Exchange Rates, Investments and Income Tax

by Tax Guy - Burlington Accountant on October 30, 2008 Print This Post Print This Post

The disposition of capital property by an individual investor will generally result in a capital or loss.  Commonly individuals will convert funds into U.S. dollars to travel or for investment purposes.  Any gain or loss on the foreign exchange is normally treated as a capital gain.  There is a general exclusion of $200 on the gross amount of the gain or loss and ½ half of the net gain is included in taxable income for the tax year.

Investors with accounts in both Canadian dollars and U.S. dollar may wonder how the foreign exchange impacts their investments.

Funds on Deposit

A individual taxpayer (who is not a speculator or business acquiring foreign funds for business purchases) deposits Canadian funds to a U.S. dollar account and at a later date converts the funds back into Canadian dollars for a gain will incur a taxable capital gain.  For individuals the first $200 of the (gross) gain is excluded.

Example:

Jan 1, 20X1: An individual taxpayer deposits $130,000 Canadian dollars to a U.S. dollar brokerage account at a rate of $1USD = $1.30CDN.

Dec 31, 20X1: The funds are converted back into Canadian dollars at a rate of $1USD = $1.40CDN.

There will be a taxable capital gain of:

$4,900 = ½ x {[$140,000 - $130,000] – $200}

The same rules and $200 exclusion also apply to capital losses.

Transactions in Securities

The $200 exclusion on foreign exchange transaction does not apply to the acquisition and disposition of securities denominated in foreign currencies.  The acquisition and disposition of securities must be converted into Canadian dollars at the rate in effect at the time the transaction took place for the purposes of determining the capital gain or loss.

The following example shows the application of foreign exchange gains and losses as they relate to the acquisition of securities.

Jan 1, 20X1 – An individual taxpayer deposits $130,000 CDN into a U.S. dollar account at a rate of $1USD =  $1.30CDN.

May 1, 20X1 – The individual taxpayer purchases 10,000 shares of Amerco Ltd. at $10 USD per share from the U.S. dollar account.  The rate in effect at the time of the purchase was $1USD = $1.32 CAD

Dec 15, 20X5 – The individual taxpayer sells 10,000 shares of Amerco Ltd. at $20 USD per share.  The rate in effect at the time of the sale was $1USD = $1.35 CAD

June 30, 20X6 – The funds from the U.S. dollar account are transferred back into a Canadian dollar account.  The rate in effect at the time of the purchase was $1USD = $1.40 CAD

Tax Implications

May 1, 20×1: There is a foreign currency gain of $2,000 CDN = [($1.32 - $1.30) x $100,000.  The taxable amount of the gain included in income in 20X1 is:

$900 = [($2,000 - $200) x ½]

The adjusted cost base of Amerco Ltd. shares is $132,000 CDN = ($10 x 10,000 x $1.32)

Dec 15, 20X5: There is a taxable capital gain of $69,000CDN in 20X5 calculated as follows:

Proceeds of disposition: $270,000 = ($20 x 10,000 x $1.35)

Adjusted cost base: $132,000 = ($10 x 10,000 x $1.32)

Taxable capital gain:  $69,000 = [½ x ($270,000 - $132,000)]

The proceeds in the U.S. dollar account following the sale is $200,000 USD and the rate in effect is $1.35.

June 30, 20X6: There is a foreign currency gain of $10,000 CDN = [($1.40 - $1.35) x $200,000].  The taxable amount of the gain included in income in 20X6 is:

$4,900 = [($10,000 - $200) x ½]

Note: Theis post was updated March 2011.

Open a Questrade account today and get a $50 commission rebate. Use the offer code: taxresource

Questrade Democratic Pricing - 1 cent per share, $4.95 min / $9.95 max

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

Print This Post Print This Post

{ 74 comments }

Guy April 13, 2010 at 2:57 am

Hey,

1. I’m still unclear as to which exchange rate I need to use when receiving interest & dividends. Is that the date listed on the dividend cheuqe I’ve received, or the date I’ve deposited that cheuqe in the bank?

2. Also, can I simply use the final amount in CAD I got when I deposited in the bank? For example, on day X I’ve deposited $10 USD dividend cheuqe. If my band rate was 1.2 can I report $12 income or should I use the BOC (e.g. 1.1) and report $11?

