This simple inquiry can give rise to many questions, as many taxpayers misunderstand the rules regarding which exchange rate to use.
Stock Market Transactions
The Tax Act recognizes that a taxpayer can profit from variations in exchange rates. Thus, the law provides that they may realize a capital gain or a loss when selling securities throughout the year.
In the case of a sale of a security listed on a foreign stock exchange (like the NYSE), we must express the price of that sale in Canadian dollars. The tax authorities require us to use the rate in effect on the settlement date of the transaction, and not the date on which the trade took place. The rate used is the one that prevailed, legally, at the time the transaction was concluded between investors. This nuance is very important and all taxpayers must ensure that the information they have on hand respects this rule.
Moreover, the tax authorities require that the rate used is the one posted by the Bank of Canada at noon on the settlement day of the transaction. The following example was given by the Canada Revenue Agency in a response made at the 2015 convention of l’Association de planification fiscale et financière (APFF):
Thus, in an example where a taxpayer receives proceeds from the sale of a security listed on the New York Stock Exchange in a US dollar account, the conversion to Canadian dollars must be made at the rate posted at noon by the Bank of Canada on the settlement date of the transaction.
It is therefore not possible to use the average for the year to determine the gain or loss on a transaction. For the acquisition as well as for the sale, the daily rate must be used to determine the amount that will be subject to income tax.
Owning a Property in the United States
The large fluctuations in the US dollar versus the Canadian dollar could have a rather unusual impact on those who must repay a mortgage in US dollars. For each payment made in 2015, the Canadian taxpayer realized a loss because the principal amount to be repaid is now higher than it was when they signed their mortgage.
Canadian tax authorities have confirmed that a taxpayer may claim a capital loss on the principal repayment of debt denominated in a foreign currency, even if the debt was used to purchase property for personal use. However, the basic rule provides that no expense may be recorded as a capital loss when personal property is involved.
In this respect the CRA stated the following at the 2009 APFF convention:
The CRA recognizes that gains and losses on personal transactions in foreign currency constitute capital gains and losses under paragraph 39(2) of Interpretation Bulletin IT-95R, which provides in subsection 5:
5. Sundry dispositions of foreign currency by individuals, such as a conversion of travellers cheques in foreign funds to Canadian dollars on return from a vacation, are considered to be on account of capital. Underline text:Foreign exchange losses sustained on the repayment of a debt which was given to acquire a personal-use property are also considered to be capital losses under subsection 39(2).(Underline added)
As in the case of stock market transactions, the gain or loss must be calculated based on the rate quoted by the Bank of Canada at noon, on the day of the transaction.
According to this generous interpretation, taxpayers who made lump sum payments or prepayments may be eligible for a capital loss. In contrast, when the Canadian dollar regains value, some will have to report a gain on repayments of their mortgage principal.