Recently, I wrote a two-part series explaining the basics of capital gains, as well as special considerations. I have received several follow-up questions relating to how to report gains or losses for foreign-denominated capital assets, and what to do when clients gain or lose after converting foreign currency.
To start, Canadians should report all income and capital gains in Canadian currency, or converted to the Canadian dollar equivalent, for Canadian income tax reporting purposes. Let’s look at the specifics.
Miscellaneous dispositions of foreign currency, such as the conversion of foreign currency or foreign-demoninated traveller’s cheques to Canadian dollars (or another currency), are to be reported as a capital gain or loss. In the case of individuals, if the cumulative capital gains or losses from such exchanges during the year total more than $200, they have to be reported for tax reporting purposes on Schedule 3 “Capital Gains (or Losses) in the Year” for individual taxpayers.
For capital property bought and disposed of in a foreign currency, the adjusted cost basis (ACB) and proceeds of disposition must be tracked and converted to Canadian dollars for tax reporting purposes. Any foreign exchange component associated with the asset’s disposition will be linked to the transaction and reflected in the capital gain or loss reported.
Note: we use hypothetical exchange rates here.
On June 5, 2017, Mr. A converts CA$100,100 to US$77,000 USD ($1 USD = $1.30 CAD). Three days later, on June 8, Mr. A’s purchase of US$77,000 worth of Apple shares is settled. The CAD-USD exchange rate is also $1.30 on June 8. Note that CRA uses the settlement date, not the transaction date, for tax reporting purposes.
A friend of Mr. A’s decides to sell his Florida condo. Given the previous nasty Canadian winter, Mr. A wants to buy it. Mr. A decides to sell his Apple shares to fund the purchase, and receives US$93,000 in proceeds on July 2. The CAD-USD exchange rate is $1.28. One week later, on July 9, Mr. A closes on the purchase of his new condo for US$93,000. The CAD-USD exchange rate that day is $1.30.
Unfortunately, Mr. A did not use his condo as much as anticipated. Fortunately, his former colleague wants to buy it. They agree on a sale price of US$100,000 and the sale closes December 22. The CAD-USD rate on that day is $1.32. On December 29, Mr. A converts the condo proceeds back into CAD, when the rate is $1.325, and he presents you with a cheque for CA$132,500 to invest in his non-registered account.
What capital gains does Mr. A have to report on the aforementioned transactions, and when?
Mr. A will have to report the capital gain associated with the disposition of his Apple shares. The capital gain for Canadian tax purposes would be as follows:
CA$119,040 (US$93,000*1.28) minus CA$100,100 (US$77,000*1.30) = CA$18,940
Mr. A will have to report the capital gain associated with the disposition of the condo (assuming he isn’t using his principal residence exemption). The capital gain for Canadian tax purposes would be:
CA$132,000 (US$100,000*1.32) minus CA$120,900 (US$93,000*1.30) = CA$11,100
While Mr. A will also have to report the disposition of the condo on a U.S. tax return, and the corresponding foreign tax credit will be reported on his Canadian tax return, we’ll disregard that for purposes of this article.
What about the US$100,000?
Mr. A might also have to report a capital gain relating to the CA$132,500 he received after converting US$100,000 in 2019. Here’s how.
First, we have to determine the ACB of the US$100,000. Mr. A accumulated USD currency from the following transactions:
- June 5, 2017: US$77,000 at 1.30 = CA$100,100
- July 2, 2017: US$16,000 (US$93,000 minus US$77,000) at 1.28 = CA$20,480
- December 22, 2019: US$7,000 (US$100,000 minus US$93,000) at 1.32 = CA$9,240
From the three transactions above, Mr. A’s US$100,000 has an ACB of CA$129,820.
As the ACB of the US$100,000 is CA$129,820, and given that he received CA$132,500 at the time of conversion (his proceeds of disposition), Mr. A does have a capital gain from the appreciation of the U.S. currency of $2,680. Assuming Mr. A has no other capital gains or losses relating to foreign currency in 2016, Mr. A should report a capital gain of $2,480 ($2,680 less the $200 threshold) relating to his U.S. currency exchange on Schedule 3 of his 2016 personal tax return.
Michelle Connolly, CPA, CA, CFP, TEP, is a Toronto-based tax and estate planning expert.