Norbert’s gambit with the Horizons US Dollar Currency ETF (DLR/DLR.U) is often the most cost-efficient way to convert Canadian dollars to US dollars, or vice-versa. Many investors perform the gambit in an RRSP, but if you’re swapping currencies in a non-registered account, you should be aware that it can have tax consequences.
At brokerages such as RBC Direct and BMO InvestorLine, you can place the buy and sell trades within minutes of each other. But several other brokerages do not allow you to journal the ETF from the Canadian side of your account to the US side (or the other way around) until the buy trade settles, which takes two business days [as of September 2017]. During this interval, the US-Canadian exchange rate can move significantly, and a big swing could stick you with a capital gain or loss when you make the sale.
What’s more, calculating this gain or loss can be tricky, because both the purchase and sale need to be reported in Canadian dollars. That means any transaction in DLR.U needs to be converted from US dollars. For example, if you’re selling DLR.U, you would look up the Bank of Canada exchange rate on the settlement date and use this value to report the proceeds in Canadian dollars. The difference between this amount and your original purchase price is your capital gain or loss.
Play it a gain
Let’s assume Mallory wants to convert $50,000 CAD using Norbert’s gambit. She buys DLR on Monday, February 17, when the US dollar is worth $1.238 CAD, so DLR is trading at $12.38. Ignoring the trading commission, her order looks like this:
Trade date | Settlement | Order | Security | Shares | Price (CAD) | Total (CAD) |
---|---|---|---|---|---|---|
February 17 | February 19 | Buy | DLR | 4,038 | $12.38 | $49,990.44 |
Mallory waits three business days and then journals DLR to the US side of her account on the settlement date, February 19. She then immediately places an order to sell all 4,038 shares of DLR.U, which is trading at $10.00 USD:
Trade date | Settlement | Order | Security | Shares | Price (USD) | Total (USD) |
---|---|---|---|---|---|---|
February 20 | February 22 | Sell | DLR.U | 4,038 | $10.00 | $40,380.00 |
To see if there is any capital gain or loss, Mallory will need to convert the proceeds of the DLR.U sale to Canadian dollars using the exchange rate on the settlement date, which is February 22. Note that it has now been five days since she placed the buy trade, and currencies can rise or fall sharply over that time frame. We’ll assume the US dollar has climbed almost three cents to $1.264, which means the proceeds of Mallory’s sale are worth $51,040.32 CAD (that’s $40,380 USD × 1.264). When we subtract the value of the original purchase ($49,990.44 CAD) we’re left with a capital gain of about $1,050. If Mallory is in a 40% tax bracket, that will cost her more than $200 in taxes.
Don’t trust your brokerage
The example above is a bit extreme: $50,000 is large amount, and a three-cent change in the exchange rate in just five days is a tad pessimistic (though certainly possible). If you’re doing a smaller gambit, chances are your gain or loss will be relatively minor. For what it’s worth, I recently used Norbert’s gambit twice to convert small amounts of USD in a non-registered account. Using the method described above, I calculated a $13 loss on the first trade and a $25 gain on the second, for a trivial net gain of $12.
Unfortunately, my brokerage (Scotia iTRADE) saw things differently. I’ve written before about why you should not trust your brokerage to accurately calculate the adjusted cost base on your ETFs, and I found that out first-hand when I received my annual Realized Gain/Loss Report for the year. It inexplicably indicates a $420 gain from the two DLR trades. I have no idea how they calculated the book values they’re using, and an email to customer service didn’t help. It’s no wonder the report includes the following disclaimer:
Scotia iTRADE provides cost basis and associated realized gain and loss information to you as a courtesy service and for informational purposes only and not for official tax purposes. Such information may not reflect all adjustments necessary for tax reporting purposes. You should verify cost basis and corresponding gain/loss information provided by Scotia iTRADE against your own records when calculating reportable gain or loss resulting from a sale.
One other issue may come up in this discussion. The CRA has a $200 exclusion on capital gains from foreign exchange, which means you don’t need to report any gain under that amount. You might be tempted to invoke this rule and elect not to claim a small gain you incurred doing Norbert’s gambit. However, this rule applies to cash conversions and was designed to avoid creating a taxable event every time Morty and Helen exchange a couple thousand bucks before heading to Del Boca Vista. While any gains or losses on DLR are due only to the exchange rate, it’s an investment fund, not cash. Any gains or losses from transacting these funds should be reported to CRA.
