Principal Issues: Whether subsection 39(1.1) applies to currency held on deposit with a financial institution.
Position: Generally, yes.
Reasons: When currency is used to describe a type of property being disposed of in subsection 39(1.1), “currency” includes deposits of currency held in a chequing or current account at a bank which can be withdrawn by the depositor at any time.
October 27, 2023
Yves Arseneau, CPA, CGA HEADQUARTERS Technical Specialist Income Tax Rulings Directorate Specialized Audit Support Division Gina Yew High Net Worth Compliance Directorate
2020-086803
Dear Mr. Arseneau:
Re: Disposition of Foreign Currency
This is in reply to your letter of October 5, 2020, requesting clarification of subsection 39(1.1) of the Income Tax Act (the “Act”). You have asked whether subsection 39(1.1) applies to dispositions of foreign currencies held on deposit at a financial institution by an individual or whether subsection 39(1.1) applies strictly to bills or coins. Furthermore, if subsection 39(1.1) does not apply, you have asked whether subsection 39(1) or 39(2) applies to dispositions of foreign currencies held on deposit at financial institutions.
Our Comments
In document F2017-0712621C6, the CRA indicated that subsection 39(1.1) would not apply to deposits of currency as a deposit represents a debtor and creditor relationship.
Subsection 39(1.1) applies if:
“[…] because of any fluctuation after 1971 in the value of one or more currencies other than Canadian currency relative to Canadian currency, an individual (other than a trust) has made one or more particular gains or sustained one or more particular losses in a taxation year from dispositions of currency other than Canadian currency and the particular gains or losses would, in the absence of this subsection, be capital gains or losses described under subsection (1) […]” [emphasis added]
Where subsection 39(1.1) applies, $200 is carved out from the calculation of capital gains and capital losses of the individual (see “C” and “F” in the formulas in paragraphs 39(1.1)(b) and (c), respectively) (the “$200 carve-out”).
Subsection 39(1.1) applies if, because of any fluctuation in the value of a currency in relation to the Canadian currency, an individual has made a gain or sustained a loss from the disposition of currency other than Canadian currency and such gain or loss would, in the absence of subsection 39(1.1), be a capital gain or loss described under subsection 39(1). Whether a gain or loss is on account of capital can only be determined after consideration of all of the relevant facts and circumstances. Where the capital property disposed of is not foreign currency, subsection 39(1) will generally apply to include the capital gain or loss from the disposition of the property in the income of the taxpayer.
The view in document F2017-0712621C6 was premised on the view that an individual, who holds a foreign currency denominated account with a financial institution generally does not hold foreign currency but rather a claim against the financial institution for foreign currency.
The $200 carve-out has been in the Act since the introduction of former subsection 39(2) in 1972. The $200 carve-out was more recently transferred to new subsection 39(1.1), along with other changes to subsection 39(2), and it is only available to dispositions of foreign currency. Subsection 39(1.1) was introduced in 2013 with effect to taxation years beginning after August 19, 2011. The Department of Finance (“Finance”) describes the change in the explanatory notes to subsection 39(1.1) as follows:
Since the intent of the $200 carve-out rule for individuals was to provide a de minimis amount in respect of holdings of foreign currency, this objective will now be better achieved through a separate rule that contemplates only foreign exchange capital gains and losses from dispositions of foreign currency. New subsection 39(1.1) also ensures that this carve-out rule does not apply to trusts.”
In today’s environment, it is common for many financial institutions to offer U.S. dollar bank accounts from which payments can be made directly and without the exchange of physical currency.
The meaning of “currency” ranges from a technical meaning (referring, for example, to a monetary unit that is a representation of value, issued by a public authority such as a central bank, and recognized as legal tender (footnote 1) ) to a non-technical meaning (referring, for example, simply to “money” that is used in a country, with the definition of “money” including sums in a bank account (footnote 2) ).
The Department of Finance (“Finance”), in the explanatory notes to subsection 39(1.1), refers to currency as “money”, but provides no further clarity on whether that is intended to include deposits:
“EN October 2012 [S.C. 2013, c. 34 (Bill C-48)] — New subsection 39(1.1) of the Act is being added consequential to the removal from subsection 39(2) of the rule that reduces the net amount of an individual's gains and losses for a taxation year from certain foreign currency fluctuations by $200. As noted below, subsection 39(2) will no longer apply to dispositions of foreign currency (i.e. money). [emphasis added]
In determining whether the purpose of subsection 39(1.1) supports the use of a non-technical meaning of “currency”, it is relevant to consider that subsection 39(1.1) does not apply to a specialized audience. Rather, it applies to any individual (other than a trust) and any transaction resulting in the disposition of foreign currency that is capital property of the individual, including when using foreign currency on a holiday in a foreign country. From that perspective, it is reasonable to consider that the purpose of subsection 39(1.1) is to provide an individual (other than a trust) a carve-out for a de minimis amount in respect of holdings of foreign currency, so that foreign exchange gains and losses to the extent of $200 realized on sundry dispositions of such currency have no incidence on their tax payable.
Consistent with the evolution of payment options and consistent with the initial purpose as reflected in the excerpt above of the technical notes, a textual, contextual and purposive interpretation of the provision supports that, in the context of subsection 39(1.1), the phrase “dispositions of currency other than Canadian currency” includes situations where foreign currency funds in a chequing or current deposit account, which entitles the depositor to withdraw the currency on deposit at any time, are converted into another currency or used to make a purchase or a payment.
Our comments in document F2017-0712621C6, where the CRA indicates that subsection 39(1.1) does not apply to deposits of foreign currency, no longer represents the CRA’s position on dispositions of foreign currency held on deposit in a chequing or current deposit account at a bank or financial institution where the depositor has the right to withdraw the currency on deposit at any time.
Furthermore, it continues to be the CRA’s position that a travellers cheque is currency for purposes of the phrase “dispositions of currency other than Canadian currency” in subsection 39(1.1), consistent with archived Interpretation Bulletin IT-95R, Foreign Exchange Gains and Losses (paragraph 5). The $200 carve-out applies in computing foreign exchange gains and losses in a year from the disposition of travellers cheques that are in foreign funds.
With respect to your second question, subsection 39(2) is intended to apply to debts and similar obligations that are denominated in foreign currency. In particular, subsection 39(2) does not apply where subsection 39(1) or 39(1.1) applies. Subsection 39(1) generally applies to dispositions of capital property. In other words, foreign exchange gains and losses, in respect of dispositions of capital properties of the taxpayer, are generally intended to be covered by subsection 39(1) (unless subsection 39(1.1) applies) and not subsection 39(2). Therefore, if the individual has disposed of a debt receivable that is capital property of the taxpayer, and subsection 39(1.1) does not apply, subsection 39(1) should generally apply to the gain or loss, and not subsection 39(2).
Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.
We trust that these comments will be of assistance.
Yours truly,
Yves Grondin
Section Manager
for Division Director
International Division
Income Tax Rulings Directorate
Legislation Policy and Regulatory Affairs Branch
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 OECD (2020), Taxing Virtual Currencies: An Overview of Tax Treatment and Emerging Tax Policy Issues, OECD, Paris.
2 Collins Dictionary (online).