ACB for a Corporation's USD Investments: Track Cost in CAD

Should my corporation track ACB in Canadian dollars for every US-dollar trade?

Yes, unless the corporation has a functional currency election (below). Canadian tax results are worked out in Canadian dollars, and an amount in another currency is converted at the Bank of Canada rate for the day it arose (Income Tax Act, s. 261). A US-dollar brokerage account therefore needs a Canadian-dollar record of every purchase, sale and fee. The running Canadian-dollar cost of each holding is its adjusted cost base (ACB).

That one figure drives two filings. For shares held on capital account, the gain or loss on each sale goes on Schedule 6 of the T2. The same cost is what the T1135 tests: the form is due when the total cost of specified foreign property is more than $100,000 at any time in the year.

A case is not simple when:

• the account holds years of trades that were never converted to Canadian dollars;
• the trades may be business income, not capital gains;
• the cost may have passed the T1135 line in a year when no form was filed;
• the gain in the books does not tie to Schedule 6.

Gather trade confirmations and statements for every year, the history of how the US dollars got into the account, the exchange-rate source used so far, and the prior T2s and T1135s.

Which exchange rate turns each purchase, sale and fee into Canadian dollars?

Use the Bank of Canada daily rate for the day of each transaction. When no rate was quoted that day, such as a weekend or holiday, use the closest earlier day that has one (s. 261(1); Bank of Canada rates). The CRA's capital gains guide converts proceeds at the rate in effect at the sale and cost at the rate in effect when the property was acquired.

The same guide treats commissions and brokers' fees as outlays and expenses and counts acquisition expenses in the average cost.

The Bank of Canada publishes its daily rates as downloadable CSV, JSON or XML files, so one table can be matched to every trade date. For days before March 1, 2017, the CRA's currency folio calls for the Bank's noon rate, kept in its archive of historical rates.

The folio accepts another daily rate source only if it meets every condition, including that it is independent, verifiable, used in the financial statements and used consistently year to year. A rate printed on a broker statement qualifies only if it meets all of them. The folio allows an average rate for certain income items, not for every amount, so convert each trade at its own day's rate.

The capital gains guide says the rate at the time of the sale. It does not say whether that is the trade date or the settlement date. For trades near year-end the two dates can fall in different tax years, so have a professional settle which to use, then apply the same date to every trade.

How does average cost work when I buy the same stock several times?

Shares of the same class of the same company are identical property, and their cost is averaged. After each purchase, the new ACB per share is the old total ACB plus the cost of the new shares, divided by all the shares then owned (Income Tax Act, s. 47; capital gains guide).

Each purchase is already converted at its own day's rate, so the average is a Canadian-dollar figure. Do not average in US dollars and convert later: the purchases were made at different rates.

Keep one pool per security. Shares of one company and class that the corporation holds in two accounts share one average. A different company, or a different class of the same company, is a separate pool.

Cost also moves without a trade: a split or consolidation, reinvested distributions and cost-base adjustments on a T3 slip each change it and go in the ledger on their own dates (capital gains guide). US-dollar dividends and interest are income, not cost; each is converted at the rate for the day it arose (s. 261(2)) and booked as the investment account guide describes.

What happens to my Canadian-dollar cost when I sell only part of a position?

The shares sold carry the average cost at that moment, and the shares kept keep the same average. Selling does not change the average cost per share (capital gains guide). The next purchase blends into what remains.

1. Convert the sale proceeds at the sale-day rate.
2. Multiply the shares sold by the current average Canadian-dollar cost per share.
3. Subtract that cost and the converted selling commission from the proceeds.
4. Leave the remaining shares at the same average cost per share.

A sale at a loss needs one more check. If the corporation, or a person affiliated with it, buys the same or identical shares in the 30 days before or after the sale and owns them, or a right to buy them, at the end of that period, the loss is held back (s. 40(3.3)). This is the corporate form of the superficial loss rule: it applies to a corporation in place of s. 54, which leaves out a disposition covered by s. 40(3.4). A person who controls the corporation, and that person's spouse or common-law partner, are affiliated with it (s. 251.1), so the owner's own purchases of the same shares can count.

The loss is treated as nil at the sale, then as the corporation's loss again at the first time listed in s. 40(3.4), such as the start of a 30-day period in which neither the corporation nor an affiliated person owns the replacement shares. It is not added to the ACB of the replacement shares, as an individual's denied loss is. Carry it in the ledger as a separate held-back loss. The investment account guide covers the entries.

Where does the currency gain or loss go, and does the $200 rule apply to a corporation?

A currency gain or loss shows up in two places, and the small-gain floor for individuals does not reach either of them.