I notice your example above omits any trading commissions. Is this just for simplicity, or is there some rule to suggest they not be included?
@Willy: Just for simplicity. In reality, your trade confirmation slips will factor in the cost of the commissions.
I made a couple of Norbert’s Gambit trades last year, and it led to very interesting tax consequences.
I use the annual average US exchange rate in my capital gains calculations for US equity transactions instead of using the rate on the trade date.
The CRA says, “Report your gains or losses in Canadian dollars. Use the exchange rate that was in effect on the day of the transaction or, if there were transactions at various times throughout the year, you can use the average annual exchange rate.”
See: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/rprtng-ncm/lns101-170/127/clc-rprt/menu-eng.html
I make quite a few transactions over the year, and it just makes things easier. The CRA doesn’t care which method that you use, as long as you are consistent. I have used this method for many years, so don’t really have a choice. For 2014, the rate was 1.1044664.
Since the rates on the date of the Norbert’s Gambit were quite a bit different than this, the capital gain reported by my capital gains calculation were WAY off the real impact of the trade.
I won’t bore you with the calculation.
Be careful when it comes to superficial losses as well if you use Norbert’s Gambit often.
@Doug. I don’t completely follow the “you can use the average annual exchange rate” suggestion. If you use DLR/DLR.U as in the above example and you use the average exchange rate for both the buy and sell transactions then you will have zero capital gains or losses since the average exchange rate will be the same for both transactions.
Am I missing something?
@HeKyLl:
When you buy the DLR, it is already in in Canadian dollars, so that end is not adjusted for exchange, only the sale of DLR.U is.
@HeKyLl: Here’s one of the calculations:
Aug 20, purchase 7500 DLR @ CDN$10.91 = $81,825.00
Aug 26, sell 7500 DLR.U @ US$9.96 = US$74,690.01 (commission included)
Using actual exchange 1.0951, proceeds = CDN$81793.03, loss=$31.97
Using average exchange 1.1044664, proceeds = CDN$84,492.61, gain 667.61
— a $700 difference!
@Doug: Thanks for sharing your experience. Sounds like your brokerage was equally baffled by the transactions.
@Tyler: Superficial losses would only be an issue if you claimed a capital loss on a gambit trade and then bought DLR again within 30 days. You could simply choose not to claim the capital loss, and then there’s no problem.
Yet another reason to leave this gambit to Norbert. Most of my transactions are too small to make it worthwhile to use the Gambit anyway, so have avoided so far.
I did my first gambit a couple of weeks ago with BMO Investorline. I was converting roughly US$50,000 to C$. I phoned in both my buy and sell orders (DLR), the BMO rep understood what I was doing, and everything worked perfectly. Thank you for saving me several hundreds of dollars.
Now the matter of figuring out the tax consequences of what I did. If I understand your post I have neither a capital gain nor loss because both the buy and sell settled “within minutes of each other”. The exchange rate was US$1.00/C$1.2463.
But the US dollars I was selling were the proceeds from selling some US securities a month earlier. At that time the exchange rate was US$1.00/C$1.1932. (I held on to the US$’s for about a month before selling them and benefited from a depreciation in the C$.) My gain is equal to:
US$50,000 (1.2463 – 1.1932) = C$2,655
I know you guys are not tax advisors but don’t I have to report that as a capital gain?
Finally, on another matter, I just want to say I think you guys are fantastic and do a wonderful job educating Canadian investors. I read everything you write and I have learned a great deal from you. That is saying something because I am an ex corporate finance bank executive and I am currently a finance/economics professor.!! Thank you again.
GMF
I have done many currency exchange using DLR / DLR.U. For small amount, I use an fx broker in Vancouver which has good rates (much better than the banks) but for large amount, I use DLR though RBC Direct Investing. I always sell as soon as the trade goes through. The only challenge I have had is to have all shares trade at once when I have large amounts, one time I had to wait the next day for the share to go through. That’s partly my fault since I don’t do market trades ever but it’s important to note it’s not a high trading volume.
Great post, very informative.
Regarding the reply on Superficial loss:
“Superficial losses would only be an issue if you claimed a capital loss on a gambit trade and then bought DLR again within 30 days.”