Thanks for your help!

Guy

Tax Guy April 13, 2010 at 10:52 am

Hello Guy,
Strict interpretation is that you use the rate in effect the date you received the cheque. However, you can use the average rate for the tax year if value a series of periodic payments. The link to the average rate is on the CRA website here: http://www.cra-arc.gc.ca/tx/ndvdls/fq/xchng_rt-eng.html

freddy April 15, 2010 at 10:08 am

Thanks a lot TAX GUY for the detailed article. Believe it or not, your blog entry was the only online free resource that I could find dealing with the topic of reporting capital gain/loss from foreign publicly traded stocks with detailed examples and prompt feedback. I had a question regarding capital loss as a result of US to CAD exchange rate going down as is the case since year 2000. If I immigrated to Canada in 2000 with $10,000 US money (USD to CAD 1.5 exchange rate) and invested it in GIC that was renewed for 8 years and then exchanged the total amount in 2008 for CAD dollars (at 1.05). Is it possible to book this capital loss from declining foreign exchange rate when filling taxes for 2009 or 2010 although the transaction happened in 2008.
Thanks

Tax Guy April 15, 2010 at 11:44 am

Freddy
Assuming you purchased the GIC at the same time you became a resident of Canada, the cost of the GIC would have been $15,000 CAD. The POD at maturity would have been $10,500. The loss is $4,500 of which $2,250 is an allowable capital loss that can be applied to capital gains. If the transaction occurred in 2008, then the loss occurred in 2008: The loss must first be applied to and capital gains in 2008 and the excess carried back to any capital gains in any of the prior three years or carried forward indefinitely.

Enguss April 17, 2010 at 12:53 am

Just a very simple question: Do I use the nominal rate or cash rate 4% on Bank of Canada website for the purpose of calculating foreign transaction?

Tax Guy April 17, 2010 at 2:45 pm

Hi Enguss:
You would use the foreign exchange rates listed on the BoC site here http://www.bankofcanada.ca/en/rates/exchange.html

Which rate you use depends on the transaction you are converting.

You can also use the rates posted by the CRA: http://www.cra-arc.gc.ca/tx/ndvdls/fq/xchng_rt-eng.html

Brian April 18, 2010 at 6:09 pm

I disagree with your calculation of the foreign exchange gain and loss with respect to the US investment account.

On Jan 1/01 CDN $130,000 was converted into US$ and subsequently invested.

On June 30/06, when the US account was closed, the investor received CDN $280,000 (US $200,000 X 1.40).

The investor has made CDN $150,000 in capital gains, or $75,000 in taxable capital gains (i.e., 50%).

The question then becomes, what portion of the $150,000 represents capital gain on the sale of Amerco and what portion is a capital gain on the foreign exchange?

I contend that there is no capital gain, as your example shows, on May 1st. This is because IT-95R states that CRA considers a foreign exchange transaction to have taken place “at the time of conversion of funds in a foreign currency into another
foreign currency or into Canadian dollars”. On May 1st there is no conversion of the US$ into either Canadian dollars or another currency. The May 1st “gain” is unrealized until such time as the funds are converted into Canadian dollars.

On December 15th the sale of Amerco triggers a capital gain. The amount of the gain is equal to the proceeds from the sale US $200,000, at the FX rate of $1.35, or CDN $270,000, less the Aramco cost of US $ 100,000 (at the FX rate on the purchase date of 1.32), or CDN $132,000. The capital gain is therefore $138,000 and the taxable portion is $68,000.

On June 30th the investment funds (US $200,000) are repatriated, producing (@1.40) CDN $280,000. Since the initial investment was CDN $130,000, the total capital gain is $150,000.

HOWEVER, since $138,000 (above) was reported as gain on the sale of Amerco, the foreign exchange gain is ($150,000 – 138,000) $12,000, of which 50% (6,000) is taxable.

Tax Guy April 18, 2010 at 8:40 pm

Hi Brian:
The acquistion of Amerco May 1 is a dispositon of an asset (cash) which triggers a gain or loss on the cash position. Otherwise, the government is assuming part of the risk of holding cash.

