Do You Have To Pay Taxes On Foreign Exchange Gains in Canada
According to CRA foreign exchange and tax rules, all Canadians must file tax returns for their income, including foreign exchange gains or losses. The foreign exchange gains are the capital gains on securities or cash you hold in foreign-denominated currencies due to foreign exchange rate fluctuations. So, they are subject to taxation by the CRA.
Most investors consider foreign exchange gains or losses as capital in nature. However, it’s a question of fact whether they should treat foreign exchange gains and losses as income or capital in every particular situation. For that reason, it’s imperative to talk to your tax advisor and find out what tax treatment applies to your situation.
Thankfully, this guide explores the tax reporting obligations for cash and other securities held in foreign currencies. As well, you will learn how to pay taxes on foreign exchange gains in Canada. That is if you have to report the transactions as capital exchanges.
That said, let’s get started!
Foreign Exchange Gains and Losses Tax Treatment in Canada
The Canada Revenue Agency (CRA) considers foreign exchange gains and losses as capital gains or losses. But when filing returns, you only have to report your net gain or losses for that year when it’s over $200. If your net profit or loss is $200 or less, you don’t need to report it in your income tax or benefit return.
Note that foreign exchange gains or losses can be realized or unrealized. The latter refers to the change in the value of foreign-currency-denominated transactions recorded in financial statements before the settlement of the invoices. Conversely, the unrealized foreign exchange gain by CRA occurs when the transactions get settled.
Now, we’ll look at the various types of investments and how the CRA treats them based on the foreign exchange gains and losses. Here are the assets we’ll look at:
- Publicly traded shares & Canadian mutual funds
- Negotiable instruments
- Discount instruments
- Non-negotiable instruments
- Cash held in foreign currency
Publicly Traded Shares & Canadian Mutual Funds
When you redeem mutual funds or sell publicly traded shares denominated in foreign currencies, it may trigger a foreign exchange gain or loss. So, you will have to convert the security’s adjusted cost base and sale proceeds into Canadian dollars to determine your capital gain or loss.
For tax reporting purposes, you should use the foreign exchange rate that was in effect on the transaction date to calculate your capital gain or loss in Canadian dollars. For example, suppose you made several transactions at different times of the year. Then, you can use the average annual foreign exchange rate for the transactions.
Assets traded on the secondary market are known as negotiable instruments. They include notes, mortgages, debentures, bonds, government treasury bills, commercial paper, and guaranteed investment certificates (GICs).
When the instruments get denominated in foreign currencies, foreign exchange gains or losses may occur due to foreign exchange fluctuations. That can happen even when you maintain the securities in the same currency or roll them over to similar proceeds.
Due to currency exchange fluctuations, discount instruments like T-bill, BA, or strip bonds can also produce capital or income (or both) gains and losses.
Once you determine the appropriate income, you can calculate the capital gain or loss (plus the foreign exchange gain or loss).
The CRA considers financial instruments like non-negotiable GICs, term deposits, and other non-negotiable investments to be “on-deposit.”
Therefore, the agency doesn’t deem them to be disposed of until you convert them to another currency or use them to buy negotiable instruments or other assets.
Cash Held in Foreign Currency
Any cash you hold in a foreign currency as a traveler’s check, in a safety deposit box, in a bank account, or a High-Interest Savings Account (HISA) is subject to reporting gains or losses due to fluctuations of foreign exchange rates.
Notably, the first C$200 of the total foreign exchange gains and losses on cash is exempt from taxation in a tax year. However, if the sum of your exchange gains and losses for all forms of cash exceeds C$200, you must report the excess to the CRA.
It’s important to note that the C$200 exemption doesn’t apply to the gains and losses realized from the sales of securities or instruments denominated in foreign currencies. The CRA will only consider that a foreign exchange gain or loss has happened at:
- The time you use money in a foreign currency to make a payment or purchase
- The time of converting funds in a foreign currency into Canadian dollars or another foreign currency
How to Report Foreign Exchange Gains on a Non-Registered Portfolio
When you have invested in foreign-denominated securities in your non-registered portfolio, you will have to convert your gain or loss to Canadian dollars. Next, list all the securities on Line 131 and Line 132 of Schedule 3. Finally, find the total on Line 199.
If Line 199 indicates a foreign exchange gain, proceed to report that on Line 127 of your return. However, if it indicates a loss, you will attach Schedule 3 to your return.
Note that you can lose money on the foreign-denominated security but gain on the foreign exchange. You will have a capital gain so long as the security’s sale price is higher than its cost base. That is when you convert both into Canadian dollars.
Reporting Your Forex Gains (or Losses) as a Currency Trader or Broker
If you are a currency trader or broker, the CRA will treat your gains as business income. For that reason, they will be 100 percent taxable.
To report your income, calculate your income or losses in CAD. Then, you can use Form T2125 to determine your income and expenses. Next, report your gross income on Line 166 (Commission) or Line 162 (business), depending on your income’s nature. Finally, report your net income on Line 139 (commission) or Line 135 (Business)
CRA Foreign Income Exchange Rate for Capital Gain and Loss Reporting
You should report your foreign exchange gains or losses in Canadian dollars. However, use the CRA foreign exchange rates that were working on the day you transacted. If you carried out many transactions at different times throughout the year, refer to the annual average exchange rates to find the exact exchange rate for a particular day.
What happens if the applicable exchange rate is not available in the list?
In that case, the CRA will accept the exchange rates from another source provided it meets the following conditions.
- Widely available
- Recognizable in the market
- Published by an independent body regularly
- Used under well-accepted business principles
- Used consistently by the taxpayer from year to year
- Used during the preparation of a taxpayer’s financial statements
Excellent examples of sources of foreign exchange rates, besides the Bank of Canada, include Thomson Reuters Corporation, Bloomberg L.P., and OANDA Corporation.
The Canadian Revenue Agency requires Canadians to pay taxes on foreign exchange gains or losses above C$200. So you have to convert the gains or losses on account of capital using the foreign exchange rates applicable on the transaction date.
You should also calculate the income earned in foreign currencies using the foreign exchange rate in effect on the date you received the interest. The CRA will also accept the conversion determined by the average annual exchange rate for a specific year.