Doesn’t superficial loss apply if you purchased the security within 30 days, either before or after, of selling the security?
If this is true then a person cannot claim a capital loss on a Norbert’s gambit but must claim any capital gain.
Is this correct?
Why do you have to use the *settlement date* of the second transaction? I thought CRA says to use the *date of the transaction* to account for currency gains and losses. Using the settlement date makes no sense to me.
I am a little surprised to see that someone managed to use Norbert’s Gambit at Scotia iTrade in 2014. My effort to use it there was blocked completely, and that brokerage was recently mentioned by Rob Carrick at the Globe and Maill as not permitting the use of the method for currency conversion.
There’s a startup called Transferwise funded by Richard Branson and other heavy hitters that has just expanded to include CAD-USD exchanges at extremely cheap rates to undercut banks. I can’t wait for the day I can stop doing Norbert’s Gambit since it’s such a pain, and this may be it.
https://transferwise.com/blog/2015-02/usd-live/
@Tennis Lover: Yes, the superficial loss rule applies if a security is bought within 30 is before or after the trade resulting in the loss. I was just pointing out that it this only applies if you actually claim the loss. If you do a couple of gambits and you incur a loss and gain, you always need to report the gain, but you can just ignore the loss if it’s small and you’re worried about running afoul of superficial loss rules.
@Chris: It comes down to how you interpret the term “transaction date.” Many people assume this means the trade date. But the actual transaction occurs when the money is exchanged on the settlement date. This is why, for example, if you want to sell a stock to harvest a capital loss you cannot do it on December 30. The trade would settle in January and therefore the capital loss is deemed to have occurred in the next tax year.
@Doug: When I do it I simply send in an online request to have them journal the shares, which occurs after the settlement date. Then I sell them online. So far I have not had a problem.
@Gilbert wrote “I know you guys are not tax advisors but don’t I have to report that as a capital gain?”
I’m not a tax adviser either, and hadn’t thought about this much before, but it seems to me that US dollars are not considered differently than any other non-Canadian-cash asset, so there would be a deemed disposition triggering a tax event whenever US dollars when converted back to Canadian dollars, or anytime the US cash was spent purchasing anything.
If true, this would mean that you would need were to track of the ACB of the US cash in your account and report the gain or loss of the exchange not only when you converted back and forth to Canadian dollars, but all the time. For example, if you were to sell some Apple shares one day, then buy some shares of IBM a few days later, you would need keep track of the ACB of the US cash between those transactions, and report the gain or loss of the exchange.
I doubt that many people do this.
As I said, I’m no expert, but it looks to me that this type of reporting would be required within US dollar investment accounts. I hope that someone more knowledgeable will comment on this. It is an interesting question.
Whisker off-topic, but same fx theme. I’d welcome insight in regards CAD->USD at Scotia iTRADE. I am familiar with Norbert’s Gambit and have executed this for non-registered account at RBC multiple times. Great. But I must use Scotia for an RRSP account and seek to hold some USD ETFs in the Scotia RRSP account.
As I understand, based on CCP/PWL White Paper, then Scotia ‘USD friendly RRSP’ account provides reduced fx spread for those that seek to rebalance USD denominated securities (sell USD security, buy USD security same day). But that this service may charge full retail fx spread on CAD->USD transactions.
But what is the best approach to minimize fx costs, in a Scotia RRSP, in the case of a deposit of significant CAD and subsequent purchase of USD securities?
Dan, thanks for another interesting article.
Your comment on the $200 exclusion for capital gains from forex transactions made me question something that I had previously taken for granted.
Suppose I held a US ETF in an unregistered account, and it paid me a dividend of US$10,000 when the Canadian dollar was at parity with the US dollar. If I left the US$10,000 in my brokerage account until now, and then converted it into Canadian dollars, say CAD$12,000, would I need to pay capital gains taxes on the $2,000 appreciation since the dividend was paid?
Similarly, in my case, I worked in the US for a number of years, and when I moved back to Canada I deposited some of my USD savings into my Canadian brokerage account (in USD). If I now converted those USD to Canadian dollars, would I be subject to capital gains tax?
I had always assumed the answer was no in both cases, that cash is not considered to be capital property but I am now questioning myself.
