Principal Issues: What is the CRA's position with respect to the use of average foreign exchange rates for the conversion of amounts of income and capital gains?
Position: An average rate may be acceptable for items of income, but not for capital gains.
Reasons: The definition of relevant spot rate in subsection 261(1) provides that a rate other than the rate quoted at noon by the Bank of Canada at the relevant date may be used, provided it is acceptable to the Minister.
FINANCIAL STRATEGIES AND FINANCIAL INSTRUMENTS ROUNDTABLE, OCTOBER 10, 2014
2014 APFF CONFERENCE
Question 9
Currency Conversion and Average Exchange Rate
Under the ITA, gains or losses arising from the disposition of property are calculated in Canadian dollars using the exchange rates prevailing at the time of acquisition in calculating cost and at the time of disposition in the calculation of selling price. In Technical Interpretation 2007-0237791I7 of September 4, 2007, the CRA stated that it had not established an administrative position that it would accept conversion rates different from those provided in Gaynor v. MNR, 1991 CTC 470 (F.C.A.), for transactions of a capital nature.
Furthermore, since June 2013, subsections 39(1) and 39(2) have been amended and have been replaced by new subsections 39(1), (1.1), (2) and (2.1) dealing with foreign exchange gains and losses on converting foreign currencies or in respect of the disposition of property.
The CRA website in the section "How to Calculate the Capital Gain", states:
Revenues must be reported in Canadian dollars. Use the exchange rate in effect at the time the transaction took place. You can use the average annual exchange rate when transactions are spread over the entire year. (Your emphasis)
Although this information can be found in the section "How to calculate a capital gain", it refers only to revenues.
On the other hand, several other technical interpretations deal with the conversion of currencies in various situations (periodic payments of interest or dividends, futures contracts, etc.).
Question to the CRA
Can the CRA clarify its administrative position with respect to the use of average exchange rates for the conversion of foreign currency transactions (interest, dividends, calculation of capital gain or capital loss on property, etc.)?
CRA response
Under paragraph 261(2)(a), and subject to an election made under subsection 261(3), the computation of a taxpayer's "Canadian tax results" must be made using the Canadian dollar. Where an amount that is relevant to that computation is expressed in a currency other than the Canadian dollar, that amount must, pursuant to paragraph 261(2)(b), be converted to the Canadian dollar using the "relevant spot rate", as defined in subsection 261(1), posted on the day on which the particular amount arose.
The computation of a taxpayer's income, as well as any amount taken into account in the computation, are, in particular, under the definition provided in subsection 261(1), part of the taxpayer's "Canadian tax results", so that subsection 261(2) will be applicable therein and the amounts relevant thereto and expressed in foreign currency will have to be converted into Canadian dollars according to the "relevant spot rate" posted on the day on which they arose.
Paragraph (a) of the definition "relevant spot rate" in subsection 261(1) provides that, for the purposes of paragraph 261(2)(b), a rate other than the rate posted at noon by the Bank of Canada on the particular day may be used if acceptable to the Minister. We are of the view that an average exchange rate could qualify in this regard. However, we do not accept using an average exchange rate respecting the calculation of capital gains and losses. Thus, pursuant to paragraph 261(2)(b), the CRA's position is that all amounts expressed in a foreign currency before being taken into account in the calculation of such gains or losses (namely, the adjusted cost base, the proceeds of disposition and the expenses of the disposition) must be converted into Canadian dollars in accordance with the "relevant spot rate" for the day or days when they arose. This result accords with the principles elaborated by the Federal Court of Appeal in Gaynor.
Hugo Gravel
(613)957-2058
2014-053863