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., Sorry - too many questions to answer (over 1,800 at the moment- all of which I have saved over the last two years with the intention of answering them). I am adding your name to our Q & A list and another question may answer yours. AND, I have answered over 6,000 questions at http://www2.jurock.com/askexpert/expert.asp?aid=121&cid=63 <http://www2.jurock.com/askexpert/expert.asp?aid=121&cid=63> or www.centa.com <http://www.centa.com> and you should be able to find your answer by going there or more specifically, to http://www.centa.com/search.htm However, if you can not find your answer, answers to this and other similar questions can be obtained free on Air on the last Sunday morning of each month (Sunday Jan 29, 2006 is next). On the last Sunday at 9:00 AM on 600AM in Vancouver, david ingram will be a guest on Fred Snyder of Dundee Wealth Management's LIVE talk show called "ITS YOUR MONEY" Those outside of the Lower Mainland of British Columbia will be able to listen on the internet at www.600AM.com <http://www.600am.com/> (9:00 AM Los Angeles Time every Sunday morning) Call (604) 280-0600 to have your question answered. BC listeners can also call 1-866-778-0600 free of charge. Callers to the show and questioners on this board may also attend the Vancouver Thursday Night seminars on finance and making your Canadian Mortgage Interest deductible. There are 17 different topics covered and every Thursday night is different. They are presented by Fred Snyder at his office at 1764 West Seventh (the Spence Diamond building at 7th and Burrard) in Vancouver. Call (604) 731-8900 to register and be sure to bring your spouse, significant other or financial advisor. I will be at the Thursday evening following my last Sunday appearance. I will be at the Thursday, Feb 2nd 7 PM seminar to talk for a short time about mortgage interest as a deduction. And, of course, we are always here to prepare your US / Canadian and State returns by emailed pdf files, snail mail, fax or courier. -------------