Craig April 19, 2010 at 8:12 pm

Hey, great discussion. Trying to understand the following for my filing…

What about if you deposit multiple rounds of CAD into your US account, at various times, at various exchange rates.

Then you buy multiple different securities, at various times, at various exchange rates.

How do you track which exchange rate is applicable to the cash you’re using to purchase a given security?

Tax Guy April 20, 2010 at 2:00 pm

Hello Craig,

Each time you deposit funds, transfer funds to another currency, or use funds to acquire investments is considered a disposition at fair market value.

In this case, each time you deposit funds to the US account, your ACB is calculated on the value of the deposit. For example, if you deposit $1,000 when the rate is 1.3 and another $1,000 when the rate is 1.05, the ACB of the cash is $2,000 CAD.

When you convert back, the amount you receive, less $200 is your capital gain.

JL April 23, 2010 at 1:13 am

The Bank of Canada website actually shows 2 rates, the nominal rate, and the cash rate (4%). The cash rate is closer to what the brokers would charge us for doing an exchange. It’s most beneficial to us if we use the cash rate all the time, but are we allowed to do that?
For example, let’s say the dollar is at par. If I buy a US stock and need to convert from Cdn dollars, the exchange will cost about 1.04. Later, when I sell, if I convert back to Cdn dollars, I’ll only get about 0.96 on the exchange. In this case, it makes sense to use the cash rate. But if I never convert back to Cdn, then future trades with that US money makes sense to use the nominal rate. But then it starts getting really confusing for taxes if I need to use nominal rate for some trades and cash rate for others.

Tax Guy April 23, 2010 at 8:42 am

Hello JL:
do have a couple of thoughts:

1) The nominal rate reflects the market for currency.
2) The cash rate reflects the retail rate for currency.

If you have purchased US securities with Canadian dollars, your FX rate is pre-determined. If you have acquired them using pre-converted US funds, I would be inclined to use the nominal rate as the average rate is derived from this rate.

With respect to interest or dividends received, I may choose to either use the cash rate or the average rate, depending on which one was better.

SUSD February 21, 2011 at 3:23 pm

Interestingly, the yearly average exchange rates the CRA publishes represents the nominal rate. There doesn’t appear to be an average for the “cash” rate.

VV April 23, 2010 at 9:39 pm

Hi there,
I have a question here. I have several US stocks, bought and sold several times during the year. How can I calculate the exchange rate loss occurred through out 2009?
ex: I bought 1000 shares ABC at ex rate was 1us=1.27cdn, sold in the year. I received bank statement to us 1.14197729 for all transactions I made in year 2009. How to calculate?
Appreciate your help.

Tax Guy April 24, 2010 at 6:33 pm

Hello VV:
When you bought the stock, it’s price is converted to CAD for the ACB and the proceeds of sales are converted into CAD. The FX gain/loss is then included in the stock price.

See the CRA or Bank of Canada sites for the appropriate rates. For each transaction the rate to use is the rate in effect on the settlement date.

SUSD February 21, 2011 at 3:37 pm

Box taxtips.ca and advisor.ca say the exchange is calculated with the trade date not the settlement date as you indicate. You’re thoughts?

http://www.taxtips.ca/personaltax/investing/taxtreatment/shares.htm:
“When shares in the foreign corporation are sold, the proceeds are converted to Canadian dollars using the exchange rate on the date of the sale (trading date).”

http://www.advisor.ca/tax/tax-news/taxation-of-foreign-investments-2375:
“Note as well that when shares in foreign corporations are bought or sold, the corresponding purchase and sale prices must be converted to Canadian dollars using the official exchange rate on the trade date, as opposed to the settlement date.”

Tax Guy February 21, 2011 at 4:01 pm

The CRA has said that transactions post 1974 are taxed based on settlement date. IT-133, paragraph 11(d):

Returns for 1974 and subsequent taxation years must be prepared on the basis of settlement date whereas 1973 returns must be prepared on the basis of a and (b) above, which in some cases will require the beginning of the year on the trade date basis and the year-end settlement date basis.

AH June 2, 2010 at 11:53 pm

I purchased US Stocks several times in different years and kept track of the ACB in USdollars. How do I calculate the Capital gain and the Foreign exchange gains/losses? Do I have to keep track the ACB in Cad$ each time I made a purchase?

