On a recent trip to New York City, I was able to pay for most of my travel expenses by using my United States dollar VISA credit card, the bill for which I will pay using U.S. dollars from my U.S. dollar chequing account. But from time to time, the odd expense, such as tapping my phone to enter the New York subway system (US$2.90), gets charged on a Canadian credit or debit card, and I end up paying the applicable foreign exchange rate.
In November 2024, the foreign exchange rate I was charged was over $1.40 to buy U.S. dollars, which surprised me. After all, at the beginning of 2024, the FX rate was closer to $1.32. The appreciation of the U.S. dollar against the Canadian dollar (and many other major currencies) in the last two months could have tax implications, depending on your situation. Fortuitously, this week the Canada Revenue Agency (CRA) released a technical interpretation letter that provides us with a good refresher on how foreign currency gains, and losses, are to be treated for Canadian tax purposes.
In the letter, the CRA was asked how gains or losses on a foreign currency bank account, a foreign currency guaranteed investment certificate, a foreign currency term deposit, and other similar foreign currency deposits are to be treated by an individual Canadian taxpayer. The CRA was also asked how the foreign exchange gain/loss rules work when shares, bonds, mutual funds or real estate are purchased and sold in a foreign currency.
The CRA responded that if, as a result of any fluctuation in the value of a foreign currency relative to Canadian currency, an individual has made a gain or suffered a loss from the “disposition” of a currency other than Canadian currency, that gain (or loss) would be a capital gain (or capital loss), and be taxable (or allowable).
A disposition of foreign currency occurs when you either spend it, convert it to another currency (Canadian or otherwise), or use it to purchase a negotiable instrument (such as a note or bond) or some other asset. For example, foreign funds on deposit, such as U.S. dollars, can be moved from one form of deposit to another, and, as long as such funds can continue to be viewed as “on deposit,” no disposition will occur. The CRA has stated that term deposits, guaranteed investment certificates and other similar deposits which are non-negotiable are considered to be funds on deposit.
On the other hand, transactions in which foreign currency funds are invested in negotiable instruments, such as notes, bonds, mortgages, debentures, U.S. government treasury bills and U.S. notes and commercial paper, will require a foreign exchange gain (or loss) calculation at the time the foreign currency funds are used to purchase these investments, and each time these investments mature or are otherwise disposed of, whether or not the funds are rolled over into similar securities.
The good news is that, under the Income Tax Act, you only have to report the amount of your foreign currency net gain or loss for the year if that gain/loss is more than $200. If the net amount is $200 or less, you do not have to report it on your tax return.
In 2020, the CRA clarified that foreign currency held by an individual on deposit in a chequing account or a current deposit account at a financial institution, to the extent that the individual can withdraw the deposited currency at any time, convert it to another currency at any time, or use it at any time to make a purchase or payment, would be eligible for this treatment.
The recent CRA technical interpretation also confirmed that when you dispose of securities, such as stocks or bonds, or real estate, denominated in foreign currency, your capital gain (or loss) on disposition would include a foreign currency component. For these transactions, you’re supposed to use the actual foreign exchange rate that was in effect on the day of the transaction. In other words, to properly report a gain (or loss) on a foreign property, you would convert the proceeds to Canadian dollars using the exchange rate on the date of sale and compare that to the adjusted cost base (ACB) or tax cost of the property using the foreign exchange rate on the date of purchase of the property.
For example, let’s say Jed bought 1,000 shares of a U.S. stock on Nov. 8, 2012, when the price was US$10 per share, and the U.S. dollar was at par with the Canadian dollar. By December 2024, the price of the shares has fallen to US$8 per share, and Jed decided he wanted to do some 2024 year-end tax loss harvesting to use the US$2,000 ((US$10 – US$8) X 1,000) accrued capital loss against other gains he realized in 2024.
So, on Dec. 5, 2024, when the U.S. dollar was trading at C$1.41, Jed sold the U.S. shares for US$8,000, yielding proceeds of $11,280. So, what initially appeared to be an accrued capital loss of US$2,000 (US$10,000 – US$8,000) turned out to be a capital gain of $1,280 ($11,280 – $10,000) for Canadian tax purposes.
Note that the CRA will require Jed to report his foreign exchange gain on his 2024 securities transactions on his 2024 tax return even if he doesn’t actually convert the foreign funds (i.e. the US$8,000) back to Canadian dollars, which may be the case if he has a U.S. dollar non-registered trading account, and he leaves the funds in that account for future trades.
Finally, keep in mind that foreign income, such as U.S. dividends, may be treated a bit differently. While the CRA says that you’re supposed to use the Bank of Canada exchange rate in effect “on the day you received the income,” if the income was paid to you more or less evenly throughout the year, you can use the average annual rate for the year, which can be found on the Bank of Canada’s website.
Any foreign taxes withheld on your non-registered foreign income may entitle you to claim a foreign tax credit when you calculate your federal and provincial or territorial taxes. You would also use the same rates that were used for the income to calculate the Canadian equivalent of the foreign taxes paid for purposes of calculating the foreign tax credit.