@Ross: Try asking Scotia to waive the $30 quarterly fee, it worked for me. For what it is worth, they told me that iTrade will be implementing US dollar RSP accounts (like other non-registered accounts) later this year.
@Ross: Oh, and the “US friendly RRSP” account is not only for wash trades. A very fair exchange rate is used for both purchases and sales of US securities, when paying in Canadian dollars. If you enter a trade, the exchange rate is shown on the confirmation screen shown before you submit the order.
@CCP: But if you have to use the settlement date for the second trade, why aren’t you also using the settlement date for the first trade?
@Ross:
Sorry for the number of messages folks, but for comparison sake, I see that the DLR ask is currently CDN$12.51 and the DLR.U bid is US$9.99. You can do the math to see if the rates are friendly or not.
Also, in my experience, the rate shown on the confirmation screen in the iTrade “US friendly RRSP” account is the rate actually paid, not an estimate as it says on the screen. The settlement amount has always been exactly as the confirmation screen says (limit orders).
@Doug, thanks for the proactive effort. Much appreciated. I thought leverage and extend your analysis. Was not sure of source or type (bid, ask, mid) of indicated 1.2513 quote.
Specifically, I checked on CurrencyOnline, a service that I’ve used to transfer capital between currencies. Were I to place a trade today, at 12.05pm PST, with CurrencyOnline to sell CAD and buy USD of a capital sum then the quote was 1.2564. Were I to instead sell USD and buy CAD then the quote was 1.2451. Both quotes are inclusive of CurrencyOnline margin (that appears to be 90bp – huh, not as competitive as I thought but that’s a different story). Based on CurrencyOnline bid/ask quotes then derived mid price is 1.25075 just a few minutes after your Scotia iTRADE quote.
Your quote of 1.2481 is 22bp from the mid, which given several minutes of time difference in quotes, seems remarkably similar to the 50bp bid-ask spread of Scotia Capital Inc indicated in the related CCP/PWL White Paper. I had understood, seemingly incorrectly, that the 50bp SCI spread applied to USD sell + USD buy transactions but not to USD securities purchased with CAD $. Very interesting. Thanks again.
@Ross: The quote 1.2513 was a Reuters quote of symbol CAD=X, not sure if it was the mid-point or not. I also have an Interactive Brokers account with FX trading, and although the time isn’t the same, it currently shows 1.2503 to buy, 1.2502 to sell, subject to a trading commission of about $1.20 per trade.
Screenshot: http://1drv.ms/1G17hWU
@Chris: Because there is no currency conversion to consider when you buy DLR: it is only an issue when you have to convert USD. If you do the gambit the other way around (buy DLR.U with USD and then sell DLR) you would indeed use the settlement date.
@Ross: Again, sorry for spamming the CCP blog, but did you notice that the rate that I was quoted via the iTrade “US friendly RRSP” for purchase of US securities was BETTER (not worse) than the actual exchange rate prevailing at the time. I was thinking backwards….
That is, it would have cost CAD$124,810 to buy US$100,000 of securities, instead of CAD$125,130 as indicated by the real-time mid rate. I suppose that the iTrade system is only updated periodically throughout the day, and the rate is indicative of lower USD.CAD rates earlier in the day.
Doug’s follow up question to my own on calculating FX capital gains/losses gives me the courage to write about another related problem I have been struggling to figure out.
Imagine the following tax nightmare scenario:
-You own several US listed ETF’s in a non-registered account
-They pay dividends thru-out the year which you receive in US$
-You accumulate (i.e. hold them as cash) those dividends (lets say US$5000) over the course of 2014
-In 2015 you take that US$5000 and buy whatever US$ ETF you own that under-performed the others
For tax purposes in 2014 you report the US$ dividends you received in 2014 at the C$ equivalent. You could use the actual US$/C$ FX rate on the day you received the dividends or alternatively the average US$/C$ FX rate for the year. Lets say you used the average. I have not looked the average rate up (I am not ready to do my taxes yet) but lets suppose for simplicity it was US$1.00/C$1.2000.
When you buy your ETF’s in 2015 you use the US$/C$ FX rate on the date of settlement to determine your C$ adjusted cost base. Lets say the rate is now US$1.00/C$1.2500. The C$ has depreciated.