Tax Guy June 3, 2010 at 10:11 am

AH,
Yes you should keep tack of your ACB in Canadian dollars. You can obtain the rate in effect at the date your purchases settled from the Bank of Canada’s website (this is the source the CRA is most likely to accept).

jdw June 27, 2010 at 4:06 pm

A FOREX Canadian tax question.

My $5000.00 CDN trading account (Alpari-UK) is in Britain.
This account is converted and held in USD.
I do not trade Canadian dollars.
I trade EUR/USD, GBP/USD, USD/JPY.
My account grows to $100000.00 USD.

I understand I am taxed as either income or capital gains when I convert back to CDN and withdraw some funds.

I am contemplating using this account as a holiday account. I only withdraw funds in Europe and never in CDN currency.

I never make any Canadian capital or income gains, so where is my Canadian tax liability?

Tax Guy June 28, 2010 at 1:09 pm

jdw:

If you are a resident of Canada then all transactions are valued in Canadian dollars. A movement from one currency to another or an buy/sell is a disposition for tax purposes.

You deposit CAD to GBP and buy a stock –> You have a currency gain/loss based on the value of the CAD on the date you transferred to GBP and the date you bought.

You sell and you have a gain or loss on the stock in CAD, plus a currency gain or loss based on the value of the currency on the date of the buy and the date of the sell — the stock gain loss is the gain or loss based on the value of buy sell in the buy FX rate.

Jeff September 25, 2010 at 10:09 am

I have a US$ brokerage account. I sometimes withdraw funds to pay for daily expenses (eg. a family trip to Florida). In attempting to keep track of the ACB of the US cash in my account, would I use the preailing ACB FX rate when accounting for those expenditures (as opposed to the prevailing market rate).

That seems to me the logical thing to do because if I were to simply convert $10,000 Cdn into and hold the cash at home then over the course of the next 3 years spent those funds here and there, I wouldn’t have to track those periodic expenditures by treating each one as a disposition of US dollars immediaely followed by a purchase of US (both at prevailing rates) thereby incuring a cap gain or loss would I?

Also would the answer you give to the above also apply to the US$ expenses I incur within the brokerage account (eg. brokerage charges, inerest expense…)
Thanks,
Jeff

Tax Guy September 26, 2010 at 9:04 am

it doesn’t matter where you have your money. The same rules apply.

Bob'surUncle November 4, 2010 at 9:02 am

Dear Tax Dude, The Capital Gains Guide from Can Rev is pretty vague on this and could only find a short paragraph on Currency Trading.

Scenario:
I purchased Chinese Yuan on speculation that the currency was going to appreciate in value over the Cdn dollar. For the transaction, I physically took possession of the Yuan and held it for 1 month or less and exchanged it back to Cdn dollars for a considerable net profit after applying the applicable exchange rates.
For example the total gain less ABC = $500,000 Cdn

Questions:
*Do I understand correctly that this exchange would be taxed as a capital gain and not income?
*At tax time (if a gain) would I be able to claim the $375,000 lifetime capital gains exemption against the gain and therefore be subject to claiming $125,000 as the gain?
*Do I understand correctly that the tax calculation for capital gains is the gain x 50% and then the rest is taxed as income? *Using the example of $125,000 x 50%= $62,500 + income x marginal tax rate?
*Is there a maximum amount of capital gains that an individual can claim under the 50% calculation? In other words can an individual claim unlimited capital gains?
Thanks,

Tax Guy November 4, 2010 at 2:34 pm

Whether or not your transactions are on the capital or income account is a question of fact. If the transactions are on account of capital, it must then be determined if these are regular capital gains or those under the provisions of s.39(2) and subject to the $200 exemption.

The gain or loss is the difference between the proceeds and cost. A taxable capital gain or allowable capital loss is 1/2 of the difference.

The capital gains exemption only applies to the disposition of qualifies small business corporation shares and has no application in this case.

Juan dela Cruz December 5, 2010 at 7:30 pm

Hi Tax Guy,

On behalf of the commenters here, I just wanna say that we appreciate your effort for writing this article on foreign currency conversions for capital gains. It so unfortunate that our stock brokers do not send us tax receipts that would already contain the sell/buy amounts of our foreign-denominated security transactions IN CANADIAN DOLLAR CURRENCY, which further adds confusion to us taxpayers on the right FX rate to usefor our capital gains/loss declarations on our income tax returns.

