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On a current journey to New York Metropolis, I used to be capable of 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, corresponding 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 international alternate fee.

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In November 2024, the international alternate fee I used to be charged was over $1.40 to purchase U.S. {dollars}, which shocked 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 scenario. Fortuitously, this week the Canada Income Company (CRA) launched a technical interpretation letter that gives us with an excellent refresher on how international foreign money features, and losses, are to be handled for Canadian tax functions.

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

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

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A disposition of international foreign money happens while you both spend it, convert it to a different foreign money (Canadian or in any other case), or use it to buy a negotiable instrument (corresponding to a word or bond) or another asset. For instance, international funds on deposit, corresponding 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 acknowledged that time period deposits, assured funding certificates and different related deposits that are non-negotiable are thought-about to be funds on deposit.

Then again, transactions during which international foreign money funds are invested in negotiable devices, corresponding to notes, bonds, mortgages, debentures, U.S. authorities treasury payments and U.S. notes and industrial paper, would require a international alternate acquire (or loss) calculation on the time the international foreign money 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, beneath the Revenue Tax Act, you solely must report the quantity of your international foreign money internet acquire or loss for the yr if that acquire/loss is greater than $200. If the online quantity is $200 or much less, you don’t have to report it in your tax return.

In 2020, the CRA clarified that international foreign money 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 foreign money at any time, convert it to a different foreign money at any time, or use it at any time to make a purchase order or fee, can be eligible for this therapy.

The current CRA technical interpretation additionally confirmed that while you eliminate securities, corresponding to shares or bonds, or actual property, denominated in international foreign money, your capital acquire (or loss) on disposition would come with a international foreign money element. For these transactions, you’re supposed to make use of the precise international alternate fee that was in impact on the day of the transaction. In different phrases, to correctly report a acquire (or loss) on a international 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 international 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 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 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.

Observe that the CRA would require Jed to report his international alternate acquire on his 2024 securities transactions on his 2024 tax return even when he doesn’t really convert the international 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 international earnings, corresponding to U.S. dividends, could also be handled a bit otherwise. 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 acquired the earnings,” if the earnings was paid to you kind of evenly all year long, you should utilize the common annual fee for the yr, which may be discovered on the Financial institution of Canada’s web site.

Any international taxes withheld in your non-registered international earnings could entitle you to assert a international tax credit score while you calculate your federal and provincial or territorial taxes. You’ll additionally use the identical charges that have been used for the earnings to calculate the Canadian equal of the international taxes paid for functions of calculating the international tax credit score.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Non-public Wealth in Toronto. Jamie.Golombek@cibc.com.

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