The known damage caused to our finances by the falling dollar includes more expensive costs for groceries and other goods, plus killer foreign-exchange costs when visiting the United States.
What people may not be aware of is a potential tax hit on money cashed out of U.S.-dollar savings or chequing accounts.
The definition of financial savvy these days is to have a bunch of cash in a U.S.-dollar account. You're being paid close to zero in interest, but benefiting hugely in terms of how your money is valued in Canadian dollars. If you made a $10,000 (U.S.) deposit in a U.S.-dollar account in early 2014, your money was worth about $10,200 (Canadian); it was worth close to $13,600 early this year.
Leave that money alone and you have no tax worries. But if you convert it back to Canadian currency to spend it, you've got yourself an accumulated capital gain of $3,400.
"Any foreign-currency gains or losses in excess of $200 is reportable to CRA as a capital gain or loss," said Caroline Battista, a tax analyst at H&R Block.
The actual gain in this example would be $3,200 – your full gain of $3,400 minus the $200 of currency gains that Canada Revenue Agency allows you to have without paying taxes. The taxable amount of the currency gain in our example would actually be $1,600, based on the fact that only 50 per cent of capital gains are taxable.
You could safely remain ignorant of this tax issue when our dollar was stronger and more stable. But with the dollar down dramatically in recent months, your humble U.S.-dollar account could be your best-performing financial asset.
CRA is clear in specifying that currency gains are not taxable when money continues to sit in a U.S.-dollar account. A capital gain is triggered when you convert funds in a foreign currency into Canadian dollars or another foreign currency, or when you used the foreign currency to make a purchase or payment.
If a capital gain is triggered, report your net currency gain or loss in Canadian dollars. Tracking the value of your U.S. cash in Canadian currency is easy – just use the 10-year currency look-up on the Bank of Canada website. Specify a date and the converter will show you the Canadian-dollar value of U.S. money (and vice versa).
To properly track your currency capital gains, you'll need to factor in any interest paid on your money. If you've added money gradually to your U.S.-dollar account, you'll also need to account for the various exchange rates that applied at the time. Ann Galvin, tax partner at the accounting firm Stern Cohen, said it's reasonable to use an average exchange rate for a year to cover multiple small deposits to a U.S.-dollar account over that period. The Bank of Canada look-up can give that annual figure to you.
Ms. Galvin said the $200 exemption from CRA would likely protect people who move small amounts of money in and out of a U.S.-dollar account. "I think that for a few dollars one way or another, they don't want people to be offside."
But she has a client who early last year put $300,000 Canadian in a U.S. deposit account for a planned property purchase that ultimately fell through. "She brought the money back in November and she said, you know, I made money on it. I said, yes, and you're also going to have to pay tax on it."
Note that the rules for currency gains on savings accounts apply to cash held in a U.S.-dollar account at a U.S. bank, as well as a Canadian bank. If you have U.S. savings and other foreign investment assets that cost more than $100,000, use the T1135 foreign income verification statement to document a currency capital gain (you need to report the gain on Schedule 3 of the personal income-tax return as well).
If you're sitting on a pile of U.S. dollars, give some thought to both the investment and tax implications of cashing out. A rebound in the loonie would erode your current gains, but that's unlikely until oil prices make a sustained move higher. This gives you some flexibility in deciding when to convert your U.S. dollars back to Canadian currency and take your tax hit. There's one good thing about our weakling dollar.