So far, so good – looks like you have a handle on your taxes. But ooops – what about the depreciation of the C$ from 1.200 to 1.2500. You have enjoyed a gain while you held the US$’s as cash calculated as follows:
(US$10,000)(1.2500 – 1.2000) = C$500
What do you do about that???
Of course, when the C$ was appreciating a few years ago you were suffering a loss determined in the same fashion when you invested your US$ dividends. But I never dreamed at that time of trying to successfully claim a capital loss. Now my nightmare scenario is CRA dreams about claiming I have a capital gain that should be reported.
Anyone else having trouble sleeping at night?
I sure appreciate your white paper on Norbert’s Gambit and how it relates to RBC Direct investing.
I followed your paper to the T and got my $US for 79.3 cents today minus the 2 trades at $9.95.
Was really stoked to see how well that operation worked!
HEDJ
WisdomTree Europe Hedged Equity Fund– got this ETF afterwards
Let me echo the comment about Transferwise above. I just started using that for my Euro to Canada transfers and I have seen some pretty significant savings. If its now working between the US and Canada transfers, it could be a really good way to keep the bank fees (hidden and published) out of the exchange completely.
@Peter I just checked the rates on TransferWise and they’re 0.5%. This compares to the 0.2% cost of doing Norbert’s Gambit on a $25K exchange (after the bid-ask spread and transaction costs) according to the links here https://canadiancouchpotato.com/2013/12/03/norberts-gambit-the-complete-guide/comment-page-4/
So you’re saving 0.3% – the equivalent of $30 on a $10K transaction or $75 on a $25K transfer. Given the hassle of the two trades, the call to journal, accounting hassle, and potential tax, I would say it’s not worth it for these amounts that this blog used to suggest trying Norbert’s Gambit on.
@CPP – in the spirit of encouraging the theme of simplicity in your portfolios this year, and now that TransferWise is in Canada, do you think it’s time to abandon Norbert’s Gambit except on trades $50-100K+?
I wasn’t sure where to post this q -it doesn’t relate to this article.
My question is three-fold:
1. How does CCP recommend we protect our non-registered investments from lawsuits? I believe that money inside Registered accounts is protected. My Registered accounts are full, so most needs to be in non-registered accounts. (Perhaps you’ve done an article on this?) Obviously the first step in protection is to do nothing evil, but that alone doesn’t ensure some people won’t try to gain money this way. ETFs, etc, can save us on MERs, but if the account is vulnerable to lawsuits, the savings in MER may be made moot.
2. I can put my non-registered amounts inside a disability Trust, which would have at least two financial benefits for me, one being continued access to up to $6000/yr in disability payments, and two being the protection of the funds inside it from lawsuits. However, per disability Trust rules, the Trust cannot access self-directed options, ETFs, eSeries, etc. It must involve a banker, who is limited under her securities license as to what she may allocate to. She can put them in RBC Canadian Index, TD US Index, National Bank International Index, all of which have higher MERs. Those MERs would be offset by the $6000/yr in social benefits and the protection from potential lawsuits, but are there equivalent funds that are permitted under securities licenses would have a better net gain in the long run?
3. Are RBC Canadian Index, TD US Index, National Bank International Index as detailed/diverse/broad as VXC, TDB902, etc -just with higher MERs?
@DaveP: Reading their website, they say USD can only be sent to chequing accounts in the USA. Transfers to TransferWise (in either CAD or USD) are also performed via wire transfer, which are going to be pretty expensive ($40 or so).
Maybe TransferWise will be an option one day, but I don’t think it’s a viable option for Canadians yet.
@Gilbert: Many thanks for the kind words! Note that although the two Norbert’s gambit trades can be placed within minutes of each other at BMO, the settlement of the USD trade still takes three days, so a capital gain is still possible.
@Gilbert, Doug, Bruce: I’ll leave the question to your tax preparers. Your logic is sound, but I don’t know of any situation where such a transaction was deemed to be a taxable capital gain. How could one possibly track the book value of USD cash that accumulated in a brokerage account?
@Ross: You could try to to Norbert’s gambit in a non-registered account and then transfer the US securities to the RRSp in kind:
https://canadiancouchpotato.com/2012/02/27/a-new-way-to-sidestep-currency-conversion-costs/
@Tara: Your questions are important and should be directed to a professional who understands your situation. The only thing I will add is that, yes, the index mutual funds you mention are largely the same as the ETFs and e-Series funds I recommend, but with higher fees.