• On the shares: the currency movement is already inside the capital gain, because cost uses the purchase-day rate and proceeds use the sale-day rate. There is no separate entry for it.
• On the US dollars themselves: each time the corporation disposes of US dollars, such as to buy shares, convert back to Canadian dollars or pay a fee, it can realize a gain or loss. Under s. 39(2), that gain or loss is deemed capital to the extent it is not already income. The T2 guide says foreign exchange gains and losses from buying or selling capital properties are capital gains or losses.

An individual ignores the first $200 of net currency gain or loss in a year. That floor is in s. 39(1.1), and it applies only to an individual other than a trust. A corporation does not get it, so even small gains and losses on the US dollars belong in the records.

Whether the gain on the cash is capital or income depends on why the corporation holds the cash. US dollars that work as business cash can produce income. The corporate foreign exchange guide covers that line. Moving money between the Canadian-dollar and US-dollar accounts, including Norbert's gambit, is in the transfers guide; the entry for the exchange difference is in the US-dollar account guide.

Are my corporation's trades capital gains or business income?

It depends on the facts, and the Act has no bright line. The CRA's IT-479R is archived, so the CRA no longer updates it, but it still lists the factors the CRA has looked at: how often the corporation buys and sells, how long it holds, its knowledge of the markets, whether security transactions are part of its ordinary business, the time spent studying the markets, financing mainly on margin or other debt, advertising that it will buy securities and, for shares, whether they are speculative or pay no dividends.

No single factor settles it, but a combination may. IT-479R treats a corporation whose prime business activity is trading in shares as a trader, with its gains and losses on income account. A corporation whose prime business is holding securities is not a trader just because it sells some from time to time.

An election can fix capital treatment for Canadian securities only. A Canadian security is a share of a corporation resident in Canada, a unit of a mutual fund trust, or a debt issued by a person resident in Canada, and the election is not open to every taxpayer: a trader or dealer in securities, for one, is excluded (s. 39(4) to (6)). Shares of a US company are not Canadian securities, so for US stocks the facts decide.

Where do the gains and losses land on the T2?

For shares held on capital account, each sale is listed in Part 1 of Schedule 6 with its proceeds, adjusted cost base and outlays and expenses. Gains and losses on the US dollars go in Part 4, Other properties (T2 guide).

The year's net result is amount P in Part 9. Where it goes depends on its sign:

A net capital loss reduces taxable capital gains only: the guide lets it apply to the three previous years and carry forward without a time limit.

Schedule 1 starts from net income in the financial statements. For capital-account share sales already in that income, deduct the book gain at line 401 or add back the book loss at line 111 of Schedule 1, then include the taxable capital gain from Schedule 6 at line 113; a net capital loss goes to Schedule 4 (Schedule 1). Otherwise the gain is counted twice.

Reconcile the ledger to the Schedule 6 totals and explain any difference from the books. A difference can come from a trade converted at another rate, a missing purchase, or an average taken in US dollars. How the gain is then taxed inside a corporation is in the holding and investment guide.

T1135: when is it required for a corporation, and which cost counts?

A corporation resident in Canada files Form T1135 when the total cost amount of its specified foreign property is more than $100,000 at any time in the year (Income Tax Act, s. 233.3; CRA: Form T1135). Cost decides, not market value: the CRA says the cost amount generally is the adjusted cost base (CRA questions and answers).

Due date: the same day as the T2, six months after the end of the tax year (CRA: Form T1135).

What goes into the total:

• US shares count whether the corporation holds them at a Canadian or a US broker, and so does every other kind of specified foreign property, not only this account. Property used or held exclusively in carrying on an active business is excluded; whether shares held by a corporation whose business is trading fit that exclusion is a point to settle with a professional before relying on it.
• The form instructions convert foreign amounts at the rate in effect when the property was purchased. That is the Canadian-dollar cost the ACB ledger already holds.
• The test is "at any time in the year", so property sold before year-end still counts.

Which holdings count and how to fill in the form are in the foreign property reporting guide. A form that was never filed is in the missed T1135 guide.

Can my corporation keep its books and file in US dollars instead?

Only with a functional currency election. A corporation that does not elect reports in Canadian dollars even if its books are kept in US dollars. The election covers the whole corporation, not one account. The CRA and s. 261(3) set these conditions:

• The corporation is resident in Canada throughout the year and is not an investment corporation, a mortgage investment corporation or a mutual fund corporation. These are narrow defined terms: an investment corporation, for example, must be a public corporation with most of its property in shares, bonds, marketable securities or cash, among other tests (s. 130(3)). Check the definitions before assuming a holding company is in or out.
• The US dollar, euro, UK pound, Japanese yen or Australian dollar is the primary currency in which it keeps its books for financial reporting throughout the year. A US-dollar brokerage account alone does not meet this.
• It has not filed a functional currency election before.
• It files Form T1296 no later than 60 days after the first day of the tax year.

The corporation's tax results, including capital gains, are then worked out in the elected currency. For investments already held, the existing Canadian-dollar cost and earlier cost-base adjustments are converted at the relevant spot rate for the last day of the last Canadian-currency year (s. 261(7)); that sets the opening cost in the elected currency, so keep the old ledger and the conversion. ACB is tracked in that currency from then on. The T1135 amounts are stated in that currency too. The Act reads a Canadian-dollar amount such as the $100,000 line as its equivalent in the elected currency at the Bank of Canada rate on the first day of the year (s. 261(5)), but the form still words that line as Canadian dollars, so confirm how the line applies before relying on either reading.

The election is hard to undo: the Act allows only one, and a revocation applies only to years that begin six months or more after it is filed (s. 261(3) and (4)). The corporate foreign exchange guide covers what it changes on the T2.

What records do I keep for each trade so the ACB survives a CRA review?

Keep enough to rebuild every gain from the broker's own documents:

• the trade confirmation: date, security, quantity, price, currency, commission and fees;
• the statements that tie the confirmations to the account, for every period;
• the exchange rate for each trade day and its source, such as the Bank of Canada series;
• a ledger per security: date, shares bought or sold, Canadian-dollar cost, running shares, running cost and average cost per share;
• the transfers that put US dollars into the account and the rates used, because the gain on the cash depends on them;
• the split, reinvestment and T3 notices that change the cost;
• the prior T2s with Schedule 6 and the prior T1135s, so each year's ledger starts from the figures filed.

If years of trades were never converted, the ledger can be rebuilt from the statements trade by trade. It needs a complete set from the first purchase, because a missing purchase shifts every average after it.

Example

These examples are illustrative. Amounts are in US dollars (US$) or Canadian dollars (C$) as marked.

Two purchases and a partial sale

A holding corporation buys 100 shares in January and 100 more in March, then sells 100 in October. Each trade is converted at its own day's Bank of Canada rate.

The cost of the 100 shares sold is 100 times C$75.75, which is C$7,575. The gain is C$9,660 less C$7,575, which is C$2,085 before fees. The 100 shares kept carry C$7,575, still C$75.75 each. Converting the US-dollar gain of US$1,500 at the October rate gives C$2,070, which is C$15 less. Commissions would be converted at their own day's rate, added to cost on the buys and deducted from proceeds on the sale.

Cost passes the T1135 line over three years

The corporation's only specified foreign property is its US stocks.

• Year 1: cost stays at C$90,000 all year. No T1135 on this test.
• Year 2: it buys C$40,000 more in March, so cost reaches C$130,000. A T1135 is due, and Part A or Part B can be used because cost stays below C$250,000. Market value falling to C$110,000 does not change this.
• Year 3: it buys C$130,000 more in June, so cost reaches C$260,000, then sells shares with C$150,000 of cost in December, which leaves C$110,000 at year-end. Part B is required, because cost was C$250,000 or more at one point in the year.

A corporation that trades every day

A corporation buys and sells US stocks about 200 times a month, closes most positions the same day and uses margin to fund them. Frequency, short holding and margin financing are IT-479R factors that point toward business income. If the CRA treats the profit that way, it is reported as income, not through Schedule 6, and the ACB averaging rule is not the tool. Each trade still needs its own Canadian-dollar conversion. Whether the T1135 exclusion for property held in an active business applies is a separate question to settle before the first return is filed.

Different for you?

• The account has years of trades never converted to Canadian dollars: the ledger has to be rebuilt from the broker statements, and each year's T2 and T1135 tested against it. Catch-up bookkeeping covers the rebuild, and corporate tax help covers the returns that depend on it.
• A T1135 may have been missed: see the missed T1135 guide and get corporate tax help before filing late.
• You cannot tell whether the trades are capital or income: the classification changes the T2 and the records, so have it assessed with corporate tax help.
• You move money between Canadian-dollar and US-dollar accounts, or use Norbert's gambit: see transfers between CAD and USD accounts.
• You are unsure whether a holding counts on the T1135: see which holdings count.
• The corporation is in Quebec: see a US bank account for a Canadian corporation, which covers Quebec's own foreign property return.
• You are weighing a US-dollar functional currency election: see foreign exchange gains on a corporate return and get corporate tax help before electing.
• You sold at a loss and bought back: see the investment account inside a corporation.
• You want the account's books kept for you: see bookkeeping.
• You are deciding between investing inside the operating company and a holding company: see holding and investment corporations.