Principal Issues: When to report a foreign currency gain or loss in respect of funds denominated in a foreign currency on deposit for the purposes of the Act
Position: Depends on whether the gain or loss is on account of capital or on revenue account.
Reasons: If the deposit is on account of capital, subsection 39(2) applies. Then the gain has to be "made" or the loss "sustained". This implies that the gain or loss has been realized and is not merely an accrued gain or loss. However, if the gain or loss is on revenue account, income computed in accordance with GAAP may represent the truer picture of the income of the taxpayer and the temporal method sanctioned by GAAP requires accrual of currency gains and losses on monetary assets at taxation year-end.
Tax Executives Institute Meeting - December 2006
Question 22
Foreign Currency
In document 2002-0160807 (April 16, 2003) CRA stated that Interpretation Bulletin IT-95R, Foreign Exchange Gains and Losses (December 16, 1980) is outdated because it does not reflect certain relevant court decisions (such as Gaynor (91 DTC 5288), Netupsky (92 DTC 2283), Kootenay (82 DTC 6023), Friedberg (93 DTC 5507), and Canderel (98 DTC 6100), the substantial amendments to section 1650 of the CICA Handbook in 1983, and the announcements of CRA at the 1984 Canadian Tax Foundation Annual Conference and in Income Tax Technical News No. 14 (December 9, 1998). As important, IT-95R does not address foreign exchange hedging transactions. As a result, although some of the general principles expressed in the bulletin are still applicable, certain positions expressed in the bulletin may not be relied upon as representing current law or the interpretive position of the CRA in respect of foreign exchange gains or losses.
IT-95R provides that foreign currency on deposit will not result in the recognition of a foreign exchange gain or loss until the deposit is converted to another currency or to some form of negotiable instrument. Does this general position still apply?
CRA Response
The appropriate timing for the recognition of foreign currency gains or losses in respect of foreign currency on deposit for income tax purposes depends on whether the deposit is capital property. If the deposit is capital property, a foreign currency gain or loss would not be recognized for tax purposes until the foreign currency is converted to another currency or expended for some other purpose.
If however the deposit is on revenue account and a truer picture of a particular taxpayer's income for a taxation year would be reflected by recognizing an accrued foreign exchange gain or loss in respect of foreign currency on deposit at year end then such gain or loss would be included in income for that taxation year for the purposes of the Act. A truer picture of a taxpayer's income would normally be determined by following Generally Accepted Accounting Principles ("GAAP"). The GAAP require translation of monetary items at taxation year end generally with the related foreign exchange gain or loss being included in the computation of income.
We recognize that IT-95R contains several administrative positions pertaining to the treatment of foreign currency gains and losses for the purposes of the Act. We intend to review those positions and may decide to archive IT-95R if we conclude that one or more positions are no longer supportable under the current law.