Foreign exchange loss -

My_question_is: Canadian-specific
Subject:        Foreign exchange loss
Expert:         taxman at centa.com
Date:           Sunday April 16, 2006
Time:           07:55 PM -0700
QUESTION:
I have a case here regarding foreign exchange loss and hope you can help me
out.
An actively trading investor deposited USD200,000 in 2003 to his online
trading account, deposited USD200,000 in 2004 and another USD200,000 in
2005. In 2004 he withdrew USD50,000 for personal use. In 2003, he lost
USD100,000, in 2004 he gained USD200,000, and in 2005 he loss USD300,000. He
held a margin account and traded numerous transaction every year but he has
a non-financial related job. In the middle of 2005, he closed all his
positions, and by the end of year, he exchanged all left USD350,000 to
Canadian dollars. The investor reported USD100,000 as capital loss in his
tax return in 2003, USD200,000 as capital gain in 2004, and USD300,000 as
capital loss in 2005. Several questions arise from this case:
1. For the left USD350,000, the investor exchanged to Canadian dollars at
the rate of 1.2, if he can claim capital loss on foreign exchange loss, how
to decide his adjusted cost base?
2. For the USD50,000 he withdrew from his account, he trasfered to his
Canadian cheque account. And he did not claimed any capital gain or loss. If
he can, how to decide ACB again?
3. Because of active trading, the investor used annual average exchange rate
for transaction. Also because it was an margin account, he could trade
bigger position than the amount he actually owned. Ideally he should used
spot rate when transaction happened, but practically he could choose annual
average rate or monthly average rate. The point here is that due to of high
volatility of foreign exchange in recently year, using different rate, the
result could be quite different. For example, he purchased positions of
USD1,000,000 at the rate of 1.4, and then sold teh positions at teh rate of
1.2. Although no gain or loss in US dollar, he had CAD200,000 loss.
Actually, the result of his tax report was very ridiculous, in 2003, he had
USD100,000 loss, but because of transaction as the example, his loss in
Canadian dollars more than 300,000. In my opinion, no matter how many
transaction he made, what kind of commodity he traded, how big his position
he had, the whole online trading account should be treated as one
investment. The sale proceed is USD350,000 X 1.2 Plus 50,000 x rate to
change to Canadian dollars, ACB is USD600,000 x rate of actually purchase US
dollar. Using different rate should not affect the final result,otherwise
the tax system seems unfair.
4. If he had a bank loan. Can he deduct interest expenses from other income?
or can he increase his ACB? OR can he make election?
5. For margin expenses, same as question 4?
6. Can internet services charge, data services charge, trading books and
courses be deducted from other income? for traders and investors, what is
the difference?
Thanks in advanced for your opinion.
=======================
david ingram replies:
For Canadian income tax purposes, each transaction should be done in
Canadian dollars at the exchange rate that day.  It is easily available.
Since he is buying and selling in Canadian Dollar amounts, any exchange loss
is accounted for at the time.
If he has borrowed to fund this, the interest is deductible if he is trading
in income producing securities.  If he is trading in growth stock or penny
stocks or non-income producing securities, he is likely a trader and any
profits are taxable at full rates and any losses are business losses.  If
this is the case, any interest expense is a cost of doing business.
That's all - too busy.,
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