The Canadian dollar has dropped more than 25% since only a short while ago when it was on par with the US dollar. As a result, not only has the cost of living increased dramatically, but also costs for those visiting the United States have skyrocketed.
The depressed loonie provides a nice opportunity to cash-out on funds that collecting dust in US dollar accounts. What most people don’t consider however is that withdrawing the money can trigger a possible tax hit.
For those who have cash in an American account, it may be an attractive time to cash out and buy Canadian dollars. But assuming the money was purchased earlier at a more favourable rate, a taxable capital gain will be incurred on the profit.
For example, if one purchased $10,000 USD in 2014 for $10,0000 CDN when the dollar was at par and deposited it into a USD account, those same $10,000 USD would have appreciated about 35% in 2 years. And if those US funds were converted back into Canadian funds, the $3500 profit would become a taxable capital gain.
Foreign-currency gains must be reported to the Canada Revenue Agency, and taxes are payable upon 50% of such a gain. But a capital gain is not triggered while the funds remain in US dollars in one’s account – even though these dollars may be worth more at any given moment.
For those who have gains or losses resulting from foreign exchange transactions, in order to ensure that the capital gains resulting from foreign exchange transactions are reported accurately, it is imperative that all such transactions are recorded (with both amounts and exchange rates for each transaction), and that supporting documentation, such as bank receipts or statements, are available as proof in the event of an audit.
So the bottom line is, while it may be a good time to buy back Canadian dollars, remember to keep some money aside to pay the taxman and keep proper records in case of an audit down the road.