A reader emailed me about how to calculate capital gains tax on US traded stocks within a Canadian non-registered account (in USD). While the calculations are very similar to trading Canadian stocks, the difference is that the currency exchange needs to be accounted for.
Capital gains for Canadian stocks
Before we get into the meat of the article, lets first go over some of the basics of capital gains tax for Canadian stocks. When stocks are traded in a non-registered account (outside RRSP/TFSA/RESP), they are subject to tax.
While paying tax can be a burden, the bright side is that capital gains gets preferential tax treatment. That is, any capital gains, the profit between sell price and buy price, has a 50% inclusion rate. This means that 50% of the gains are added to income and taxed at your marginal rate. If the investor is in the highest marginal tax bracket, then he’ll pay close to 25% of his gain in capital gains tax.
What if there is a loss? You can read more about how capital loss works and how they can reduce your total capital gains tax for the year.
Calculating Capital gains Tax for US stocks
Now to answer the reader question, how does capital gains tax work for buying or selling US stocks when trading in US dollars? While the basic concept is the same as Canadian stocks, the difference comes when the currency exchange comes into play.
Basically, the buy price and sell price need to be converted to Canadian dollars first prior to calculating capital gains. Once capital gains after foreign exchange is calculated, the same 50% inclusion rate is used. To figure out the exchange rate on the day of the trade, the Bank of Canada website has all the forex history you need.
Here’s an example:
- Stock: XYZ on NYSE
- Buy Price USD: $10 x 100 shares = $1,000
- Buy CAD/USD Exchange: 1.05 (on day of buy trade)
- Buy CAD: $1,050
- Sell Price USD: $15 x 100 shares = $1,500
- Sell CAD/USD: 0.97 (on day of sell trade)
- Sell CAD: $1455
- Capital Gain: $405 minus commissions
- Capital Gains Tax: ($405 minus commissions) x 50% x marginal tax rate
In the above example, if it was simply a stock on the TSX, then the capital gain would be $500 (minus commissions). However, since there may be a loss or gain due to the value and volatility of the USD currency itself, it can work in favour or, in this case, against the investor.
Another method my accountant told me about is to use an average USD/CAD exchange for all the transactions to avoid looking up the exchange rate on the day of the trade for every transaction. While this may simplify things, you’ll need to work through the numbers yourself to see which option reduces capital gains the most. For a frequent trader, I can see how using a single annual average forex rate can be advantageous.
Personally, to keep things simple, I hold US securities in registered accounts. As per my portfolio allocation article, US dividends stocks are kept in an RRSP to avoid the withholding tax on the dividend and the occasional USD trade may be made within my TFSA.
Do you trade US stocks? Do you keep them in registered accounts as well?