Currency Risk a New Concern for Canadian Retirees

Evelyn Jacks

It’s been an expensive year of wealth erosion for Canadians, with new taxes and lingering inflation.  From a year end planning perspective, are there tax strategies to consider with a new economic trigger; that is, the drop in the value of the loonie to a level even further than 4 year lows posted at the end of October, as the threat of tariffs to be imposed by the U.S. are increasing.  Here are some things to consider:

1. The rate of change in currency valuation. Consider how far the dollar has fallen.  Back in 2019, it took 1.3269 Canadian dollars to buy an American dollar.  Those rates remained relatively stable until the end 2023 when the dollar began its fall, as shown in the chart from the Bank of Canada, below.  The key differential has been the weaker performance of the Canadian economy against that of the US. 

However,  by the end of October 2024, the exchange rate was 1.3755; and by the end of November, the rate hovered in the 1.40 range. 

What does this mean for investors?   There may be currency gains or loss to account for when trading in US assets.   Specific tax rules require that foreign exchange gains or losses including cash exchanges are considered to be capital gains (or losses).  However, that reporting is only required if the net gain or loss is more than $200.  If less, there is no reporting requirement.

Will this affect your retirement-in-the-sun budget?  For U.S. vacation property owners, the cost of living just went up.  If you are converting Canadian dollars to pay for living expenses, take the currency valuations into account. It’s important to factor this into your budget. 

Rent the Property?  Earning U.S. rental income can help to offset costs; but again, income reporting must be in Canadian dollar equivalents on the Canadian return.  There will be additional forms to file (T776 Statement of Real Estate Rentals or T2125 Statement of Business or Professional Activities, depending on the number of services provided) as well as Form T1135 Foreign Income Verification Statement.

Cash in?  It could be more expensive.  If that is all getting to be a bit too expensive, or complex, selling the U.S. property can bring a larger capital gain than expected on the Canadian tax return, given the value of the US dollar.  That’s not a bad thing, except that starting in 2024, capital gains over $250,000 will be subject to a higher inclusion rate if incurred after June 24, 2024:  that’s 66 2/3%.  Currency gains can factor into larger transactions to push transactions over this threshold.   In some cases, this may be a reason to holding off on the transaction until the new year.

The Bottom Line.  Discuss the implications of currency fluctuations as part of your year end tax planning initiatives and be prepared for more volatility in the new year.