The Canada Revenue Agency requires taxpayers to report capital gains on foreign currency when the transactions are on capital account. Adjusted cost base must be calculated in Canadian dollars in a similar fashion to securities. When you convert Canadian dollars into a foreign currency, the adjusted cost base is established in Canadian dollars. When the funds are later converted back into Canadian dollars, a capital gain or loss will be realized if the exchange rate has fluctuated.
A capital gain or loss is also realized when the funds are used to purchase securities that trade in the foreign currency, or when the funds are used to pay expenses or make a purchase. In these cases a deemed disposition of the foreign funds is considered to have occurred, even though they may not have been converted into Canadian dollars.
Special attention must be made when holding foreign currency in a foreign currency bank account or brokerage account. A conversion of Canadian dollars into a foreign currency will increase the ACB of the foreign funds by the value in Canadian dollars. Similarly, if you receive foreign funds directly (for example: income, dividends, interest), the value in Canadian dollars is added to the ACB of the foreign funds. This will affect the amount of the capital gain or loss when the foreign funds are eventually converted to Canadian dollars or spent (although the income, dividends, and interest will likely be taxable immediately).
If you hold a foreign currency in multiple accounts, do not calculate ACB separately for each account. ACB must be jointly since the same currency is considered an identical security (see Tracking Adjusted Cost Base with Multiple Brokerage Accounts).
The CRA provides a $200 exclusion on foreign exchange gains. If the gain on foreign currency is less than $200 for the year, you do not need to report it. Also, any loss less than $200 cannot be claimed. This was put in place so that taxpayers are not overburdened by the complexity of tracking ACB for foreign currency used casually such as for traveling. But when gains exceed $200 the calculations can become quite cumbersome.
For example, suppose you convert CAD$100,000 into U.S. dollars with an exchange rate of CAD$1=USD$0.9192. The U.S. cash balance becomes:
CAD$100,000 x USD$0.9192/CAD$ = USD$91,920
Since ACB is tracked in Canadian dollars, the initial ACB is simply CAD$100,000.
Next, suppose the funds earn interest of USD$80 when the exchange rate is CAD$1=USD$0.9304. The interest would be immediately taxable in the current tax year. The ACB of the U.S. dollars increases by USD$80 converted into Canadian dollars. The ACB increases to:
CAD$100,000 + (USD$80.00 / USD$0.9304/CAD$) = CAD$100,000 + CAD$85.98 = CAD$100,085.98
The account balance is now USD$92,000.
Then, suppose you spend USD$1,200 on a vacation funded directly from your U.S. dollar account, when the exchange rate is CAD$1=USD$0.9023. This results in a deemed disposition of the U.S. dollars even though no conversion to Canadian dollars took place. The proceeds in Canadian dollars are:
USD$1,200 / (USD$0.9023/CAD$) = CAD$1,329.93
A capital gain has occurred and must be reported on your tax return. The capital gain is equal to:
CAD$1,329.93 — (CAD$100,085.98 x (USD$1,200.00 / USD$92,000.00)) = CAD$1,329.93 — CAD$1,305.47 = CAD$24.46
The new ACB is:
CAD$100,085.98 — (CAD$100,085.98 x (USD$1,200.00 / USD$92,000.00)) = CAD$100,085.98 — CAD$1,305.47 = CAD$98,780.51
and the U.S. cash balance is USD$90,800.
Next, you convert USD$1,000 into Euros when the exchange rates are CAD$1=USD$0.9409 and USD$1=EUR€0.7234 (and therefore CAD$1=EUR€0.6806). The U.S. cash balance is now USD$89,800 (USD$90,800 — USD$1,000). The USD$1,000 is deemed to have been sold so this results in the following capital gain:
(USD$1,000.00 / (USD$0.9409 / CAD$)) — (CAD$98,780.51 x (USD$1,000.00 / USD$90,800.00)) = CAD$1,062.81 — CAD$1,087.89 = —CAD$25.08
The capital loss of CAD$25.08 can be applied to offset capital gains. The new ACB for the U.S. dollars becomes:
CAD$98,780.51 — (CAD$98,780.51 x (USD$1,000.00 / USD$90,800.00)) = CAD$98,780.51 — CAD$1,087.89 = CAD$97,692.62
Assuming that you don’t spend the Euros immediately, you must now track the ACB for this new holding. The initial Euro cash balance is:
USD$1,000.00 x (EUR€0.7234/USD$) = EUR€723.40
The initial ACB for the Euros becomes:
EUR€723.40 / (EUR€0.6806/CAD$) = CAD$1,062.89
The ACB for Euros must now be tracked separately.
Finally, you purchase 100 shares of YHOO for USD$80.00 per share with a commission of USD$9.99 and an exchange rate of CAD$1=USD$0.8941, funded directly from your U.S. dollar account (see Calculating Adjusted Cost Base when Purchasing Foreign Currency Securities). This results in a deemed disposition of U.S. dollars in the amount of:
(100 shares x USD$80.00/share) + USD$9.99 = USD$8,009.99
This results in the following capital gain:
(USD$8,009.99 / USD$0.8941/CAD$) — (CAD$97,692.62 x (USD$8,009.99 / USD$89,800.00)) = CAD$8,958.72 — CAD$8,714.00 = CAD$244.72
The ACB of the U.S. dollar is now:
CAD$97,692.62 — (CAD$97,692.62 x (USD$8,009.99 / USD$89,800.00)) = CAD$97,692.62 — CAD$8,714.00 = CAD$88,978.62
And the U.S. cash balance becomes:
USD$89,800.00 — USD$8,009.99 = USD$81,790.01
Finally, the ACB of YHOO must also be calculated in Canadian dollars:
USD$8,009.99 / (USD$0.8941/CAD$) = CAD$8,958.72
AdjustedCostBase.ca can be used for calculating ACB and capital gains on foreign currency balances. To do so, create a new security for each foreign currency as follows:
Each transaction can be inputted as a buy or sell transaction for U.S. dollars. Here is the first transaction from the example above:
This is a buy transaction because U.S. dollars are being purchased. The price can be entered as $1.00 indicating that each unit (or “share”) is equivalent to USD$1.00. For all transactions on U.S. dollars, use $1.00 as the price, since one unit of currency will always be worth USD$1.00. The “Price in Foreign Currency” checkbox is checked, and the exchange rate is entered. This results in the following transaction:
Note that the ACB is CAD$100,000 as expected. All values in the transaction list are shown in Canadian dollars. The remaining transactions can be entered in a similar fashion. For the purchase of Euros two transactions must be inputted: a sell transaction for U.S. dollars and a buy transaction for Euros. Similarly, for the purchase of YHOO you must enter two transactions: a sell transaction for U.S. dollars and a buy transaction for YHOO.
Below are the list of transactions for the entire example: