Dear Nancy Woods,
I'm having difficulty figuring out what my true gains or losses are because of the drastic changes in the Canadian dollar versus the U.S. dollar. Can you give me some advice?
Whenever I evaluate a holding that trades in U.S. dollars, I typically convert to Canadian dollars at the current exchange rate when I am doing it. Yes, you want to know if you have a gain or loss of the investment in the currency you purchased it in, but, ultimately, you should assess everything in Canadian dollars. I think it is more appropriate because eventually you will be declaring the gain or loss on your income tax return in Canadian dollars not U.S..
What this means is you need to have the exchange rate to purchase U.S. dollars on the date of your purchase. You can either use the rate of that day or, if you have multiple U.S. transactions, use the Canadian Revenue Agency posted average exchange rate that they announce at the end of the year. You need to be consistent with the source of the rate that you use and be sure that it is "reasonable."
When a foreign currency holding is sold, the new current exchange rate is used to convert back to Canadian dollars for tax purposes. This does not mean that you have to actually convert the U.S. dollars back to Canadian, but you declare it as if you did.
You will find that on occasion a security may have a gain in one currency and a loss in another. It is important to not let currency fluctuation influence your decision to sell, however. That decision should be based on other reasons, such as fundamentals.
So, in the case that you are just assessing a loss or gain of a holding, I think it wise to measure the final figures based in Canadian dollars.
Nancy Woods is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. Visit her website www.nancywoods.com or send an email request to firstname.lastname@example.org. You can also send your questions to email@example.com.