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Capital Gains Tax when Converting Currency

When I wrote about some low cost ways to convert your valuable US Dollars (USD) back into Canadian dollars (USD), there was a comment about the potential for capital gains tax which caught some readers by surprise. At a high level, if there is any sort of “profit” from doing a conversion from USD to CAD within a non-registered account, then there will be taxes owed. Lets get into the weeds a little more.

What is Capital Gains Tax?

This tax only applies to investments in non-registered accounts and U.S based investment real estate. If you sell a position in a non-registered account, and there is a profit (capital gain), then there will be capital gains tax owed when you file taxes for that year. How is capital gains tax calculated? At the simplest level, 50% of your capital gain is added to your income for the year. If you are at the highest tax bracket, then you will pay approximately 25% of your capital gain in tax.

For example:

Say you purchased $1,000 worth of a Canadian publicly traded company in a non-registered account and later sold it for $1,500.  In this simplified example, the capital gain would be $500.  The next step would be to take 50% of your capital gain and add to income for the year to determine your marginal tax rate.

Say that your marginal tax rate for the year is 40%, then your capital gains tax payable is $250 x 40% = $100.  In this case, your tax would be 20% of your capital gain, or half your marginal rate.  This calculation can get a bit more complicated because your buy price can change if you add to your position or make renovations when it comes to an investment property.  This is called calculating your adjusted cost base and you can read more about it here.  Otherwise, you can read more about capital gains tax here.

How does Capital Gains Tax Apply to Foreign Exchange?

So back to the original issue of taxation of doing foreign exchange (FX).  It can get confusing thinking in terms of a foreign currency and trying to calculate profit.  Buying and selling USD is very similar to buying and selling an equity as the value of USD relative to CAD changes over time.

For example:

Say that back in 2011/2012, you had the foresight to buy $10,000 USD when CAD/USD was at par.  Being the astute capitalist, you figure with CAD being around 1.40 would be a good time to sell USD and convert back to CAD.  Since you purchased $10,000 USD with $10,000 CAD, and sold for $14,000 CAD, your capital gain is $4,000 CAD.  Hint: convert everything to CAD first before doing your calculations.

Typical capital gains tax calculations apply here (see above), but with a small wrinkle.  Canada Revenue Agency (CRA) does not require that you report FX gains/losses unless it is greater than $200.  So in this case, you would report $3,800 ($4,000 – $200) as your capital gain, then taxed on the $1,900 (50% of $3,800).  If using the same marginal tax rate as the first example, you’re looking at about $760 in taxes.

What about U.S. stocks and U.S property capital gains?  Here’s an article on how to calculate U.S capital gains tax in a non-registered account, and the tax implications of buying a U.S property.

 

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FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 12 comments… add one }
  • mike February 8, 2016, 4:06 pm

    1) Can you claim capital loss with currency exchange?

    2) What if you buy then sell a US stock but then leave the stock in USD so you actually havent realized the “gains” by converting it back to CAD.

    • FT FrugalTrader February 9, 2016, 9:55 am

      Hi Mike, yes, you can claim a capital loss with FX. But note that you need to account for the $200 as indicated in the article. As well, with regards to stocks, you’ll need to calculate capital gains/loss by converting buy/sell price in CAD, then calculating your gain.

  • Patrick Hankinson February 8, 2016, 4:21 pm

    Also curious on Mike’s first question. Could you claim a capital loss on currency exchange?

  • Faisal February 8, 2016, 7:14 pm

    I had the impression that if the gain or loss was less than $200 (i.e. absolute value), then you wouldn’t have to report it. However, it didn’t occur to me that the $200 would be exempted in the event that your gain or loss was greater than $200. Interesting.

    • FT FrugalTrader February 9, 2016, 9:56 am

      Hi Faisal, it’s relatively new information to me as well. I found that detail online via accountants and confirming with my own accountant.

  • FT FrugalTrader February 9, 2016, 10:00 am

    As a capital loss example:

    Say that you purchased $1,000 USD with $1,400 CAD. You didn’t end up doing anything with the money, and a few years later converted the $1,000 USD back to CAD but only received $1,000 CAD (ie. back to par). In this case, you would have a $400 LOSS, but with the CRA exemption, you can only claim $200 as a capital loss.

  • Nancy February 23, 2016, 12:03 pm

    Do capital gains taxes apply if you were to sell a Canadian owned car to an American who pays in USD and which you subsequently convert to Canadian dollars giving you a profit on the sale?

    • FT FrugalTrader February 24, 2016, 12:17 pm

      My understanding is that if you sold a non-registered asset with a capital gain, then it would be taxable.

  • Vincent Hoang February 29, 2016, 6:52 pm

    Hello,

    I have a question regarding USD funds. What if they were accrued via employment income and not bought for profit? Do capital gains tax have an impact here. Is there a need for some kind of proof to the government here?

    Thanks,
    Vincent

  • ForeignContent November 19, 2016, 1:29 pm

    HI. You made a comment on RedFlag that DLR is considered currency, and therefore the $200 change minimum to include in Tax would apply. Can you please provide information where you got this confirmed? CRA gave me a reverse opinion so it would be appreciated.

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