Rising loonie will affect foreign holdings; Hunting down historical rates may save tax
With the Canadian dollar reaching parity with the U.S. greenback, Canadians with U.S-dollar investment income or a pension, are no doubt wondering what the potential tax impact may be come the 2007 tax-filing season.
Last month, the Canada Revenue Agency (CRA) was asked whether a taxpayer was required to use the Bank of Canada annual average exchange rate to convert pension and investment income to Canadian dollars.
The taxpayer wanted to know whether she could instead use the exchange rate she received from her bank when she deposited her foreign pension and investment income into her Canadian bank account. The CRA responded that there was nothing in the Income Tax Act nor in CRA's published material that requires a taxpayer to use the Bank of Canada annual average exchange rate to convert pension or investment income to Canadian dollars. In fact, the CRA pointed to the 2006 General Income Tax and Benefit Guide, which indicates that the taxpayer can use the exchange rate that was in effect on the day the foreign income was received.
That being said, if amounts were received at various times throughout the year, taxpayers are permitted to use the Bank of Canada annual average exchange rate "as a convenience."
If the Canadian dollar continues to hold strong against the U.S. dollar until the end of the year, you may wish to sit down with your accountant and determine which conversion method gives the best results for you. Next April, that may depend on the amounts you received as well as the timing of those amounts.
For example, say Barb received a total of US$10,000 up to Aug. 31, 2007. Using the monthly average Bank of Canada exchange rate of $1.1147 to the end of August, she would report $11,147 of income.
Digging deeper, we learn that Barb had received US$8,000 of this income on Aug. 8, 2007 (rate $1.0499) and $2,000 back on Feb. 8, 2007 (rate $1.1853). Using the actual exchange rates on the dates Barb received her U.S. dollar income would translate to only $10,770, a reduction in income of $377 compared with the "average rate."
While the average rate method is more convenient, it may be worth the trouble of hunting down those historical rates as it might save you some tax.