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

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On a latest journey to New York Metropolis, I used to be in a position to pay for many of my journey bills through the use of 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 every so often, the odd expense, akin 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 trade fee.

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In November 2024, the overseas trade fee I used to be charged was over $1.40 to purchase U.S. {dollars}, which shocked me. In any case, at the start of 2024, the FX fee was nearer to $1.32. The appreciation of the U.S. greenback towards the Canadian dollar (and plenty 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 great refresher on how overseas forex features, and losses, are to be handled for Canadian tax functions.

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

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

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

Alternatively, transactions during which overseas forex funds are invested in negotiable devices, akin to notes, bonds, mortgages, debentures, U.S. authorities treasury payments and U.S. notes and business paper, would require a overseas trade achieve (or loss) calculation on the time the overseas forex 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 related securities.

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The excellent news is that, underneath the Revenue Tax Act, you solely need to report the quantity of your overseas forex web achieve or loss for the 12 months if that achieve/loss is greater than $200. If the online quantity is $200 or much less, you shouldn’t have to report it in your tax return.

In 2020, the CRA clarified that overseas forex 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 forex at any time, convert it to a different forex at any time, or use it at any time to make a purchase order or cost, can be eligible for this remedy.

The latest CRA technical interpretation additionally confirmed that while you get rid of securities, akin to shares or bonds, or actual property, denominated in overseas forex, your capital achieve (or loss) on disposition would come with a overseas forex element. For these transactions, you’re supposed to make use of the precise overseas trade fee that was in impact on the day of the transaction. In different phrases, to correctly report a achieve (or loss) on a overseas property, you’ll convert the proceeds to Canadian {dollars} utilizing the trade fee on the date of sale and examine that to the adjusted price base (ACB) or tax price of the property utilizing the overseas trade fee 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 wished 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 features 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 achieve of $1,280 ($11,280 – $10,000) for Canadian tax functions.

Observe that the CRA would require Jed to report his overseas trade achieve 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 will be 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, understand that overseas revenue, akin to U.S. dividends, could also be handled a bit in a different way. Whereas the CRA says that you just’re supposed to make use of the Bank of Canada trade fee in impact “on the day you acquired the revenue,” if the revenue was paid to you kind of evenly all year long, you should use the typical annual fee for the 12 months, which may be discovered on the Financial institution of Canada’s web site.

Any overseas taxes withheld in your non-registered overseas revenue could entitle you to assert a overseas tax credit score while you calculate your federal and provincial or territorial taxes. You’ll additionally use the identical charges that had been used for the revenue 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 Personal Wealth in Toronto. Jamie.Golombek@cibc.com.

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