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 {[$130,000 x ($1.40 - $1.30)] – $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.
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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.
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.
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.
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.
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.
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.”
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.
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?
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).
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 $100000.00 USD.
I understand I am taxed as either income or capital gains when I convert back to CDN and withdraw some funds.
I am contemplating using this account as a holiday account. I only withdraw funds in Europe and never in CDN currency.
I never make any Canadian capital or income gains, so where is my Canadian tax liability?
jdw:
If you are a resident of Canada then all transactions are valued in Canadian dollars. A movement from one currency to another or an buy/sell is a disposition for tax purposes.
You deposit CAD to GBP and buy a stock –> You have a currency gain/loss based on the value of the CAD on the date you transferred to GBP and the date you bought.
You sell and you have a gain or loss on the stock in CAD, plus a currency gain or loss based on the value of the currency on the date of the buy and the date of the sell — the stock gain loss is the gain or loss based on the value of buy sell in the buy FX rate.
I have a US$ 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
it doesn’t matter where you have your money. The same rules apply.
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,
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.
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.
That is a great idea.
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) ?
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.
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?
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