Tax calculation on Fixed Deposit


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web2000   
Member since: May 06
Posts: 849
Location:

Post ID: #PID Posted on: 19-02-14 11:14:00

I have put some funds in NRE fixed deposit. Since it is not taxable in India but I have to decare it as foreign income and pay tax on it in Canada.
There are two options which come to my mind but I am not sure which one is correct to calculate the taxes. I will go by example to make it easier to understand.
Let us say that I have invested $5000 for one year at 9% interest rate and at that time the exchange rate was 1$=50 rupees. When FD matured the exchange rate was 1$=60. So here are the options

Option 1.
Total amount invested: 5000*50 = Rs. 250,000
Total amount at time of maturity: Rs. 272,500 [9% interest]
Total interest: 272500-250000 = Rs. 22500
Total interest in Canadian dollars: 22500/60 = $375


Option 2.
Total amount invested: Rs. 250,000 [$5000]
Total amount at time of maturity: Rs. 272,500
Total amount at time of maturity in Canadian dollars: 272500/60 = $4542
Total interest earned in Canadian dollars: 4542-5000 = -458


So as per option 1 I will be declaring $375 as foreign income and pay tax on it. But in option 2 I have no gain but capital loss due to exchange rate fluctuations so no tax to be paid.

I just want to know which option I have to follow. Theoretically I had $5000 and then end up $4541 at the time of maturity and I should not be paying any tax on it even though in Indian rupees I had earned some interest income.

I hope there will be many people on this forum who are in similar situation and can advise which is the correct method to calculate the taxes.

I could not find any information on CRA site

Please advise which option to follow

Thanks



dimple2001   
Member since: Apr 04
Posts: 2873
Location: Western Hemisphere

Post ID: #PID Posted on: 19-02-14 17:29:45

The taxable entity is the interest component, not the initial or the final amount. Therefore, I would consider only the interest amount subject to the exchange rate. The reason I say that is your FD may have been initiated in 2012, but matured in 2013 which is the year interest is generated and therefore taxed for the 2013 tax year.

The other component is the exchange rate. Bank of Canada publishes annual average rates for many countries including India. CRA has a link available sometime starting March of every year for these rates. It is a one page pdf. This exchange rate removes the ambiguity of whether to use the starting rate, ending rate, or a floating rate.

With that said, you can simplify by just taking the interest portion in Rs (let's say it happens to be Rs 22500) and then convert to CAD using the BOC average exchange rate.

That will be my opinion.


-----------------------------------------------------------------
Dimple2001


Full House   
Member since: Oct 12
Posts: 2677
Location:

Post ID: #PID Posted on: 20-02-14 00:39:36

Quote:
Originally posted by web2000

I have put some funds in NRE fixed deposit. Since it is not taxable in India but I have to decare it as foreign income and pay tax on it in Canada.
There are two options which come to my mind but I am not sure which one is correct to calculate the taxes. I will go by example to make it easier to understand.
Let us say that I have invested $5000 for one year at 9% interest rate and at that time the exchange rate was 1$=50 rupees. When FD matured the exchange rate was 1$=60. So here are the options

Option 1.
Total amount invested: 5000*50 = Rs. 250,000
Total amount at time of maturity: Rs. 272,500 [9% interest]
Total interest: 272500-250000 = Rs. 22500
Total interest in Canadian dollars: 22500/60 = $375


Option 2.
Total amount invested: Rs. 250,000 [$5000]
Total amount at time of maturity: Rs. 272,500
Total amount at time of maturity in Canadian dollars: 272500/60 = $4542
Total interest earned in Canadian dollars: 4542-5000 = -458


So as per option 1 I will be declaring $375 as foreign income and pay tax on it. But in option 2 I have no gain but capital loss due to exchange rate fluctuations so no tax to be paid.

I just want to know which option I have to follow. Theoretically I had $5000 and then end up $4541 at the time of maturity and I should not be paying any tax on it even though in Indian rupees I had earned some interest income.

I hope there will be many people on this forum who are in similar situation and can advise which is the correct method to calculate the taxes.

I could not find any information on CRA site

Please advise which option to follow

Thanks.



------

I would like you to keep all the documents associted with regards to the initial deposit, into the NRE account. It will also give you the exchange rate at which it was INITIALLY converted into Indian rupees.

You please stick to the Canadian Reporting system, which is 1st of Jan to 31st December of each year. Pro-rate the interest to the reporting date.

I tried to get the old CAD to IR rate... No luck. So, wait for one or call the CRA on their toll free number and provide them with your e-mail and ask them for a copy. Alternately, get the PDF location from the operator.

The value of your Initial Deposit will fluctuate, as the Indian Currency is on a float. So, leave the amount of Initial deposits' original value as is, till such a time you want to repatriate it back to Canada. At that time you can do the accounting adjustments, which might be a loss, Initial value Minus the final value, which will give you the loss. It could be negligible too, who knows?!! The financial institution that you have your FD will also provide you with a statement, if you ask them for it. But they might also demand a few documents from yoou with your SIN Number etc., from you. It is your call to decide how you want to go about it.

When reporting the interest income convert the rupees to the CAD with the values that CRA will provide you with, in their PDF document.


FH.



web2000   
Member since: May 06
Posts: 849
Location:

Post ID: #PID Posted on: 20-02-14 11:17:37

Thanks dimple2001 and Full House.

It is much simpler to report interest as a separate entity and calculate the loss if any at the time of repatriation.











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