted by chandresh
Though I am a CA, I have never been able to understand one seemingly simple aspect of taxation and seek advise from fellow professionals or others who have faced similar situations (and I am sure there are many).
Most of us, including me, have invested some part of our savings in foreign currecies, mostly USD. In last few years USD has constantly been depreciating against CAD.
Now if I had invested say USD10,000 in January 2007 into a GIC or a term deposit (FCNR/monthly rollover deposits in some other foreign banks etc. etc.) and I received interest of about $400 during the whole year on this deposit, I am required to report this $400 earnings (at an average yearly rate of conversion into CAD) on my tax return.
When I invested the USD10,000, the fx rate was 1.16, and so I actually invested CAD 11,600. As of Dec 31, my USD 10,400 (10,000 principal and 400 interest) was worth CAD 10,192 at the year end rate of 0.9800.
Can I now claim this principal loss of CAD1,408 ($11,600 initial investment less value of my investment as on Dec 31), if I reconvert that deposit into CAD?? I think I might not be able to claim the loss if I physically did not convert back the USD into CAD since the loss is not realized, but I wonder if I can claim the loss if I actually convert back into my original CAD?
Opinions welcome - both based on understanding of tax law as well as personal experiences.
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Chandresh do you have the transaction report for the first $10,000.00 U.S. Other wise you will have to obtain the average price or atleast the closing price for that day from any bank that you know. Also you will have the exchange commission costs too in that statement. (Now you are a Marked man!)
There are two parts to this.
1) The Capital gain or a capital loss, as the case may be, and
2) The Receipt of interest as stated from the Bank's Fixed deposit receipt. Since it was done in the year 2007, the year gets completed during the year 2008, and you would not have received the interest till, in the year, 2008 and so you need not file the interest earnings till 2009, for the year 2008. (Date of maturity 366 days 'a year plus a day')
The capital gain or a loss as in this case is reported AND gets adjusted against a capital gain, when ever that event takes place. (The loss gets adjusted ONLY against a gain)
The interest received is an INCOME and you report the same AS income for this current year 2008. (The return for which you file in the next year.)
Here is the interesting part: If you now convert the $10,000.00 back to Canadian Dollars and have a transaction report for that, then, you can claim the loss we are talking in (1), together with the transaction costs and the commission costs on the foreign Exchange. If you don't convert it, then there is no loss!! BUT you do have a virtual loss. To capture it, you have to go through this exercise and INCUR IT. You cross the bridge when you come to it. If you decide to leave the sum for an additional period of like term, then, and if during that time the US Dollar bounces back to where ever it will be then, you decide upon its conversion back to the Canadian Currency, if you deem find it is necessary. OR you can go forward till you decide to LIQUIDATE that position. Alternately, you can claim the virtual loss without incurring it. But then, you will have to report if there is a gain in the next, that is your choice. It will be exercise in futility.
If initially your income was from EMPLOYMENT and any monies that you made from Stock Trading or the Forex Markets were reported as capital Gain/Loss as the case may be, then any Gain or Loss that you currently incur will be adjusted against the same entity. All of a sudden it does not become regular income.
But once you pack up from your employment you still have the option to continue, which is a lot more beneficial to you, by availing the same loss or the gain from it.
But if you decide to open up a business at a later date, you have the option to do the transactions under the business name and also derive the benefits of owning the business and claim the expenses associated with it. i.e., if you are trading in the capital markets.
At the same time, you also can transact under your personal name and derive the benefits of the individual taxation over and above the ones from the business.
From the foregoing, it is very clear, that the trading in your personal name has to fall under Capital Gains and Losses, because the number of transactions taken place are limited to a few or ONE in this case.
If they are numerous and are not long term and speculative, then the tax people review this as trading in speculative markets and will determine them as Income generating. At which time it will be beneficial to open up a firm and transact through and hire and pay and claim and derive the benefits of doing business and owning one.
All of these are my opinions and the TAX people are the final authorities who will determine as per the current rules and laws that are written in their books.
Just in the Passing, I would like to inform you that there are Off shore brokers and entities that will open a trade and never close the same. So, when you buy, your buy stays ON. So also when you sell, your sell stays ON, it never balances with the other one. This way there is never a closure of a transaction and hence there is NO TRADE. Only there is a POSITIVE BALANCE or a NEGATIVE BALANCE from the INITIAL DEPOSIT. Hence NO reports to send. No capital gains or losses. No taxes to report and no taxes to pay.
I love that. Hope you do too.
Freddie.
Hi Freddie,
Thanks for your detailed explanation!
The 2007 term deposit was a hypothetical situation so it is not a 1 year term deposit - infact. all my deposits are on monthly rollovers.
