Principal Issues: 1) Whether subsection 39(1.1) applies to currency held on deposit with a financial institution. 2) Whether subsection 39(1.1) applies to dispositions of negotiable instruments or real estate.
Position: 1) The phrase “dispositions of currency other than Canadian currency” in subsection 39(1.1) includes dispositions of foreign currency held by an individual 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. 2) No, the capital gain or capital loss attributable to the fluctuation in the value of currency on the disposition of marketable securities or real estate, where it is established that it is capital property, is subject to subsection 39(1).
Reasons: 1) Textual, contextual and purposive interpretation of subsection 39(1.1). 2). Application of the act.
XXXXXXXXXX 2020-086592 Jean-François Benoit, CPA, DESS Fisc.
January 19, 2024
Dear Madam,
Subject: Disposition of foreign currency by an individual
This is in response to your email of August 12, 2020 in which you requested our comments regarding subsection 39(1.1) of the Income Tax Act (the “Act”).
Specifically, you asked whether subsection 39(1.1), which applies to dispositions by an individual of banknotes or coins of currency other than Canadian currency, can also apply to dispositions of currency other than Canadian currency held by an individual on deposit at a financial institution. You gave as an example a bank account in a foreign currency, a guaranteed investment certificate in a foreign currency, a term deposit in a foreign currency and other similar deposits in a foreign currency.
You also asked for confirmation that subsection 39(1.1) does not apply to dispositions of marketable securities (shares, mutual funds, bonds, etc.) or real estate since, in your opinion, those dispositions are subject to subsection 39(1).
All legislative references herein are to provisions of the Act.
Our Comments
This technical interpretation provides general comments about the provisions of the Act. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC70-6R12, Advance Income Tax Rulings and Technical Interpretations
In short, subsection 39(1.1) applies if, because of any fluctuation in the value of a currency relative to Canadian currency, an individual has a gain or loss in a taxation year from dispositions of currency other than Canadian currency and the particular gains or losses would, in the absence of subsection 39(1.1), be capital gains or losses described under subsection 39(1).
In 2017-0712621C6, we indicated that subsection 39(1.1) does not apply to foreign currency amounts in an individual's account with a financial institution because the individual is not holding a property that is a foreign currency; rather, the individual is holding a debt obligation.
However, we changed this position in 2020-0868031I7. Based on a textual, contextual and purposive interpretation of subsection 39(1.1), we concluded that the phrase “dispositions of currency other than Canadian currency” in that subsection includes dispositions of foreign currency held by an individual in a chequing or current deposit account at a financial institution, to the extent that the individual is entitled to withdraw the currency on deposit at any time, convert it into another currency at any time, or use it to make a purchase or a payment at any time.
Regarding your second question, we agree with your understanding that the disposition of marketable securities or real estate is not subject to subsection 39(1.1). The capital gain or loss attributable to the fluctuation in the value of currency on the disposition of such property, where it is established that the property is capital property, is covered by subsection 39(1).
Best regards,
Isabelle Landry
Manager
Business and Employment Income Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch