Why read this?

Your client:

  • › is a currency trader,
  • › has foreign-denominated securities, and/or
  • › owns foreign currencies.

When to calculate gains or losses

CRA says a foreign exchange gain or loss happens when the transaction occurs—not as the currency’s value fluctuates while on deposit. Examples of transactions include when:

  • money is converted from one currency to another, or back into Canadian dollars;
  • foreign currency is used to make a purchase or payment; or
  • foreign currency is used to pay all or part of a capital debt.

Source: CRA Interpretation Bulletin 95R

What to do

Your client trades currencies in a non-registered account

  1. Calculate gains and losses in Canadian dollars (CAD).
    The cost to acquire the foreign currency, expressed in CAD, is the transaction’s cost base, says Gabriel Baron, tax partner at EY in Toronto. When your client disposes of the currency, convert the sale price back into CAD using the transaction date’s exchange rate to calculate the gain or loss.
  2. Choose an income or capital treatment for gains and losses.
    CRA allows a taxpayer to treat gains and losses as either income or capital, but she must use the same treatment every year.

    a Capital treatment is preferable if your client has profited from the trades, as gains are taxed at 50% of her marginal rate, says Baron. For capital treatment, complete Lines 151 and 153 of Schedule 3: Capital Gains (or Losses).
    If your client has a gain, report the total from Line 199 of Schedule 3 on Line 127 of the return. If she has a loss, attach Schedule 3 to the return.

  3. b Income treatment is preferable if your client has lost money, as 100% of the loss can be deducted, says Baron. For income treatment, list total income on Line 130 of the return.

Your client has foreign-denominated securities in her non-registered portfolio

  1. Convert the gain or loss to CAD, as above.
  2. List securities on Lines 131 and 132 of Schedule 3, says Jordan Cahill, partner at Cahill Professional Accountants in Vancouver. Calculate the total on Line 199.
    a If Line 199 shows a gain, report it on Line 127 of your client’s return.
  3. b If Line 199 shows a loss, attach Schedule 3 to the return.

WARNING: Your client can lose money on the security but gain on the exchange, notes Baron. As long as the sale price of the security is higher than its cost base when both are converted into Canadian dollars, your client has a capital gain.

Your client is a currency broker or trader

If currency trading is your client’s livelihood, CRA treats her gains as business income, which is 100% taxable.

  1. Calculate income or losses in Canadian dollars.
  2. Use Form T2125: Statement of Business or Professional Activities to calculate income and expenses.
  3. Report gross income on Line 162 (Business) or Line 166 (Commission) of the return, depending on the nature of the income.
  4. Report net income on Line 135 (Business) or Line 139 (Commission) of the return.

TIP

Clients who trade currencies often should record transaction timelines, says accountant Jordan Cahill. The timeline should include when the currency was purchased, when it was sold and the exchange rates on those days. “It shows when the taxable event happens, the gain and what to report on the income tax return,” he says.

TRACKING GAINS

Date BUY
April 29, 2011
SELL
September 17, 2015
Exchange Rate CAD $1

US $1.0542

CAD $1

US $0.7584

Amount CAD $10,000.00

US $10,541.85

US $10,541.85

CAD $13,900.48

Gain CAD $3,900.48


Jessica Bruno is content editor at Advisor Group. Reach her at jessica.bruno@rci.rogers.com or on Twitter, @JessicaNBruno.

Originally published in Advisor's Edge Report

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