Foreign Currencies Gains and Losses

Evelyn Jacks

As we all know, it’s been a roller coaster week in tariff news. The Canadian dollar started to sink, although not to its lowest historical level-yet. The 30 day pause in implementation of the U.S. tariffs has provided a wake up call: What effect will such a Black Swan event have on portfolios and, by extension, retirement plans?

Is this a good time to buy or sell U.S. property?  Understanding the effect of foreign currency gains and losses on your taxes is important if these triggers result in asset dispositions.  This can be complicated, too.  Consider the following:

How Low Can the Loonie Go?   According to the History of the Canadian Dollar,  an interesting compilation by Connor, Clark and Lunn Financial Group, we haven’t seen its the lowest level yet:  on January 21, 2002, the Canadian dollar hit its all-time low against the US dollar, dropping to 61.79 cents (US); it cost $1.62 CDN to buy $1 US.  In short, the loonie could go lower.

How Does a Low Loonie Affect Taxpayers?  For Canadians, especially retirees, travel becomes much more expensive; so does the cost of maintaining a property abroad.  However, for those who hold foreign property, and decide to sell it, there may be some tax advantages with the recent reprieve in the capital gains inclusion rate increase until January 1, 2026.

How are foreign currency gains taxed?  There are some basic rules to consider:

1. The Canadian tax system is based on residency.
2. Canadian residents must report worldwide income in Canadian funds.
3. Income earned in a foreign currency must be converted to Canadian dollars, generally speaking, based on the day a transaction occurred, but there are some exceptions.  
4. Most taxpayers and their advisors would use the Bank of Canada exchange rate to do so.  However, CRA notes it will also accept alternative sources if they are widely available and verifiable, used regularly and in accordance with “well-accepted business principles.”  It also accepts rates from Bloomberg L.P. Thomson Reuters and OANDA Corporation.
5. Resulting foreign exchange gains or losses incurred by individuals are considered to be capital gains or losses. But to eliminate small transactions from the reporting requirements, the first $200 (in capital gains or losses in Canadian funds) don’t need to be reported.
6. Canadian residents must report the sale of their U.S. property in the U.S.  File forms 8288, 8288-A (mandatory) and 8288-B (if the sale qualifies for a reduction or exemption.

Bottom line:  Before making any decisions in such a volatile time, it’s critical to take a Real Wealth Management approach – to engage a multi-stakeholder team of professional specialists to understand the effect of  anticipated foreign currency transactions.

Additional educational resources:

Cross Border Taxation

The student will learn the key concepts surrounding residency, non-residency, immigration, emigration, taxation of U.S. citizens and Canadian residents with cross-border transactions. Learn about the lifetime gift & estate tax exemption and how to File FinCEN 114 forms and other changes under the Canada-U.S. Tax Convention.

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