So the client has 2 bank accounts: one in CAD and one in USD. her transactions are all in her USD account. So I understand that I have to record the realized gain/loss from currency exchange on the day she transfers her money from the USD to CAD bank account based on the initial rate of the transaction date. My questions is do I need to account for the difference between the bank rate vs market rate when I record for the realized gain/loss as well?
For example:
Jan 01 2024: receive $15000 of payment in USD => market rate of exchange of that day is 1.3245 => balance is CAD is 15,000 * 1.3245 $19,867.5
Jan 05 2024: The client transfer $15000 USD to CAD account => TD bank 's rate is 1.2345 => money goes into CAD account = 15,000 * 1.2345 = $18,517.5
So initially I would take the difference of $1350 ( 19,867.5-18,517.5) as the realized capital loss amount which is to be reported on Sch3. However, the thing is the market rate on Jan 05 2024 is actually higher than the bank rate, for example market rate on Jan 05 2024 is 1.3 => CAD amount based on market rate is 19,000* 1.3 = 19,500 => that means the actual loss is only $367.5 ( 19,867.5-19,500).
Now I don’t know if I can actually go ahead and claim the difference between the bank rate and market rate as bank fee which is 982.5 ( 1350 - 367.5) as this amount is not officially stated on the bank statement and just being taken accounted into the transferred money. I hope all of this make sense and someone who have done something like this would shed some light upon the topic.
You do not need to account for the difference. You account for what was actually transacted. There is no FMV attribution to the transfer of foreign currency, it is simply the rate at which it was exchanged at that time.
I think where CalgaryTax1 is confused is that the gain or loss happens on the initial receipt of the $15k US into income if it was for instance a deposit for self employed income or sale of stocks or something that would result in a taxable transaction. It is only one transaction so if for instance stock was sold for $15k US which was deposited to the US account but not transferred to Cnd until a few days later and the exchange rate was different like in this case then you use the exchange rate that it actually happened at on transfer to the Canadian account when figuring out the proceeds of the stock sale. It is not two separate transactions where you would use the exchange rate on the date the $15k was received for proceeds and then try to report a separate gain or loss on currency exchange when it was transferred to Cnd a few days later.
I’m having trouble with a client who had all their investments with BMO. I did AFR and all are accounted for, but the gain/losses amount is far different then the amount on the gains/loss statement which has been converted to CAN. I dug deeper and saw that the reason for this is the exchange rates used. If I use the AFR amounts, it shows gains of $14K. If I enter manually from my BMO report same transactions, I get nearly double the capital gains!!! Some actually go from a loss to a gain. Anyone else have this?
I believe the issue may lie with your proceeds or cost not being converted on transfer and you needing to manually input the converted figures yourself. (where one of the two is converted, and the other is not) … an issue I’ve had in the past.
Do you? I agree with @Deepinthemoneycall if it’s just personal cash being moved between accounts for personal reasons. If your client is not doing it with the INTENTION to earn profits on FX fluctuations, there is no need to report it for tax purposes. However, as @laurie mentions, if the FX gains/losses exist as a result of buying/selling investments in foreign currencies, those gains/losses should be accounted for on the T5008 slips - included as part of the gain/loss on disposition of the investments - in CAD $.
Yes, it is my fault for not mentioning that this is actually a whole business investment operation. The client actually incorporated her company for this activity. So she purchased luxury goods and sells them and it all happens outside of Canada, so all of her transactions are in USD. However, as she filed for T2 return, we need to account for this in CAD, hence my question.
I haven’t seen such errors as @Deepinthemoneycall , and I’ve never investigated that closely to determine differences due to FX rates. But I have seen where “some” investment management companies (not all) actually provide the correct amounts on T5008 slips (for tax purposes), considering the effect of superficial loss rules and replacement property rules. So, the T5008 slips may not match the “accounting” statement from the investment company.
It’s not easy to figure out unless you analyze the entire history of the client’s portfolio transactions, so I tell the client to get their portfolio manager to confirm what is correct - it’s not my job to figure that out unless the client wants to pay me an extra $1,000 or $10,000 or whatever it takes.
So, then, for tax purposes, the FX gains/losses are just a necessary part of doing business, and are just included in “business income or loss.” No need to separate FX gains/losses from business profits because they don’t exist on account of capital (so, they are not capital gains/losses). On the other hand, for internal reporting purposes, the client may like to SEE how much profit or loss could be attributed to FX gains/losses.
When I have clients with US accounts on a T2 return I simply record all the US transactions in US dollars. I then have two conversion accounts - one on the balance sheet underneath the US dollar account that says convert to Cnd and adjust it at the end of the year rate. I also have an account for currency exchange differences on the income statement that I put the balancing side to. I don’t record a conversion on US transactions as I go - only when it is transferred back and forth between Canadian and US accounts and at year end to adjust the US dollar accounts to Canadian at year end. Any accounts on the income statement (revenues/cost of goods) that are in US dollars get converted at the average for the year. You just need to keep track of which accounts are in US dollars and which aren’t so I usually include it in the account name. If they have some sales in US and some in Cnd then I just have two sales accounts. That way I can reconcile the US bank in US dollars and the Canadian bank in Canadian dollars and the final balance sheet and income statement are all in Canadian dollars.
Realized transactions are converted at the average FX, and US accounts that are tracked as unrealized will have a FX rate translation to CAD that is added back on the schedule 1.
Have any of these clients been audited by CRA? That is, does CRA allow this practice??? I assumed the rule was strict - ALL values on the T2 must be in CAD. That is, I understand you are accounting for the difference, but each number on the S100 and S125 is not the CAD value.
The thing is she has the control of when to transfer the money from the US account to the CAD account. So for example:
She bough an item for $5 usd and sells it for $10 usd on Jan 01 2024: that means she makes a profit of $5 usd on that day. Now if she transferred that amount right away to her CAD bank on the same day, she would get $7 CAD for example. However, if she waits a few more days when the exchange rate is better, she could get $8 into her CAD account. So wouldnt you say that I should account for that $1 difference as realized capital gain? I dont see how could I account this difference as business gain
Yes, thats what I am doing as well. Anything stays on the US account will be accounted for as unrealized gains/loss at YE as everything must be converted into CAD. So basically, the ending balance of the US account would be converted into CAD amount and with the FX gains/losses being accounted for as unrealized gains losses.
I suppose. If you frame it that way, you might have the basis for and argument, but I don’t think it will be easy to convince CRA. Even as you describe it, it sounds like she is doing the FX trading “daily”, which is just like “day traders” or such active investors - whose profits have been deemed “on account of business” rather than “on account of capital”. I’ve heard of a few TCC cases about that.
ok, so I just realized that on T2, there is actually a line 7004 : Foreign operation translation gains/losses. So I think that this is exactly where I should report this amount, and as you said it is part of the business income, not part of the capital gain/losses account. I was just confused because I always assume FX gains/losses are reported as capital gains/losses but again, the nature of this business is trading so it makes sense that it is part of the business activity
Not sure how that line is treated - part of OCI? Not taxable? I would be careful with that - I’ve always done it like @Deepinthemoneycall described - with the addback/deduct on S1. Be aware of the difference between the realized gains/losses and the unrealized ones - when the cash is converted from the USD account to the CAD account those gains/losses are “realized” and should be included in income.