U.S. dollar and other foreign currency moves could affect taxes

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On a current journey to New York Metropolis, I used to be in a position to pay for many of my journey bills by utilizing my United States greenback VISA bank card, the invoice for which I’ll pay utilizing U.S. {dollars} from my U.S. greenback chequing account. However infrequently, the odd expense, similar to tapping my cellphone to enter the New York subway system (US$2.90), will get charged on a Canadian credit score or debit card, and I find yourself paying the relevant overseas alternate price.

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In November 2024, the overseas alternate price I used to be charged was over $1.40 to purchase U.S. {dollars}, which stunned me. In spite of everything, in the beginning of 2024, the FX price was nearer to $1.32. The appreciation of the U.S. greenback towards the Canadian dollar (and lots of different main currencies) within the final two months might have tax implications, relying in your scenario. Fortuitously, this week the Canada Revenue Agency (CRA) launched a technical interpretation letter that gives us with a superb refresher on how overseas foreign money positive aspects, and losses, are to be handled for Canadian tax functions.

Within the letter, the CRA was asked how positive aspects or losses on a overseas foreign money checking account, a overseas foreign money assured funding certificates, a overseas foreign money time period deposit, and different comparable overseas foreign money deposits are to be handled by a person Canadian taxpayer. The CRA was additionally requested how the overseas alternate acquire/loss guidelines work when shares, bonds, mutual funds or actual property are bought and bought in a overseas foreign money.

The CRA responded that if, on account of any fluctuation within the worth of a overseas foreign money relative to Canadian foreign money, a person has made a acquire or suffered a loss from the “disposition” of a foreign money aside from Canadian foreign money, that acquire (or loss) can be a capital gain (or capital loss), and be taxable (or allowable).

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A disposition of overseas foreign money happens once you both spend it, convert it to a different foreign money (Canadian or in any other case), or use it to buy a negotiable instrument (similar to a notice or bond) or another asset. For instance, overseas funds on deposit, similar to U.S. {dollars}, will be moved from one type of deposit to a different, and, so long as such funds can proceed to be seen as “on deposit,” no disposition will happen. The CRA has acknowledged that time period deposits, assured funding certificates and different comparable deposits that are non-negotiable are thought of to be funds on deposit.

However, transactions through which overseas foreign money funds are invested in negotiable devices, similar to notes, bonds, mortgages, debentures, U.S. authorities treasury payments and U.S. notes and business paper, would require a overseas alternate acquire (or loss) calculation on the time the overseas foreign money funds are used to buy these investments, and every time these investments mature or are in any other case disposed of, whether or not or not the funds are rolled over into comparable securities.

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The excellent news is that, beneath the Revenue Tax Act, you solely need to report the quantity of your overseas foreign money web acquire or loss for the 12 months if that acquire/loss is greater than $200. If the web quantity is $200 or much less, you should not have to report it in your tax return.

In 2020, the CRA clarified that overseas foreign money held by a person on deposit in a chequing account or a present deposit account at a monetary establishment, to the extent that the person can withdraw the deposited foreign money at any time, convert it to a different foreign money at any time, or use it at any time to make a purchase order or fee, can be eligible for this therapy.

The current CRA technical interpretation additionally confirmed that once you get rid of securities, similar to shares or bonds, or actual property, denominated in overseas foreign money, your capital acquire (or loss) on disposition would come with a overseas foreign money element. For these transactions, you’re supposed to make use of the precise overseas alternate price that was in impact on the day of the transaction. In different phrases, to correctly report a acquire (or loss) on a overseas property, you’d convert the proceeds to Canadian {dollars} utilizing the alternate price on the date of sale and evaluate that to the adjusted value base (ACB) or tax value of the property utilizing the overseas alternate price on the date of buy of the property.

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For instance, let’s say Jed purchased 1,000 shares of a U.S. inventory on Nov. 8, 2012, when the value was US$10 per share, and the U.S. greenback was at par with the Canadian greenback. By December 2024, the value of the shares has fallen to US$8 per share, and Jed determined he needed to do some 2024 year-end tax loss harvesting to make use of the US$2,000 ((US$10 – US$8) X 1,000) accrued capital loss towards different positive aspects he realized in 2024.

So, on Dec. 5, 2024, when the U.S. greenback was buying and selling at C$1.41, Jed bought the U.S. shares for US$8,000, yielding proceeds of $11,280. So, what initially seemed to be an accrued capital lack of US$2,000 (US$10,000 – US$8,000) turned out to be a capital acquire of $1,280 ($11,280 – $10,000) for Canadian tax functions.

Word that the CRA would require Jed to report his overseas alternate acquire on his 2024 securities transactions on his 2024 tax return even when he doesn’t really convert the overseas funds (i.e. the US$8,000) again to Canadian {dollars}, which often is the case if he has a U.S. greenback non-registered buying and selling account, and he leaves the funds in that account for future trades.

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Lastly, needless to say overseas earnings, similar to U.S. dividends, could also be handled a bit in another way. Whereas the CRA says that you simply’re supposed to make use of the Bank of Canada alternate price in impact “on the day you acquired the earnings,” if the earnings was paid to you roughly evenly all year long, you need to use the common annual price for the 12 months, which will be discovered on the Financial institution of Canada’s web site.

Any overseas taxes withheld in your non-registered overseas earnings could entitle you to say a overseas tax credit score once you calculate your federal and provincial or territorial taxes. You’d additionally use the identical charges that had been used for the earnings to calculate the Canadian equal of the overseas taxes paid for functions of calculating the overseas tax credit score.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Non-public Wealth in Toronto. Jamie.Golombek@cibc.com.

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