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Canadian tax questions


mcliu
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A couple of Canadian tax questions for the end of the year:

 

1) Are the gains/losses from shorting stocks treated as income or capital gains? Judging from this: http://www.cra-arc.gc.ca/E/pub/tp/it479r/it479r-e.html , it seems like it should be treated as income.. Can anyone confirm this?

 

2) With the US$ gaining so much on the C$, I've sold some stocks where I've lost money in US$ but made money in C$ terms. Since CRA requires you to convert your transactions to C$ when reporting (even if you don't actually convert the US$ into C$), I would have to pay taxes on these money-losing trades as a result of the implied exchange gain.. Does that make sense or am I missing something?

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perhaps this forum is of help: financialwebring.com, look under 'taxing situations'.

 

for the second question, in a corporate setting, you would most certainly have an unrealized gain or loss on foreign exchange necessary to produce balance sheets and income statements that balance. But for an individual, I have never seen any such reporting standard. It would seem that tax would be owing on such a gain even if technically unfair. However, you could use an average rate if there are many transactions, "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."

 

 

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I work in public accounting in Canada.

 

As for the first question, that is a toughy.  We have difficulty with the tax treatment of shorts as well.  Generally speaking, they are counted as income, and not capital gains, but there may be circumstances in which it would be treated as a capital gain. 

 

As for the second question, purchases and disposals of foreign securities are translated at the specific at which they are bought and sold.  I have had many clients that have made a loss on US stocks, but once it is converted into Cdn, they have made a gain.

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As for the second question, purchases and disposals of foreign securities are translated at the specific at which they are bought and sold.  I have had many clients that have made a loss on US stocks, but once it is converted into Cdn, they have made a gain.

 

I have always used the average rate for the year in terms of the exchange rate. 

 

Either way, you need to be consistent.  If you are going to hold a lot of US securities or ADRs going forward I would go with the average.  It is much simpler when doing your calculations than reverse engineering daily trades.  80% of my holdings since 08 have been US or ADRs.  I figure it probably breaks even over time. 

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