Translation disclaimer
This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: [Tax Interpretations translation] Conversion of foreign currency transactions and calculation of foreign exchange gains and losses of an individual whose transactions relate to income when using foreign currency to make a purchase of securities. The individual uses a method set out in paragraph 8 of Interpretation Bulletin IT-95R, i.e., the historical rate or settlement method.
Position: Under the method set out in paragraph 8 of Interpretation Bulletin IT-95R that is used by the taxpayer, the foreign exchange gain or loss in respect of the foreign currency account is to be calculated when the account is converted to Canadian currency or when a purchase is made from the foreign currency account.
Reasons: A disbursement from a foreign currency account on a purchase represents a full or partial settlement of a foreign currency account in the same way as a conversion of the account to Canadian funds.
XXXXXXXXXX 2006-020436
Sylvie Labarre, CA
August 29, 2007
Dear Sir,
Subject: Foreign exchange gains or losses
This is in response to your letter of September 1, 2006, in which you requested our opinion regarding the realization of a foreign exchange gain or loss when using foreign currency to purchase a security. We apologize for the delay in responding to this request.
According to the tables attached to your application, you have a Canadian dollar account and a US dollar account. You make transfers between your two accounts. In addition, you sell and buy stocks and securities in U.S. dollars and deposit them into your U.S. dollar account or pay them out of your U.S. dollar account, as applicable.
The transactions shown in the tables are representative of all your transactions. You asked whether a foreign exchange gain or loss is realized when the foreign currency is used to make the purchase of the security or whether the foreign exchange gain or loss is realized only when the security is sold. You have provided a table showing the implications of each method.
You asked us how to proceed if you have not used the required method in the previous 20 years but the difference between the two methods is only a difference in the timing of the gain or loss.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of the Canada Revenue Agency (CRA) not to issue written opinions on proposed transactions otherwise than through advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
For the purposes of this letter, we have assumed that your transactions are income-related. Our comments are therefore based on that assumption, which we have not verified. We have assumed that the sample transactions are all in the same taxation year. From the tables, it appears that you are using one of the methods recommended in paragraph 8 of Interpretation Bulletin IT-95R, i.e., the historical rate or settlement method.
In our view, a foreign currency account is settled or partially settled when foreign currency is converted into Canadian currency or when a purchase is made from the foreign currency account. Therefore, in the example you have provided, a loss would be calculated in respect of the foreign currency account on the purchase of shares in an amount equal to the amount disbursed, i.e. US $20,000, multiplied by the difference between the rate on the date of disbursement (1.4) and the historical rate in effect at the time the money was deposited into the US dollar account (1.5). Thus, the table you have entitled "Calculations taking into account a foreign exchange loss or gain on the purchase of shares" would be a representation of the method in paragraph 8 of Interpretation Bulletin IT-95R that you appear to have chosen.
In a situation where a taxpayer has not misrepresented facts through negligence, carelessness, or wilful default, or has not committed fraud, the CRA could not reassess a taxpayer more than three years after the earlier of the date of mailing of a notice of first assessment by virtue of Part I for a particular year or the date of mailing of a first notification that no tax is payable by the taxpayer for the year. Furthermore, we cannot advise you of the adjustments that the CRA would make to your tax returns for the years for which the CRA may issue a reassessment to correct the situation. Only a thorough review of the transactions and calculations already made would allow a representative of the Tax Services Office nearest to your home or a representative of a Tax Centre to determine the adjustments required. You may wish to contact the Montreal Tax Services Office to explain the situation and to provide them with your documents.
We hope that these comments are of assistance.
Best regards,
Alain Godin
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.
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