Tax on investment income
 

Two quick questions:

How are distributions and gain/loss taxed for Canadian income funds?


How are gains/losses from foreign stock markets calculated? Which exchange rates do I use? ie. the rate on the day of transactions?


Many thanks in advance.

for your first question, is that just a normal capital gain?
if so, then 50% of the gain is taxed at your marginal rate.

Most likely an income funds distribution will be interest income....so it will be taxed like other interest income. Of course it could be dividend income distribution or capital gains. A loss on an income fund would most likely be a capital gains loss.

If you're trading stocks using foreign cash, you would use the average rate for the year. I know for my USD account they give me a rate I should use on my end of the year statement.

If you're trading foreign stocks with a Canadian dollar denominated account, just use the $ value that it cost directly....at least that's what I have been doing.

Misteranswer: I exchanged the USD first then I buy a NYSE stock on a different day. Therefore my cost would be from day 1 but the actual exchange rate would be from day 2.
But it sucks that you just take the average rate for the year, I thought I could minimize my capital gains by timing my buys on a day when USD is strong and my sells on a day when USD is weak, thus creating less of a spread.

As for the income fund, my friend (who works at PWC in tax) told me that distributions are subtracted from the ACB, therefore when you sell the capital gains would be higher. However, she's not 100% sure.

The cost of your NYSE stock would the amount you paid at the time of purchase in CDN. I would use the day 2 exchange rate since you bought the stock on day 2.

I don't know what your friend at PWC told you but it may not be right to deduct distributions from your ACB. It depends. If your distributions are 100% return of capital then your friend is correct. If your distributions are a mixture of interest, gain, and dividends, then you can not deduct the distributions against your ACB.

Only the return of capital portion of your distributions is deductible against your ACB.

Distributions can be a mixture of income and return of capital where income can be interest, gains, dividends, foreign income, etc.

Many thanks zeroFX

So for calculating ACB and POD, I will use the daily USD/CAD rate?

For ACB, use the exchange rate at which you purchased the investment.

For POD, use the exchange rate at which the sale was finalized or when you received the proceeds.

For reporting distributions, use the average exchange rate or you can use the exchange rate at the time you received the distributions. Using the average exchange rate is easier.

So I guess I'll just use the daily rate when calculating my ACB and POD. This gives me less of a gain because of the currency fluctuations.

The $ stays in a USD dollars in my investment account so there's has not yet been a transaction.