Investors Beware: Foreign Exchange Transactions Can Be Taxing

According to the Bank of Canada, the record low for the Canadian dollar against the US dollar, since October 1950, was recorded on the January 21, 2002 — just over 15 years ago — when the loonie was worth just sixty-two cents. But there have been some rebounds lately; and this means for some, there may be a tax consequence.

In general, foreign exchange transactions pose a reporting problem. The Income Tax Act doesn’t provide direction on whether currency fluctuations are taxable as income (100% income inclusion) or a capital gain or loss (50% income inclusion).  

In general, if the gain or loss is result of the purchase or sale of goods or services used in business operations, the full gains or losses are reported. But if the gains or losses resulted from the purposes or sale of capital assets, the reporting resulting in a capital gain or loss. 

That reportable gain or loss is triggered on conversion of the funds from one currency to another. Gains or losses of more than $200 in foreign exchange are reportable at the exchange rate that was in effect on the day of exchange, or an average exchange rate provided the calculations are consistent.

If the taxpayer has a foreign bank account transacting in foreign currencies, including the payment of foreign expenses, there may be a number of transactions in which a foreign exchange gain or loss can result.

For help with these transactions, it’s best to speak to a Tax Services Specialist.

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