Principal Issues: What date must be used to convert proceeds received in a foreign currency from a stock market transaction that is on account of capital?
Position: The settlement date.
Reasons: The date of settlement is the date the vendor is entitled to the proceeds.
Financial Strategies and Financial Instruments Roundtable, October 9, 2015
2015 APFF Conference
Question 5
Exchange transactions, settlement date and exchange rate to be used
By virtue of the current rules of the Toronto Stock Exchange (Rule 5-103) and the New York Stock Exchange, the "Settlement Date" for a stock exchange transaction is the third business day following the day on which the transaction occurred (which is not included in the calculation). Paragraph 2 of former Interpretation Bulletin IT-133, Stock Exchange Transactions - Date of Disposal of Shares (canceled), made reference to this. For example, the gain on a transaction made on December 30, 2014 will be reported for tax purposes only in the 2015 taxation year.
In the case of a sale transaction for a security listed on a foreign exchange (such as the New York Stock Exchange), it is also necessary to express the sale price in Canadian dollars. If, for example, in the case of a U.S.-dollar denominated account where the funds remain in U.S. dollars, the question becomes whether to use the exchange rate in effect on the date of the transaction or that in effect on the settlement date. In view of the high volatility of the foreign exchange market, it is not uncommon for a favorable or unfavorable variation of 1 to 3% to occur between the date of the transaction and the settlement date.
On the other hand, from the date of the transaction, the sale price of the shares is fixed definitively, at least in terms of the selling price expressed in foreign currency, on the date of the transaction. In addition, if the taxpayer requests that the proceeds of disposition of the shares be deposited in Canadian dollars on the settlement date, the exchange rate used by the financial institution will generally be the exchange rate on the date of the transaction.
In paragraph 8 of Interpretation Bulletin IT-95R, Foreign Exchange Gains and Losses (Archived), the CRA states the following respecting transactions on income (rather than capital) account: "Transactions on income account are normally recorded in a taxpayer's accounts in the Canadian dollar equivalent determined according to the rate of the exchange prevailing at the time of the transaction." On the other hand, the CRA's position on stock exchange transactions on capital account is not stated.
Questions to the CRA
(a) Should the exchange rate in effect on the transaction date or the settlement date be used in respect of transactions on capital account carried out on a foreign exchange, such as the New York Stock Exchange?
(b) Is the CRA prepared to accept either date to set the exchange rate on the condition that the taxpayer use the same method for all of his or her stock exchange transactions, year after year?
CRA Response to Q5(a)
We are of the view that it is the settlement date of a stock exchange transaction (and not the trade date for the transaction) which is the date of disposition for purposes of calculating the capital gain or loss under subsection 39(1).
Since it is the settlement date of the transaction which gives rise to the proceeds of disposition, the conversion to Canadian dollars of the foreign currency amounts received must be made at the rate quoted by the Bank of Canada for noon on the settlement date for the transaction, by virtue of paragraph 261(2)(b) and the definition of “relevant spot rate” in subsection 261(2).
Thus, in the example of a taxpayer receiving proceeds of disposition of the sale of a security on the New York exchange in an American dollar account, the conversion to Canadian dollars must be made at the noon rate quoted by the Bank of Canada for the settlement date for the transaction.
CRA Response to Q5(b)
The taxpayer must follow the approach described above.
Yves Grondin
2015-058898