Travelling Abroad?  Foreign Currency Exchanges Could Have Tax Consequences

Danielle Doan

It may be difficult to remember a time when the exchange rate of the Canadian dollar to foreign currencies, especially the U.S. dollar, was lower than it currently is. The Bank of Canada has a great chart of help you track the changes. For taxpayers and their advisors, it’s important to track them to determine if a capital gains tax consequence has been triggered during the year. This can happen when foreign currency, once exchanged, produces more Canadian dollars, over the original sum exchanged. There are some interesting tax rules to consider in these cases.

Exchange of foreign currency into Canadian currency, as well as other transactions involving foreign currency, can trigger a taxable capital gain for Canadian personal income tax purposes pursuant to subsection 39(1.1) and 39(2).  According to CRA’s IT-95R, transactions resulting in the application of subsection 39(2) are as follows:

(a) at the time of conversion of funds in a foreign currency into another foreign currency or into Canadian dollars,

(b) at the time funds in a foreign currency are used to make a purchase or a payment (in such a case the gains or loss would be the difference between the value of the foreign currency expressed in Canadian dollars when it arose and its value expressed in Canadian dollars when the purchase or payment was made), and

(c) at the time of repayment of part or all of a capital debt obligation.

For example, typical transactions could include; funds from a U.S. dollar bank account are transferred to a Canadian bank account, Euros are used to purchase a good or service in Germany, or the Mexican Pesos is used to pay a mortgage payment on a property in Mexico.

Capital Gain and Loss Calculations.  Let’s walk through an example. Consider the simple scenario of a U.S. dollar savings account that was originally funded in a previous tax year with $10,000 Canadian dollars, when the exchange rate was at par. However, in the current year, the entire U.S. dollar savings account is transferred back to the Canadian dollar bank account when the exchange rate is 1.35.

The gain is calculated by taking the original Canadian equivalent cost base of $10,000 and comparing it to the Canadian proceeds converted using the Bank of Canada exchange rate on the date of conversion of 1.35. The result is a $3,500 gain.

What happens when some of the money is transferred at different times?

Reporting Requirements and some Good News

As long as the transaction is on account of capital, and not part of an ongoing business and therefore on account of income, the capital gain is reported on schedule 3 in the year it was triggered.

The good news?  Capital gains from foreign exchange can be offset by capital losses from foreign exchange triggered in the same year and are subject to a $200 CAD de minimus. Note this $200 de minimums is only for net capital gains on foreign currency exchange, and does not apply to other types of capital gains.

Currently, the capital gain inclusion rate is 50%, and therefore 50% of the net capital gains over capital losses in excess of $200, is the taxable capital gain. The taxable capital gain is reported on line 12700 of the personal income tax return. 

Other considerations

When foreign currency is involved, this may indicate a scenario where there could be a requirement to file form T1135: Foreign Income Verification Statement. For more information, read our article “Canadian Resident Reporting Requirements Regarding Ownership of Foreign Property”.

Bottom Line. It pays to work with a DMA™ - Tax Services Specialist who is well versed in cross-border transactions.  Knowledge Bureau has an excellent certificate course on the subject, which, increasingly is the source of questions from taxpayers who travel or have property abroad.