Currency - US/Canadian

[Uccmal]

 

I have been trading between US and Cdn currency every few days.

 

Al, are you doing straight up currency, using margin or buying dual listed?

 

Ive done it with dual listed shares with decent success. Good way to make some $ in choppy waters (but like all rides on choppy waters will prob need some graval ;D)

 

Hi Smazz,

 

It's a simply process of moving cash in my Margin Accounts between the Canadian and US Accounts.  It doesn't matter which account carries the margin deficit as long as the aggregate adds up to enough to cover the positions. 

 

When the Cdn dollar rises to around 0.98 cents I transfer a set amount of cash to the US side.  When the Cdn dollar slides to about 0.955 or less I reverse the process.  I have been doing this over and over and over again.  The gain is typically about 1.5-2.5% on a round trip.  That doesn't sound like much but I have done it so many times that it adds up over a period of time. 

 

Obviously the brokerage makes a good amount on the fees which is partly why I require the spreads that I do.  But the volatility has been incredible.  Every time there is a panic - about once per week like today the US dollar goes up, then when it subsides the US dollar goes down.  I should probably just liquidate my entire account and trade currency but at some point this trade will go long term against me at which point the party will be over.  When the party is over I will lose 2% or so on the last round trip which is acceptable since this is just a little extra bonus to my stock investing.

 

Smazz, What shares do you use.  Royal Bank?

 

 

[Granitepost]

Hi Al: 

Doesn't the broker charge a 2% spread in each direction that would negate any benefit from the transaction? 

 

Also, do you not find that the interest rate on Canadian $ margin balances are a lot lower (2% difference) than the interest rate on US $ margin balances?

 

Cheers

[Uccmal]

Hi Jim, My returns are all in.  As I noted in my summary above.  In a perfectly efficient system the broker would charge a much smaller spread and I would get 5% instead of 2.5 on the round trip.

 

A.

[Uccmal]

Yes, the interest rates on my Cdn acct are about 2% lower.  I take that into consideration and try to keep the bulk of the debt in Cdn currency.  I try to run my US account with a tiny debt or with a slight surplus. 

[nodnub]

Do you know what the Canadian tax treatment is for these gains?

 

[Uccmal]

There are no currency transaction taxes.  They have only ever been proposed. 

[nodnub]

yeah, I'm not referring to transaction tax (Tobin Tax, proposed--never implemented)...  I am talking about Capital Gains on "Other Property".  i.e. foreign currency.

 

I looked in the Capital Gains guide...

http://www.cra-arc.gc.ca/E/pub/tg/t4037/t4037-e.html#P816_66627

use this link and scroll down a page or two and you will find the following:

 

----

"Foreign exchange gains and losses"

 

Foreign exchange gains or losses from capital transactions in foreign currencies 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. If the net amount is $200 or less:

 

   * there is no capital gain or loss; and

   * you do not have to report it on your return.

 

Report your net gain or loss in Canadian dollars. Use the exchange rate that was in effect on the day of the transaction. If there were transactions at various times throughout the year, you can visit the Bank of Canada Web site, or contact us to get an average annual rate.

----

 

I would love to discover that this paragraph does not apply to the situation we are discussing. Do you have a definitive response from a CA on this?

[Uccmal]

No formal opinion thus far.  I'll let you know if I get audited. 

 

IMO, that paragraph you have quoted refers to the actual purchase of a foreign property such as a stock.  Moving currency back and forth would fall under the guise of a future Tobin Tax.

 

I am not even sure how you would report this type of transaction.  Its very difficult to match things because each transaction deals with a different set of exchange rates etc.  Taking this a bit further and noting the transaction costs of about 2%.  Would these fees be considered broker fees (they are) and would they then become tax deductible like all broker fees - If that is the case declaring the transactions may actually work to my benefit on an after tax basis.

 

Adding to all this confusion is that there is no T-statement from your broker with any of the relevant info on it so they are not reporting it either.

 

[Granitepost]

Hi Al:  

 

Thanks for the info.  

 

Cheers

 

 

[SharperDingaan]

 

Technically every time you switch currencies, you've sold currency X & bought currency Y. Each currency is treated as though it were a security, the FX rate forms part of the cost base & the sales proceeds when you sell your security. You pay tax on 50% of the total gain which is effectively the FX profit.

 

The reality is that CRA effectively ignores it as it is hard to track & costs more to enforce than its worth.

If the average FX difference is $0.03, you need to have shifted around 666K - & not bought anything with the funds. Most folks are not going to be doing that.

 

SD

 

 

[nodnub]

 

Technically every time you switch currencies, you've sold currency X & bought currency Y. Each currency is treated as though it were a security, the FX rate forms part of the cost base & the sales proceeds when you sell your security. You pay tax on 50% of the total gain which is effectively the FX profit.

 

The reality is that CRA effectively ignores it as it is hard to track & costs more to enforce than its worth.

If the average FX difference is $0.03, you need to have shifted around 666K - & not bought anything with the funds. Most folks are not going to be doing that.

 

SD

 

That's interesting, thanks.

 

In the second paragraph are you referring to the $200 exemption?  You would only have to move $6,666.00 at a $0.03 exchange rate profit to reach the $200 exemption. I think many people here would have surpassed this exemption many times over in a year.

[Smazz]

Haha, Al, I didnt even know this thread was here (re. my post from other thread) - good stuff ;D

 

Yes, I use RY.  For the few times Ive done it (no gettin it you know where from the broker) maybe most liquid AND, when im doing these type of Arb situations I like to do it with something I can sleep with if shit hits the fan and i have to hold the asset for a while. For me, this is the way to do it because the increased volatility means increased gains!

AL, dont pay the broker the 1.5-2% they are making on the currency ;)  Put it in your daughters education fund!

[Smazz]

 

The reality is that CRA effectively ignores it as it is hard to track & costs more to enforce than its worth.

Thats it in a nutshell- on top of that nothing comes in from the Broker statements on currency. This is not an excuse but if it was an issue they would be the first to be "yelled at" I think.

 

File this under "dont ask, dont tell"

[Uccmal]

Yeah, I definitely like that method better.  I can think of two or three cross listed stocks already I hold that are good candidates such as SLF, and MFC.  I hold them anyway for the long term.  

 

BCE as well. 

 

Thanks Smazz.