How to report foreign exchange gains and losses

Why read this?

You are a currency trader; have foreign-denominated securities; and/or own foreign currencies.

What to do

When to calculate gains or losses

• CRA says a foreign exchange gain or loss happens when a transaction occurs — not when 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

You trade 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 you dispose of the currency, convert the sale price back into CAD using the transaction date’s exchange rate to calculate the gain or loss.

TIP: Use the Bank of Canada’s 10-year currency converter for historical exchange rates.

2. Choose an income or capital treatment for gains and losses.

• CRA allows you to treat gains and losses as either income or capital, but you must use the same treatment every year.

a. Capital treatment is preferable if you have profited from the trades, as gains are taxed at 50% of your marginal rate, says Baron. For capital treatment, complete Lines 151 and 153 of Schedule 3 Capital Gains (or Losses).

• If you have a gain, report the total from Line 199 on Line 127 of the return. If you have a loss, attach Schedule 3 to the return.

TIP: CRA doesn’t tax the first $200 of a foreign currency capital gain or loss.

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

You have foreign-denominated securities in a non-registered portfolio

• Convert the gain or loss to CAD, as above.
• 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 return.

b. If Line 199 shows a loss, attach Schedule 3 to the return.

WARNING: You 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, you have a capital gain.

You are a currency broker or trader

If currency trading is your livelihood, CRA treats your gains as business income, and they are 100% taxable.

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

Sources: Jordan Cahill, BBA, CPA, CA, Cahill Professional Accountants, Vancouver; Gabriel Baron, CA, tax partner, EY, Toronto; CRA