Thanks again and more power to you.

Tax Guy December 6, 2010 at 9:27 am

That is a great idea.

ConfusedInBC February 28, 2011 at 5:26 pm

I am wondering how I determine what exchange rate (GBP –> CAD) to use for a transaction that happened in December 2010.
Transaction Date; Dec 15, 2010
Settlement Date: Dec 20, 2010

Is there an average exchange rate that I should use?
Am I forced to the use the actual rate (assuming I can get the proper one)?

In essence, I sold GBP stock and settled up in CAD. For argument sake, let’s say:
Sold 3500GBP in stock and received $5000CAD (so the exchange rate straight up would be 1.42857). Is this the one to use? Or can use a monthly average (if it benefited me) or an annual average (again – if it benefited me) ?

Tax Guy February 28, 2011 at 5:48 pm

You can get the exchange rates from the Bank of Canada site and you use the exchange rate on the settlement date.

For buys and sells you have to use the exchange rate that was ineffectual on the date the transaction settled. You can only use the average rate for receipts of dividends and interest.

I hope this helps.

Denise Filteau March 19, 2011 at 4:30 pm

Great article and comments. I’d like to know:
- when you enter your FX gains/losses in Schedule 3, is it in Section 3 (for shares and mutual funds)?
- in Schedule 3, do you have to record every FX transactions individually or can you just enter the grand total loss/gain for the year as one transaction?

interestclaimed or no interestclaimed March 16, 2012 at 11:42 am

I have received varied information on the following : cost of borrowing regarding FX transactions. I have been buying and selling from my CAD to USD account for some time and have obtained a loss one year and a gain on the prior year – is it true that you can’t claim cost of borrowing on these gains.

Thanks : also I have done the following : to calculate my gains/losses from my usd /cad account I have placed a column of all my incoming and outgoing from my cad and usd throughouit the year and calculated the difference – due to the volume of transactions that took place
i.e usd recieves 1000 USD CAD -900 difference is 100(USD – CAD) then later I sell 1100 USD(as I have a large volume of usd cash sitting in my account due to the volume of swaps to USD) and earn 1200CAD difference is 100( CAD – USD) when I add them up I made 200 towards calulating my gains – would this be adequate to calculate all my transaction due to the volume of transaction – I’m starting to think maybe I should stick to reporting this as interest and sticking to dividends :) Thanks

Tax Guy March 16, 2012 at 4:31 pm

The issues is whether the transactions are considered income from property. For the average investor, foreign exchange gains and losses are capital transaction. If you incur FX in the course of buying and selling stocks, you likely could deduct the interest. If it’s simply FX transactions, you cannot. Unless you are a business (which means 100% of the gains and losses are taxable).

Roberto November 23, 2012 at 7:31 pm

One question that was not answered.

If I spend some of the USD I have when I travel, is that considered a disposition at fair market value? That would make it really inconvenient to track (I would certainly use year averages in that case)

Burlington Accountant November 24, 2012 at 10:39 am

Hi Roberto,
Technically all exchanges of funds are taxable events. The $200 limit is designed to eliminate ant tax on sundry exchanges (foreign purchases or travel). The onus is on the taxpayer to report the amount properly.

Wolly January 5, 2013 at 6:11 pm

Can stock/options trades on foreign exchanges be elected to be income and not capital gain/loss?

Tax Guy - Burlington Accountant January 5, 2013 at 6:34 pm

Wolly,

Some options trades are income only and stock trades can be either. Whether its income or capital is a factual situation. There is an election to treat all transactions as capital but not the reverse.

What are you trying to accomplish?

UK Expat April 4, 2013 at 3:11 pm

I moved to Canada several years ago and filed as a Canadian resident from Day 1. I had (and still have) a lot of funds in GBP. These funds were never in CAD. My question is, given the significant reduction in the value of my funds (in CAD) since I became a Canadian resident, am I able to claim any sort of capital loss on conversion of the funds to CAD?

Comments on this entry are closed.

Previous post:

Next post: