Handling US dollar income and capital loss on Canadian tax returns

This year, just before we were about to file our 2022 tax returns, Rich received a notice of reassessment for his 2021 tax return.  It indicated that he missed declaring some income and as a result, would need to pay an extra amount in tax, as well as a small interest charge. The issue turned out to be on the T5 form for our dividend stock that paid in US funds.

In 2021, we had two stocks in our non-registered account that paid in US funds.  The first is Algonquin Powers (AQN.T) which is a Canadian stock that qualifies for the dividend tax credit but pays dividends in US funds.  These dividends were shown at the top of the T5 form in boxes 24-26 and were declared properly.  We also owned AT&T which is a US stock and its dividends appeared at the bottom of the T5 in boxes T15 and 16.  In a careless clerical error, I totally missed these lower boxes while preparing our tax returns.  Both of our tax returns should have been reassessed since we split our non-registered income 50/50.  But for expedience, CRA attributed all of the missing income to Rich, since his name was listed first on the Joint T5 form and my name came after.

That was just the start of the issues.  The amounts of dividend shown on the T5 were in US dollars but on the tax return, we were required to declare in Canadian dollars.  Some currency conversion was required, but at what rate?  The agent we spoke to on the CRA help line informed us that we needed to use the Bank of Canada annual exchange rate for 2021, which can be found here:   https://www.bankofcanada.ca/rates/exchange/annual-average-exchange-rates For 2021, the rate was 1.2535.

The day after we spoke to this agent, I realized that on our 2021 returns, I also neglected to submit the T5008 form that listed our capital loss when we sold AT&T in Dec 2021.  Without a record of this form on our 2021 tax return, we would not be able to claim the loss against any future capital gains.  I did not realize this at the time, and since there was no income to declare, I hadn't included it.

I was back on the phone with the CRA info line to find out what was the best course of action to retroactively add this.  Before talking to an agent, I did my own investigations and came up with two possible solutions.  I could try to do a REFILE on my 2021 tax return to add the details of the T5008 form.  This would be a viable solution if I had not also been reassessed (I got a small additional refund, which I accepted without question).  If I did a REFILE, I would be resubmitting my “pre-reassessment” form which would be out of date.

The second alternative was to log onto my CRA Account to select the “Change My Return” option.  I would not be able to enter all of the fields from the T5008, but this seemed to be OK since CRA already had this form on file.  Instead I would update Schedule 3, line 13200 and enter the amount of loss that we incurred when we sold the AT&T stock.  But once again, the amount was in US dollars so it was not as simple as taking the Book value and subtracting it from the Disposition proceeds.  Once again, I had to convert to Canadian dollars.  But this time, I needed the Bank of Canada historic noon rate for the date of the sale, which in this case was December 8, 2021.  Now I had to go to this link to get the right exchange rate:  https://www.bankofcanada.ca/rates/exchange/daily-exchange-rates-lookup  I multiplied our loss by the stated exchange rate and submitted this new value in line 13200.  I got a rapid reassessment that indicated my loss was now on record and I could claim 50% of it against my next capital gain.  Note that I applied all the loss to myself rather than giving half to Rich.  That was more complexity than I wanted to deal with and since CRA did the same with Rich's reassessment, I figured this would be OK.  I was just happy that we didn’t lose the right to use our capital loss in the future.

So, this tax reassessment led to several lessons learned.  Ironically, we learned these lessons too late to be of use to us, as we have since sold both AT&T and AQN from our non-registered accounts and currently no longer have US dividends as income from that account.  But in sharing our lessons learned, hopefully others will not make the same mistakes that I did.