When you sell capital property, you must report the transaction in your personal income tax return – and there are benefits to doing so. Capital gains are taxed at half the standard rate, and capital losses can be used to offset capital gains. One thing to keep in mind is making sure you accurately report these transactions and if your capital property was held in a foreign currency, to track the foreign exchange gain or loss.
Remember that capital property transactions applicable to your 2019 income tax return must be completed by December 31. For publicly-traded securities this means that any trades must be made no later than December 27. This article will provide some basic information on how exchange rates factor into your capital transactions. In particular, I will focus on sales from publicly-traded shares and mutual funds held in a foreign currency.
Capital property sales in foreign currency
Capital property includes tangible property such as real estate, vehicles, stocks, bonds, cryptocurrencies, collectibles, and art, as well as intangible property such as patents and trademarks. Generally, if you sell this type of property for more than what you’ve originally paid, you have a capital gain; likewise, if you sell for less than the original cost, you have a capital loss. If your asset was purchased in a foreign currency, you have to factor in foreign exchange rates to get an accurate understanding of your gain or loss.
To walk through this, let’s look at a scenario involving US currency. Let’s say you originally bought shares in a company for USD$4,000. A couple of years later, you sold your shares for USD$6,000, and incurred a USD$50 commission fee in doing so. You will need to deduct both the original stock purchase amount or adjusted cost base (ACB) of USD$4,000 and the commission you paid to sell your stock (USD$50), from your final selling amount (USD$6,000) to get your capital gain, which in this case is USD$1,950.
All values in your income tax return must be entered in Canadian currency, but don’t simply convert your USD$1,950 capital gain into Canadian. You must convert all of the funds involved in the transaction into Canadian currency, not just the final amount.
Let’s say the exchange rate was 1.5521 on the day you purchased your stock. Your original purchase price would therefore be USD$4,000 X 1.5521 = CAD$6,208.40. On the day you sold your stock, the exchange rate was 1.3500. Since your commission fee was charged on the day you sold, your commission fee is USD$50 X 1.3500 = CAD$67.502. Converting your selling price of USD$6,000 using the same exchange rate, your final selling price is USD$6,000 X 1.3500 = CAD$8,100.00.
Taking your final selling price of CAD$8,100.00 and deducting the original cost of CAD$6,208.40 and the commission fee incurred of CAD$67.50, your actual capital gain is CAD$1,824.10. This is different than if you had simply converted the final capital gain on paper of USD$1,950 into its Canadian equivalent of $2,632.50.
Due to the capital gains inclusion rate, you will only be taxed on half of your $1,824.10 gain, which totals $912.05. If you had claimed $2,632.50 as your capital gain (which is incorrect), your taxable income on the transaction would be $1,316.25.
The bottom line
If you make a profit from selling capital property, you need to report it. Since you’re only taxed on half of the capital gain, paying this reduced tax far outweighs the risks of not reporting your gain, which can include penalties and interest on the amount owing. And since foreign and Canadian exchange rates fluctuate daily, you’ll have to convert all foreign funds into its Canadian equivalent for each transaction. Don’t forget that any capital gains or losses for your 2019 tax return must have occurred within the 2019 calendar year (on or before December 31, 2019).
Bilal Kathrada, CPA, CA, is a partner at Clearline Chartered Professional Accountants specializing in income tax and succession planning for Canadian owner-managed businesses in various industries. Bilal is a member of the CPABC Taxation Forum and CPABC’s media expert on RRSPs and income tax filings.