Hello
I did a norberts gambit using td bank stock since it trades in us and Canada. I did it with rbc direct investing. Everything went well and did both transactions within minutes of each other.
Is doing it this way any different than using dlr.
Everything seems fine to me…
@john r: The difference is that the price of the stock can move significantly in the interval between the two trades, even if it’s only a minute or two. That adds an extra element of risk. It’s not necessarily a bad idea: the narrower bid-ask spread on a stock can result in more savings, and if the stock goes up you can actually get a boost. But you should be aware of the trade-off.
Excellent post Dan. I’ve always wondered about that $200 capital gains exclusion for foreign currency currency exchange. It’s hard to find good info from CRA. I think they like to be vague when it suits them. It probably makes more sense to claim the capital gain rather than risking a fight with the CRA.
Generally speaking, does the act of journaling shares over qualify, in and of itself, as a “disposition” that would create a capital gain or loss vis-a-vis that year’s taxes? Let’s say that on Jan 1st, 2014 I have $10,000 USD lying around and use it to purchase $10K of HXS.U (a USD-denominated S&P 500 ETF), which has appreciated to $12,000 by December 15th of that year, whereupon I journal it over to HXS (the CAD-denominated version of the same ETF), but continue to hold HXS rather than selling it. Does the journaling event from HXS.U > HXS constitute a disposition & result in a a $2K capital gain reportable on my 2014 taxes?
@Billy: Journaling shares from one side of an account to another is not considered a disposition. The two versions of DLR and HXS are the same security, so journaling them is not the same as selling one security and buying another.
Quick question with regards to journaling. Would I be able to journal from VUN to VTI or XEF to IEFA? They are technically the same names, no? Sort of like MG to MGA or T to TU?
@DL: No, this is not possible. VUN uses VTI as its underlying holdings but they are two completely separate funds, domiciled in two different countries. By contrast, DLR and DLR.U are quite literally the same security: they even have the same CUSIP number.
http://www.investopedia.com/terms/c/cusipnumber.asp
A bit new to this whole business. I’ve reached a point where it makes sense to convert my TD e-Series to ETF’s, MER-wise. Now I want to convert a significant portion of my cash to USD, in order to purchase VTI rather than VUN, and VEA instead of VDU. Norbert’s gambit seems like just the ticket. I have just over 54k to convert. My concern is that the Canadian dollar is the lowest it has been in 5 years compared to the US dollar, so I will get a comparatively small amount of bang for my buck. Should this be a concern in my case, or did I fail to take something into account? Or is it just a question of philosophy, speculating on the dollar’s movement?
@Martin: It’s definitely speculating on the dollar’s movements. In any case, if you hold US equities then your exposure to the US dollar is the same whether you use an unhedged e-Series fund (TDB902) or VTI. As long as you hold US stocks you are exposed to the US dollar, even if your fund is denominated in CAD:
https://canadiancouchpotato.com/2014/01/13/how-a-falling-loonie-affects-us-equity-etfs/
Re superficial losses, the CRA says:
“you, or a person affiliated with you, buys, or has a right to buy, the same or identical property (called “substituted property”) during the period starting 30 calendar days before the sale and ending 30 calendar days after the sale; AND (my emphasis)
you, or a person affiliated with you, still owns, or has a right to buy, the substituted property 30 calendar days after the sale.”
Since we don’t hold DLR long, generally, the second clause ought to exclude most losses from being superficial, shouldn’t it?
Moreover, for those transactions that still count as superficial losses,
“if you are the person who acquires the substituted property, you can usually add the amount of the superficial loss to the adjusted cost base of the substituted property. ”
So it seems like you can get the value of your losses eventually, just more painful to do so.
Please comment — I did several moderately large gambits in 2014 and have no desire to report (fake!) gains but not the equivalent losses unless I absolutely have to.
@Paula: A question like this needs to be directed to a tax professional who understands all the details of your situation.
@Gilbert, Doug, Bruce: Your comments regarding the tax implications of capital gains due to USD Forex fluctuations is a question that applies to me in 2014. I have struggled with finding a definitive answer to this question: “Do you have to report gains on USD cash, due to Forex fluctuations?”. In my situation, I sold some US equities in November 2014, when the CAD was at 1.12, but I waited until December before converting the cash to CAD at 1.16, enjoying an economic gain on the currency during the transition period.
When I asked my accountant about this, he said: “This is a grey area, but that is not usually what we do. Calculate the proceeds of disposition of the stock using the exchange rate on date you received the funds, and then that’s it. Any further fluctuation of the currency is your good (or bad) fortune”.
This didn’t quite strike me as a definitive answer, and to Gilbert’s comment: “Anyone else having trouble sleeping at night?”, I would say “yes”! This was definitely causing me anxiety. Looking for clues on the CRA website, I found the following article, under the Capital Gains section:
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/rprtng-ncm/lns101-170/127/cmpltng/bnds/frgn-eng.html
Which says:
“Foreign exchange gains or losses from capital transactions of foreign currencies (that is, money) are considered to be capital gains or losses. However, you only have to report the amount of your net gain or loss for the year that is more than $200.”
This leads me to believe the answer is yes, Forex gains on USD are taxable.
To Doug’s point, if this is true, it opens up a massive can of worms, as you would have to start tracking the ACB on USD cash at every entry and exit point, whether you are converting to CAD, buying another USD ETF, receiving a US dividend etc., or renting a condo in Palm Springs with elevated US cash. Further muddying this situation is the fact that you are allowed to use an average exchange rate for calculating investment income from US dividends throughout the year… Does it make sense to accurately track the ACB on accumulated US dividend cash, when you are using an average exchange rate to calculate tax on the dividend income? To my mind, the answer is a definitive ‘No’.
I ended up tracking down a senior Tax partner at PWC to ask him this question. He was previously a senior Tax Auditor at the CRA, and he knew his stuff. Here is what he had to say: “Technically the answer is ‘yes’, Forex gains on cash deposits are taxable, but CRA generally does not pursue this because the amounts are usually small and it is difficult to calculate adjusted cost base on. But next year, with the massive change in the currency values… you never know…”.
So it seems that it is indeed a grey area after all. To echo Doug’s comment, I doubt that many people track or report gains on USD cash, and I am guessing that CRA won’t come after you for them, as long as you are consistent, and don’t suddenly start trying to claim Forex losses. But I am left still feeling unsettled.
It would be nice if CRA would provide some clear guidance here. Something that was fair, but not onerous. One suggestion might be a distinction between the cases when foreign currency is used as capital property, vs. when it is used as money – I.e. pay tax on capital gains on your foreign cash when it is bought and sold specifically as an investment, but ignore the cases when foreign cash is used as money – either in the purchase or sale of other foreign securities, or when receiving foreign dividends or other foreign income. This would make more sense to me than the $200 exclusion rule.
I purchased vti.us on the us side of my account and it’s held in American dollars.(as per couch potato recommendations)
I did not realize that when I purchased vti.us on my wife’s account I purchased it on the Canadian side of her account. The price of the stock is converted to canadian dollars. So if the stock is 100.00 on the us side on my wife’s account is shows up as 125.00 (assuming 25% exchange rate) . Also the us dividends that’s are paid monthly are converted to canadian..
Is there any advantage or disadvantages in buying it on canadian side..
to me this saves converting back and forth and you don’t need norberts gambit.
by the way I also didn’t realize I purchased vxus on canadian side as well..
this was done at rbc direct.
@John r: When you buy a US-listed ETF on the Canadian side of your account, the currency is converted at the brokerage’s retail rate, which is usually terrible: spreads of 1.5% or more are not uncommon. It’s convenient, but very expensive.
In your case, since you have already purchased VTI and VXUS, I would suggest calling RBC Direct and asking them to “journal” these ETFs from the CAD side to the USD side of your account. This carries no cost and will allow you to have all future dividends stay in USD. When you eventually sell the ETFs, the proceeds will be paid in USD and then you can determine how best to convert them to CAD at lower cost.
I was wondering if the DLR/DLR.U unit consolidation that occurred in January will have any impact on using DLR to perform Norbert’s Gambit?
http://www.newswire.ca/en/story/1468209/horizons-etfs-announces-dlr-dlr-u-unit-consolidation
@Troy: No effect. Horizons does this regularly to keep the unit price of DLR.U as close as possible to $10 USD.