If you have savings or investments in foreign currencies, it’s important to understand how exchange rates can affect the value of your investment. Additionally, it’s critical to understand your tax obligations when you’re dealing with foreign currencies.
Anyone may exchange Canadian currency for foreign currency, but typically there is a small fee for this type of transaction. For example, if you exchange physical currency at a bank, the bank levies a fee. Similarly, if you use a Canadian credit card to purchase items online in a foreign currency or if you make a credit card purchase while abroad, your credit card provider converts the total into Canadian currency and may charge a small fee for the service. If you decide to invest or save in another currency, you should also expect to incur a fee for the conversion.
Measuring Investment Growth
If you make investments in foreign currency, you have to track how the investment is growing, but you should also keep an eye on how the exchange rate affects the investment. To explain, imagine you have $10,000 USD in US stocks. Over a year, the stocks jump in value to $12,000 USD. This means that you’ve earned $2,000 on your investment.
However, when you purchased the investment, the exchange rate was $1 CAD to 76 cents USD. As a result, you spent $13,128 CAD plus fees to purchase $10,000 USD. However, when you cash out the investment, the exchange rate is $1 CAD to 72 cents USD, and when you exchange your original $10,000 USD investment, you get back $13,971 CAD. This is $843 CAD more than you spent on the original investment, and this constitutes profit, as well.
As you track the value of your investment, it’s important to stay on top of exchange rates as explained above. You can easily search for exchange rates online, but rates can vary a bit from institution to institution, so you may want to check the exact rates at your financial institution. Additionally, when you report sums to the Canada Revenue Agency (CRA) that are originally in a foreign currency, you must convert those amounts into Canadian dollars, and the CRA recommends using exchange rates from the Royal Bank of Canada.
The CRA requires all taxpayers to report capital gains. This refers to money earned when you sell an investment. For example, if you buy stocks for $5,000 and sell them for $6,000, you have a $1,000 capital gain. This rule also extends to money you earn through foreign currency exchanges, but it only applies to gains worth more than $200.
To illustrate, imagine you were thinking about buying a property in the United States. You exchanged $328,072.50 CAD for $250,000 USD and you put these funds in a US bank account. However, the deal falls through and you close the account. In the interim, the exchange rate has changed and you receive $349,123.75 CAD for the $250,000. In this case, you have earned $21,051.25. Although $200 is exempt, you should report the rest as a capital gain on your tax return.