Currency Exchange Gains and Losses-Canada

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  • All immigrants like to get the best exchange rate possible for their money.

  • If you have £100,000 in the bank the day you land and prevailing exchange rate is 2.15, you would get $215,000 for it.

  • If you decide to hold on and end up getting 2.25 a few weeks later, so $225,000, the extra $10,000 you get is a Foreign Currency Gain that must be reported on your tax return.

  • Likewise, any losses on foreign property can be claimed as a loss on your tax return (but see below).

  • Businesses revalue their foreign currency assets when they prepare their financial statements and gains and losses are accrued. Generally, these are fully taxable or allowable.

  • Individuals only report foreign exchange gains or losses when they are realized in a transaction. In the above example $215,000 is the "cost" of the UK deposit for Canadian tax. If you become tax resident on, say, May 1 2007 and the money is still on deposit at December 31, 2007 you will not report any foreign exchange gain or loss in 2007 regardless of the exchange rate at December 31, 2007. However, you will need to report any interest received as income, and report the deposit on form T1135 that you file with your tax return.

  • If you convert the deposit to Canadian dollars on February 15, 2008 and receive $225,000 then there is a foreign currency gain of $10,000 that you must include in your 2008 tax return.

  • If you have a gain, the good news is that the Canada Revenue Agency (CRA) consider foreign exchange gains of individuals as capital gains. Therefore only half the gain (in this case $5,000) is added to your taxable income.

  • If you have a foreign exchange loss this is bad news. Capital losses can only be offset against capital gains and not any other income. Although they can be carried back three years, and forward indefinitely, a new immigrant is unlikely to have any capital gains to use in the near future, and maybe never.

  • Consider this scenario:
    • You leave £200,000 on a 12 month deposit in the UK @ 5% when you emigrate on June 30th 2007. At that time the exchange rate is 2.1 so the tax cost is $420,000.
    • On December 31, 2007 the exchange rate is 2.0. You do not report any income or loss on your 2007 tax return.
    • On June 30th 2008 the deposit matures as £210,000 when the exchange rate has fallen to 1.8. You have to report your interest income on your 2008 Canadian tax return i.e. $19,750 ((200,000 x 5/100)6/12 x (2.1 + 2.00)/2) + ((200,000 x 5/100)6/12 x (2.0 + 1.8)/2)
    • You need the money in Canada. Unfortunately the exchange rate is 1.8 and you receive only $378,000.
    • As you have no Canadian capital gains you cannot offset your loss against any other income.
    • There is an obvious problem in that you have paid tax on $19,750 of income but in reality you have made a loss of $42,000 (420,000 - 378,000).
    • You might want to take this into account when planning your finances.

  • Talk to an accountant.

  • This is one in a series of BE Wiki articles about Taxation.