Jamie Golombek: CRA releases refresher on how overseas forex positive factors and losses ought to be handled for tax functions
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On a latest journey to New York Metropolis, I used to be capable of pay for many of my journey bills by utilizing 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 infrequently, the odd expense, comparable 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 alternate fee.
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In November 2024, the overseas alternate fee I used to be charged was over $1.40 to purchase U.S. {dollars}, which stunned me. In any case, in the beginning of 2024, the FX fee was nearer to $1.32. The appreciation of the U.S. greenback towards the Canadian greenback (and lots of different main currencies) within the final two months may have tax implications, relying in your state of affairs. Fortuitously, this week the Canada Income Company (CRA) launched a technical interpretation letter that gives us with an excellent refresher on how overseas forex positive factors, and losses, are to be handled for Canadian tax functions.
Within the letter, the CRA was requested how positive factors or losses on a overseas forex checking account, a overseas forex assured funding certificates, a overseas forex time period deposit, and different comparable overseas forex deposits are to be handled by a person Canadian taxpayer. The CRA was additionally requested how the overseas alternate acquire/loss guidelines work when shares, bonds, mutual funds or actual property are bought and offered 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 acquire or suffered a loss from the “disposition” of a forex apart from Canadian forex, that acquire (or loss) can be a capital acquire (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 (comparable to a observe or bond) or another asset. For instance, overseas funds on deposit, comparable to U.S. {dollars}, will be moved from one type of deposit to a different, and, so long as such funds can proceed to be seen as “on deposit,” no disposition will happen. The CRA has said that time period deposits, assured funding certificates and different comparable deposits that are non-negotiable are thought-about to be funds on deposit.
However, transactions during which overseas forex funds are invested in negotiable devices, comparable to notes, bonds, mortgages, debentures, U.S. authorities treasury payments and U.S. notes and business paper, would require a overseas alternate acquire (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 comparable securities.
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The excellent news is that, beneath the Earnings Tax Act, you solely need to report the quantity of your overseas forex internet acquire or loss for the 12 months if that acquire/loss is greater than $200. If the web quantity is $200 or much less, you should not 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, comparable to shares or bonds, or actual property, denominated in overseas forex, your capital acquire (or loss) on disposition would come with a overseas forex element. For these transactions, you’re supposed to make use of the precise overseas alternate fee that was in impact on the day of the transaction. In different phrases, to correctly report a acquire (or loss) on a overseas property, you’ll convert the proceeds to Canadian {dollars} utilizing the alternate fee on the date of sale and evaluate that to the adjusted value base (ACB) or tax value of the property utilizing the overseas alternate 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 worth was US$10 per share, and the U.S. greenback was at par with the Canadian greenback. By December 2024, the worth 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 positive factors he realized in 2024.
So, on Dec. 5, 2024, when the U.S. greenback was buying and selling at C$1.41, Jed offered the U.S. shares for US$8,000, yielding proceeds of $11,280. So, what initially gave the impression to be an accrued capital lack of US$2,000 (US$10,000 – US$8,000) turned out to be a capital acquire of $1,280 ($11,280 – $10,000) for Canadian tax functions.
Word that the CRA would require Jed to report his overseas alternate acquire on his 2024 securities transactions on his 2024 tax return even when he doesn’t truly convert the overseas funds (i.e. the US$8,000) again to Canadian {dollars}, which stands out as 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, remember that overseas revenue, comparable to U.S. dividends, could also be handled a bit in another way. Whereas the CRA says that you simply’re supposed to make use of the Financial institution of Canada alternate fee in impact “on the day you obtained the revenue,” if the revenue was paid to you kind of evenly all year long, you should utilize the common annual fee for the 12 months, which will be discovered on the Financial institution of Canada’s web site.
Any overseas taxes withheld in your non-registered overseas revenue might entitle you to say a overseas tax credit score while you calculate your federal and provincial or territorial taxes. You’d 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.
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Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Personal Wealth in Toronto. [email protected].
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