Unraveling the Tax Tangle of Foreign Currency Gains and Losses

Personal Finance and Taxes

During my trip, I used my U.S. dollar VISA credit card for most expenses and paid with U.S. dollars from my chequing account. However, odd expenses like tapping my phone for the New York subway system (US$2.90) were charged on a Canadian card, and I had to deal with the applicable foreign exchange rate. This experience highlighted the importance of understanding how foreign currency transactions affect our taxes.

In November 2024, the foreign exchange rate I was charged was over $1.40 to buy U.S. dollars, a significant increase from the beginning of 2024 when it was closer to $1.32. The Canada Revenue Agency (CRA) recently released a technical interpretation letter that provides valuable guidance on how foreign currency gains and losses should be treated for Canadian tax purposes.

How Foreign Currency Gains and Losses are Treated

The CRA was asked how gains or losses on various foreign currency accounts and investments are to be treated. They responded that if an individual makes a gain or suffers a loss from the “disposition” of a foreign currency, it is considered a capital gain or loss and is taxable or allowable. For example, a disposition occurs when you spend, convert, or use foreign currency to purchase a negotiable instrument.

Term deposits, guaranteed investment certificates, and other similar non-negotiable deposits are considered funds on deposit and do not trigger a disposition. However, transactions involving foreign currency funds invested in negotiable instruments require a foreign exchange gain or loss calculation at the time of purchase and at maturity or disposal.

Reporting Foreign Currency Gains and Losses

Under the Income Tax Act, you only have to report a foreign currency net gain or loss if it exceeds $200. In 2020, the CRA clarified that foreign currency held in a chequing or current deposit account is eligible for this treatment. The recent CRA technical interpretation also confirmed that when disposing of foreign currency-denominated securities or real estate, the capital gain or loss includes a foreign currency component.

For example, Jed bought 1,000 shares of a U.S. stock in 2012 when the U.S. dollar was at par with the Canadian dollar. By 2024, the share price had fallen, and Jed decided to do tax loss harvesting. When he sold the shares in 2024 at a different exchange rate, what initially appeared to be a capital loss turned out to be a gain for Canadian tax purposes. The CRA will require Jed to report his foreign exchange gain on his 2024 tax return.

Foreign Income and Tax Credits

Foreign income, such as U.S. dividends, may be treated differently. While the CRA recommends using the Bank of Canada exchange rate on the day of receipt, if the income is paid evenly throughout the year, you can use the average annual rate. Any foreign taxes withheld on non-registered foreign income may entitle you to a foreign tax credit when calculating your federal and provincial taxes.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, the managing director of Tax & Estate Planning at CIBC Private Wealth in Toronto, emphasizes the importance of understanding these tax rules. If you liked this story, sign up for more in the FP Investor newsletter and bookmark our website for business news.