There are a few ways you can have a foreign exchange (FX) gain or loss.
If you do, you will have a taxable capital gain or allowable capital loss (unless you are in the business of trading foreign currency, in which case your gains and losses will be business income or loss).
Conversion / sale of foreign currency
As a simple example, you can have an FX gain or loss if you purchase foreign currency, and later sell it or convert it back into Canadian currency. Your cost of the foreign currency for Canadian tax purposes is the amount you paid for it in Canadian dollars. Similarly, when you sell the foreign currency or convert it back into Canadian currency, your proceeds of disposition equal your proceeds expressed in Canadian dollars.
However, the first CAN $200 of net gains or losses per year are ignored and do need to be not reported for tax purposes.
Example
You purchase US dollars when the FX rate is US1.00$ = C$1.20. In other words, you pay $1.20 Can for each US dollar.
You later sell US$10,000 when the FX rate is US$1.00 = C$1.30, so you receive C$1.30 for each US dollar. You will realize a capital gain of $10,000 x 0.10, or $1,000. This is your only FX transaction in the year.
The first $200 is ignored. Half of the remaining $800, or $400, is a taxable capital gain.
Purchase and sale of property in foreign currency
If you buy a property using foreign currency, your adjusted cost base of the property for Canadian income tax purposes is your cost in Canadian dollars at the time of purchase. Similarly, when you sell the property in a foreign currency, your proceeds of disposition will be the proceeds expressed in Canadian dollars at that time. Therefore, you could have an FX gain or loss. The $200 rule described above does not apply in this case.
Example
You bought some real estate in the United States for US$1 million, when the FX rate was US$1.00 = C$1.20. Your adjusted cost base for Canadian tax purposes will be C$1.2 million.
You sell the real estate for US$1 million, when the FX rate is US$1.00 = C$1.30, so that your proceeds are C$1.3 million. As a result, you will have a capital gain of $100,000, half of which or $50,000 will be included in your income as a taxable capital gain.
Note that if you sold the real estate for more than US$1 million, your total capital gain would reflect the additional proceeds, a portion of which would include the FX gain. For example, if you sold the real estate for $US 2 million, when the FX rate was US$1.00 = C$1.30, your proceeds of disposition would be $C2.6 million. Your total capital gain would be C$1.4 million, a portion of which includes an FX gain (the rest of the gain coming from an increase in the value of the corporation in US dollars).
Repayment of foreign currency loan
If you take out a foreign currency loan, the amount of the loan for Canadian income tax purposes is the Canadian dollar equivalent at the time of the loan. When you repay the loan, the amount of the repayment is similarly measured in Canadian dollars at the time of repayment. If the value of the Canadian dollar has changed in the meantime, you will have an FX gain or loss at the time of repayment. In this case, the $200 rule discussed earlier does not apply.
Example
You took out a loan of US$1 million, when the FX rate was US$1.00 = C$1.20. Therefore, the amount of the loan was C$1.2 million.
You repay the loan when the FX rate is US$1.00 = C$1.30. Therefore, the amount of your repayment is C$1.3 million.
In this case, you will have a capital loss of $100,000, half of which or $50,000 will be an allowable capital loss.