Do Taxpayer Report Gains and Losses on Currency Fluctuations?

According to the Bank of Canada, since October 1950,  the record low for the Canadian dollar against the US dollar was recorded on the 21st of January 2002 – just over 13 years ago – when the loonie was worth just .6179. 

The all-time high occurred November 7 of 2007  - the dollar rose to 1.1030 against the greenback; an amount very similar to the average exchange rate for the 2014 year: 1.10446640.   Since then, the loonie has lost more value, hitting a low of .7813 against the US dollar on January 30, and with all that activity, Canadian taxpayers might well wonder about the tax status of their gains and losses through conversions. 

On the Canadian tax return, world income must be reported in Canadian funds and therefore exchange rates must be used and calculated either on the day of the transaction, the month of the transaction or using the average exchange rate for the year.  There are tax consequences as a result, including the fact that instalment payments could be affected – positively or negatively- should there be large foreign pension receipts, for example, or investment income.

But in addition, gains or losses resulting from foreign currency transactions themselves have tax consequences, although the exact nature of the tax consequence is not clearly defined in the Income Tax Act.  Rather, the outcomes are linked to the nature of the transactions – whether they follow an income account (from a business transaction) or as a result of a capital disposition.    

Tax law is always full of interesting dark horses; this subject is no exception.  In general, tax filers must report currency gains in excess of $200 as capital gains, but can ignore amounts of capital gains or losses if the amounts are less than this.  Foreign currency gains and losses must be reported at the exchange rate in effect on the day the currency was exchanged, but as long as filing methods are consistent, average exchange rate calculations may be allowed.

Tax filers in these days of wildly fluctuating currencies might wonder if travellers cheques purchased in a foreign currency for a trip abroad and then converted back to Canadian dollars upon landing back home are subject to reporting rules if there is a gain or loss on the currency exchanges.  First, determine if the amounts were over the $200 threshhold.  If so, any gains on the currency exchange above this will be reported as a capital gain; any losses will be reported as a capital loss. 

If the tax filer acquired a foreign personal use property and has now experienced foreign exchange losses on the repayment of a debt used to acquire the property will be happy to know that those foreign currency losses can be claimed as a capital loss.   For do-it-yourself investors who trade in foreign currencies or foreign currency futures, CRA may consider those transactions speculative, and in some cases require “income” reporting.  

Understanding the “dark horses” in tax law comes from experience and the professional acumen trained specialists have when it comes to knowing when and how to research for answers.  This is where working with a DFA-Tax Services Specialist can really pay off for clients.  The Designation is also the insignia of professional excellence, for those who care to provide the best possible value for stewarding their clients’ after-tax wealth.

Evelyn Jacks is President of Knowledge Bureau, a national educational institute focused on providing knowledge and skills required to navigate a rapidly changing environment in the tax and financial services.