Foreign exchange gain tax: a capital gain above $200 for individuals

Is a foreign exchange gain capital or income?

The Income Tax Act doesn't say. The CRA's position is that the gain follows the transaction that produced it: a gain on buying or selling goods and services used in the business is income, and a gain on buying or selling capital assets is capital. How long the account stays unpaid doesn't change that canada.ca. For investors, a gain on converting currency as money is a capital gain canada.ca.

Currency dealings outside a business are treated like a speculator's commodity futures, so a client who trades currency actively can face income treatment instead of capital canada.ca. The CRA guidance on all of this is Interpretation Bulletin IT-95R from 1980. The CRA has archived it and says it won't update it, but the 2025 capital gains guide still reflects its capital treatment for currency canada.ca.

How does the $200 exclusion work?

Subsection 39(1.1) applies to an individual other than a trust. It totals the gains and the losses from dispositions of foreign currency in the year. The capital gain is total gains minus (total losses plus $200), and the capital loss is total losses minus (total gains plus $200) laws-lois.justice.gc.ca. So the $200 comes off the net figure once a year, not off each conversion.

If the net is $200 or less there is no capital gain or loss and nothing goes on the return. Anything above $200 is reported in Canadian dollars on line 6 of Schedule 3 Part 3, the line that covers foreign currencies, with proceeds on line 15199 and the gain or loss on line 15300 canada.ca. Half of the resulting capital gain is a taxable capital gain, and half of a capital loss is an allowable capital loss laws-lois.justice.gc.ca. See T1 Schedule 3 for where line 15300 flows.

The $200 applies only to gains from dispositions of currency itself. It does not reduce the currency piece inside a share gain, and a trust or a corporation never gets it.

When does a US dollar account trigger a gain?

A paper gain on US dollars sitting in an account is not taxed. The CRA says a gain or loss arises only when a transaction occurs, and lists three: converting the foreign currency into Canadian dollars or another currency, using the foreign funds to make a purchase or payment, and repaying all or part of a capital debt. Currency on deposit is not disposed of until it is converted or used to buy a negotiable instrument canada.ca.

Assume your client converts C$13,500 into US$10,000 in March 2026 at 1.3500 and has no other currency transactions that year. Each later use of those dollars is a disposition, with the cost of each US dollar at C$1.35.

Under 39(1.1) the capital gain is $430 minus ($40 plus $200), which is $190. The taxable capital gain is $95. The last US$1,000 stays in the account at its C$1,350 cost, and nothing is reported on it until it is spent or converted. Keep a record of the Canadian dollar cost of every deposit, because each withdrawal needs one.

What happens when your client buys US stocks with US dollars?

There are two gains, and only one of them gets the $200. Spending US dollars on the shares is a use of foreign funds, so it disposes of the currency canada.ca. The shares themselves take a cost converted at the rate on the purchase date, and the proceeds convert at the rate on the sale date canada.ca.

Your client funded the account at 1.3500 and buys US$10,000 of shares when the rate is 1.4000. Later the shares sell for US$11,000 at 1.4500.

If this is the only currency activity in the year, the currency gain reported is $300 ($500 minus $200) and the share gain of $1,950 goes on line 4 of Schedule 3 with no $200 reduction. The US$11,000 left in the account now has a cost of C$15,950 for its next disposition. Which rate to use for each date, and when the annual average is acceptable, is on the foreign income exchange rate page, and averaging several purchases of the same stock is on the adjusted cost base page.

How is a gain or loss on repaying a foreign currency loan taxed?

Repaying all or part of a capital debt in a foreign currency is itself a transaction that realizes a gain or loss canada.ca. For a capital debt, subsection 39(2) deems the gain or loss caused by the currency move to be a capital gain or loss from the disposition of currency, and it excludes gains and losses that 39(1.1) already covers laws-lois.justice.gc.ca. The text of 39(2) carries no $200 amount.

Assume your client borrowed US$200,000 at 1.2500 to buy a Florida vacation home, so the loan was worth C$250,000 when taken out. In 2026 your client repays US$50,000 with Canadian dollars converted at 1.4000.

The CRA says a loss on repaying a debt used to buy personal use property is a capital loss under 39(2) canada.ca, even though a loss on the personal use property itself would be denied. Business borrowing is different: a gain or loss on repaying a foreign currency loan used in ordinary business operations is generally income, and it becomes capital only where the borrowed funds form part of the business's permanent or fixed capital canada.ca. An unused allowable capital loss carries over under the net capital loss rules.

How do businesses report exchange gains on income account?

Income transactions are normally recorded at the exchange rate on the transaction date, and when the account is settled within the year the gain or loss goes into that year's income. The CRA accepts two methods: the accrual method, which adjusts current accounts to the year end rate and includes the result, and the settlement method, which recognizes the gain or loss only on payment canada.ca.

Whichever method your client uses has to fit generally accepted accounting principles, match the financial statements and stay consistent from year to year. No reserve is allowed for rate changes expected after year end canada.ca. A business US dollar bank account realizes a gain or loss each time the funds are converted or used to pay a supplier, as if they had been converted to Canadian dollars at that moment canada.ca. Capital transactions are different: the accrual method is not acceptable for capital gains and losses, which arise only on an actual transaction canada.ca.