Since you have been patient enough, as usual, to write in details and be technical about it, I have another technical question or two:
1. I am having many deposits or combinations of deposits over last 8 years since I first landed in Canada. As per tax laws, the day I landed, I am deemed to have disposed off all my belongings and reaquired them at that day's market value.
So When I landed, the USD/CAD rate was about 1.46 and so all my USD assets would have a deemed cost of USD amount times 1.46. Now if I convert the whole or a portion of it into CAD, let's say, today at a rate of 1.01, will I be able to claim a loss of 1.46 less 1.01 on the amount converted?
2. Related to the above, can I go back in years and use the same principal for whatever conversions I did during these years - first for living expenses, then for buying a car, then again for living expenses (since I did not get jobs for a long time), then for down payment of buying a house, and some instalments, etc. etc.? Yes, I have declared this all as my foreign assets throughout these 8 years in my tax returns on form 1135.
3. My forex trading has been reasonably active so I know I can claim it as a trading business rather than pure capital gains or losses. However, I do not understand how to put it on my T1 if I am going to treat it as trading income/loss since putting a purchase of $10,000,000 and a sale of 9,990,000 seems a bit awkward to show a trading loss of $10,000. Two years ago I devised a system and all my gains I lumped into one figure and called it sales, and all my losses also I lumped into one figure and showed it as purchases, but that is not really an efficient way I think, though it serves the purpose. Like if I had 20 transations which gave me a profit of $15,000 and 15 transactions which gave me a loss of 25 k, I put them as sale and purchase of 15,000 and 25,000 thereby showing a loss of 10K.
Can you suggest an efficient method which would not unnecessarily raise a red flag at CRA - though I have all documentary proofs in form of trasactions statements.
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Chandresh
Advice is free – lessons I charge for!!
Chandresh,
There is a saying here that goes "You are a very smart man McGee.!"
And my hats off to you and to the profession that you are in.
Please read through the IT bulletins and benefit all that you can from it.
Like you mentioned, "They would have considered that it was deemed to have been sold on the date of departure". The ONUS is upon you to get all of this documented from that day, either by independent evaluation, if it was a property, or from the records that you have maintained in your Portfolio at the Indian End.
As you say, if you have reported any of the gains or the losses in that (the foregoing portfolio) and paid taxes to the Canadian Government, then, it is still continuous and ongoing. It will not be hard for you to bring it to their attention, if the need arises. Because you have proof of all of the transactions and paper records to produce. As much as you do know, they will permit to file an amendment to the tax records going BACK THREE Years, to accommodate the FOREX transactions. And Forward Many number of years. (in the future.) If you did the same prior to this period, then you did derive the benefit of it and might be in a better position to do the adjustment with a request for the past. If perchance you did miss one, some where in the middle, hope you run across a kind soul who will provide you with a patient listening. ( They don't provide you with any shoulders yet.)
You know that they pro rate the income for the first year when they provide you with the Tax deductions and the benefits. like wise you know, they are not that flexible most of the time. In my books they are very fair. It is the tax laws that they said that it was temporary, which has lost its meaning.
Some where along this line with tax breaks, I have come across a bulletin in the income tax department files that provides you with a FIVE Year furlough and I am not able to put my finger on it. It is only for 'The New comers'. I may have to return back to the Libraries and do a thorough search of the IT Bulletins. Is it possible that I can leave this matter for you to research and brief us with the same?
Current year is 2008. The taxation return is for the year 2007. So, use it to your benefit, if it suits your requirements, going back three, which will put you into the taxation year 2004. Forget the ones prior to it. You missed the BUS.
The income tax department has MAIN FRAME Computers that can crunch BIIIG, HUGE numbers and could have a lot of digits and their precision runs to seven decimals and rounds it upto a penny and gives you a break when it is less than two buckaroos. They do appreciate your numbers and the BIG gains too, if you had a loss of 10,000.00 bucks, it is O.K. They know you will make it up soon and start paying taxes after you recoup the losses. I don't think they have tear ducts. 'Just file your returns with the copies of the statements or an audited version through another Chartered Accountant'. They know you both and your integrity.
They know through their computers that 80% of the traders LOOSE money.! Now they are rooting for you to win and get into the winning 20%, and pay taxes.
Good luck in your FX Trading.
Freddie.
Location: carl sagan's universe
Posted on: 25-03-08 16:58:50
Just as an FYI, 11% break even and 9 % make bread.(Rough figures)
So here is to Chandresh being one of the 9 %.
I am not a very active forex trader and my accountant advises me to claim as cap gains as I have probably maybe bought and sold my positions around 10 times last year.
Is there a fine line between what is considered active trading and intermittent trading?
