Principal Issues: [TaxInterpretations translation] Translation of foreign currency transactions and calculation of foreign exchange gains and losses of an individual whose transactions relate to income. The individual uses a method set out in paragraph 8 of Interpretation Bulletin IT-95R.
Position: Comments on the method used by the taxpayer in the examples attached to the application and application of the method to the examples of transactions where the exchange rate gain or loss has not been calculated.
Reasons: Application of the method.
XXXXXXXXXX 2006-019097 Sylvie Labarre, CA August 28, 2007
Dear Sir,
Subject: Foreign exchange gains or losses
This is in response to your letters of May 31 and August 31, 2006 requesting our opinion on the method used to calculate foreign exchange gains and losses of an individual whose transactions are on income account. We apologize for the delay in responding to this request.
You indicated that you have a Canadian dollar account and a U.S. dollar account with an investment dealer. You make transfers between your two accounts. In addition, you sell and buy stocks and securities for or with U.S. dollars which you deposit into, or withdraw from, your U.S. dollar account, as applicable. For some transactions, you have an account for paying for your purchases over a period of time.
You informed us that the sales and purchases of securities are on income account and that you use one of the methods recommended in paragraph 8 of Interpretation Bulletin IT-95R, i.e. the historical rate or settlement method.
You provided an example of a few transactions that are representative of all your transactions. You provided us with your method of calculating foreign exchange gains and losses and asked us if we agree with your calculations. You also asked us to calculate your foreign exchange gains and losses regarding the transactions you listed following the first ones showing us your calculation method.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of the Canada Revenue Agency (CRA) not to issue written opinions on proposed transactions otherwise than through advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
You informed us that your transactions are on income account. Our comments are therefore based on that assumption, which we have not verified. We have assumed that the transactions given as examples occur in the same taxation year.
In such a case, it is our view that the CRA would accept the method you used to convert your first foreign currency purchase and sale transactions into Canadian funds (i.e., the exchange rate on the date of the transaction). In addition, the CRA would accept the method used to calculate the foreign exchange gain or loss in respect of your foreign currencies deposited with the investment dealer in both of your accounts at the time there is a transaction either converting to Canadian currency or purchasing out of the U.S. dollar account, with such method providing for the calculation of the foreign exchange gain or loss by multiplying the amount traded by the difference between the rate on the date of the transaction (conversion or purchase) and the historical rate in effect at the time the money was deposited in the U.S. dollar account (average historical rate where multiple transactions affect that account).
Furthermore, you asked us to apply the method to the following transactions given in the table you attached to your request. As stated above, purchases and sales would be converted at the rate in force on the date of the transaction:
- purchase of 333 C shares $400,000US X 1.25 = $500,000 in Canadian dollars
- sale of 333 C shares US$90,000 X 1.20 = $108,000 in Canadian dollars
- sale of 222 B shares US$200,000 X 1.15 = $230,000 in Canadian dollars
(whereas the B shares were purchased for $150,000 US dollars at an exchange rate of 1.3 on the date of purchase, or $195,000 in Canadian dollars) - purchase of 444 shares of D US$25,000 X 1.10 = $27,500 in Canadian dollars
The calculation of the results for the taxation year would take into account those conversions. In addition, by taking into account the transactions given as examples in your tables, a gain or loss on exchange rate on assets or liabilities would be added to the results for the taxation year: for the last transactions given as examples in your tables, there would be a gain or loss on the disbursement of $60,000 for the purchase of 333 shares of Cco and the gain or loss on foreign exchange on the account payable created when those 333 shares were purchased, calculated as that account payable was settled. Thus, on the disbursement of $60,000 in U.S. dollars, a loss of $4,091 ($60,000 X (1.25 - 1.318183)) was incurred. Furthermore, the account payable of $340,000 in U.S. dollars was contracted at a time when the prevailing exchange rate was 1.25, which is equivalent to an account payable of $425,000 in Canadian dollars. The foreign exchange gains calculated on the partial settlements of the account payable are as follows:
- on transfer from Canadian account: $1,500 ( 30,000 X (1.25-1.2))
- on sale of shares: $4,500 (90,000 X (1.25-1.2))
- on sale of shares: $20,000 (200,000 X (1.25-1.15))
- on transfer from the account: $3,000 ( 20,000 X (1.25 -1.1))
$29 000
There is no gain or loss on settlement of the $25,000 U.S. dollar account payable that was incurred on the purchase of the 444 shares of Dco since the rate in effect at the time of payment and the rate in effect at the time of the purchase transaction are the same.
We hope that these comments are of assistance.
Best regards,
Alain Godin
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch