Moore
January 2018 Newsletter

If you realize a foreign exchange (FX) gain or incur a FX loss, it is normally treated as a capital gain or capital loss (unless, for example, you are in the business of buying and selling foreign currency). There are at least three ways in which you can have a FX currency gain or loss.

First, if you buy and later sell a foreign currency, both the “cost” and “proceeds” of the currency must be converted into and denominated in Canadian dollars. If the foreign currency has fluctuated against the Canadian dollar between the time of your purchase and sale, there will be an FX gain or loss.

Example

You bought US dollars when the exchange rate was $1 US = $1 Cdn, so your cost of the US dollars was $1 Cdn per US dollar. You later exchange $100,000 of the US dollars back into Canadian dollars when the exchange rate is $1 US = $1.1 Cdn, so your proceeds are $110,000. You will have a FX gain of $10,000 Cdn. However, for individuals, the first $200 of annual FX gains or losses on dispositions of foreign currency in any given year are not taken into account, so if this is your only FX gain or loss in the year, you would have a $9,800 FX gain, and therefore a $4,900 taxable capital gain included in your income (since only half of capital gains are taxed).

Second, you may have a debt or other liability denominated in a foreign currency. The amount of the debt (or liability) must be converted into Canadian dollars at the time the debt is incurred, and the amount of the repayment must be converted into Canadian dollars at the time of repayment. If the foreign currency has fluctuated in the meantime, you will have a gain or a loss.

Example

You borrowed $100,000 US dollars when the exchange rate was $1 US = $1 Cdn, so the amount of your debt was $100,000 Cdn. You later repay the $100,000 US loan when the exchange rate is $1 US = $1.1 Cdn, so your repayment equals $110,000 Cdn. You will have an FX loss of $10,000 Cdn. Half of that, or $5,000, will be an allowable capital loss.

Third, you may purchase a property in a foreign currency and later sell the property. Again, your cost of the property and the proceeds must be converted into Canadian dollars at the time of purchase and the time of sale, respectively.

Example

You bought some real estate for $100,000 US when the exchange rate was $1 US = $1 Cdn, so your cost of the property was $100,000 Cdn. You later sell the property for $100,000 US when the exchange rate is $1 US = $1.1 Cdn, so your proceeds are $110,000. Even though you will have no gain in terms of US dollars, you will have an FX gain of $10,000 Cdn. Half of that, or $5,000, will be a taxable capital gain.

Last modified on January 12, 2018 12:00 am