An individual trading foreign currencies in Canada must pay taxes on their profits from trading foreign exchange transactions. For reporting purposes, CRA accepts using a year-end average rate to convert foreign exchange gains and losses into Canadian dollars for reporting purposes.
Cash and securities held in foreign denominated currencies must also be reported to the CRA, so this article outlines how traders must include this amount on their tax return.
Capital Gains or Losses
No matter if you trade forex professionally or as a hobby, filing tax returns accurately is key. The Canadian Revenue Agency considers gains or losses on investments as income; accordingly, you will owe taxes and penalties that could reach thousands of dollars. Failure to file taxes correctly could leave you vulnerable and could have serious repercussions for any profits made; be wary if tempted into trying to beat the system by not filing properly as this can leave you facing severe penalties that you can no longer afford to pay back.
At first, you need to understand how a foreign currency should be reported on a Canadian tax return. Every time you buy or sell securities, their amounts on tax slips are recorded in Canadian dollars - therefore any foreign currency amount should first be converted back into Canadian dollars before using it to calculate gains or losses. Most commonly, you can use the spot rate that was in effect on the day of transaction for this task; but for multiple transactions taking place during one year it might be more advantageous to utilize an average exchange rate instead.
Consider how the Canada Revenue Agency treats cash and non-negotiable instruments held in foreign currency, which the CRA does not consider disposed until converted to another currency or used to purchase negotiable instruments or assets - meaning these assets require reporting gains or losses on a foreign currency basis.
In general, the Canada Revenue Agency requires you to report all income in Canadian dollars. Furthermore, any gains or losses from foreign exchange trading must also be recorded in Canadian dollars on your T5008 Trading Summary form. For more information, see Income Tax Folio S5-F4-C1 "Measuring Foreign Currency Transactions".
If you trade foreign currencies professionally or as part of your job, it is wise to consult a tax advisor for guidance in how best to treat these transactions. In most cases, filing the T2125 Statement of Business or Professional Activities and reporting your gross and net income at lines 162 or 166 respectively as well as foreign exchange gains/losses on Line 199 will suffice.
Spot Rates
Forex trading can generate considerable wealth for traders. Unfortunately, many traders attempt to avoid tax by engaging in tax avoidance schemes and deceiving themselves into believing they've found ways around paying taxes; unfortunately this tactic won't work and penalties from the IRS can become overwhelming quickly. Filing returns annually is the best way to stay out of trouble in this area - though it may take more time and effort up front but is ultimately worth the time and effort in the end! First things first: all Forex trading profits in the United States are subject to taxation even when trading through US-based brokers; therefore if you make significant money trading, filing an annual return must occur and pay what owed by filing returns is essential.
The Canadian Revenue Agency requires that any gains or losses on account of capital be converted back to Canadian dollars using the foreign exchange rates that existed on the date of transaction, with income earned in foreign currencies converted using their exchange rates on receipt, as well as an average annual exchange rate over a given year for easier administration.
To determine an appropriate spot rate, the Canada Revenue Agency recommends taxpayers consult an authoritative source, such as Bank of Canada, Bloomberg L.P., Thomson Reuters Corporation or OANDA Corp. If none are available then use the spot rate on the date of original transaction as a general guideline.
Taxpayers frequently make the mistake of reporting their Canadian dollar earnings in US currency instead, leading them down the path towards double taxation. Therefore, it is vitally important to monitor the USD/CAD exchange rate to make sure you are reporting your earnings correctly. You can find it on Form T5008 Trading Summary as it should be used when calculating taxable income and commission and US SEC fees are taken into account when reporting this rate.
Negotiable Instruments
If you own securities denominated in foreign currencies, such as securities or investments denominated in US dollars, they will need to be reported on your tax return Canada. When redeeming mutual funds or selling publicly traded shares denominated in non-Canadian currencies such as European Union currencies or Australian AUD dollars, for example, conversion of adjusted cost bases and sale proceeds into Canadian dollars will result either a capital gain or loss, so be sure to include this exchange rate when filing income tax returns.
If your gains or losses involve currency transactions, use the Bank of Canada exchange rates that were in effect when your transaction took place. As an alternative method for calculating foreign exchange gains or losses, Income Tax Folio S5-F4-C1 Income tax reporting currency published annually by the CRA can also be downloaded for this purpose.
Capital gains and losses generated from forex trading accounts generally count as personal income, whether or not you trade full time. Furthermore, forex profits may be subject to higher taxation rates than other forms of income due to being considered an actual business by the CRA.
Forex trading can be a challenging subject that requires significant knowledge to succeed at, yet professional traders equipped with the appropriate tools can become profitable quickly and enjoy their trading career. Key to successful forex trading lies in understanding both your own trading style and that of others to develop a strategy tailored specifically to you and the market you operate within.
Many people mistakenly believe they are paying taxes to Great Britain since Queen Elizabeth is also Queen of Canada, however this is not the case and the Canadian government does not collect any funds from its citizens in order to pay royalties to her. Any royalties collected through Canadian economic development go towards improving our nation. So traders should not worry about paying any royalties that go directly or indirectly towards Great Britain.
Non-Registered Portfolios
Taxing investments and trading income can be complex. By taking the time to file correctly, however, filing can save hundreds of dollars in taxes that would otherwise have been due.
Canadian traders should pay special attention to how their trading activities impact their personal income tax filings, since CRA may treat trading activities like forex as businesses and therefore any profits are subject to tax. They can minimize this impact by keeping track of gains and losses when trading forex.
Investors should understand the distinctions between registered and non-registered portfolios. While registered accounts such as RRSPs, RRIFs, RESPs and TFSAs provide tax benefits like tax-free growth and dividend tax credits; non-registered portfolios may incur capital gains taxes as well as income taxes on capital gains or interest income.
Non-registered portfolios resemble taxable investment accounts in that they can hold various securities, such as stocks, exchange-traded funds (ETFs), mutual funds, real estate and corporate bonds. Furthermore, these portfolios can also hold foreign currency-denominated assets with potential for gain or loss when converted to Canadian dollars at sale time.
If you transfer non-registered portfolios into registered accounts in kind such as an RRSP or TFSA, their proceeds must be reported on Form T5008 and Schedule 3 of your tax return. When selling non-registered portfolios directly, their sale proceeds are also reported here.
Foreign exchange gains or losses must also be reported on Line 199 of your tax return, as they form part of your net capital gain or loss calculation.
Investors looking to maximize tax deductions should consult their MD Advisor* before filing their taxes. Financial planners such as MD Advisors can assist in maximizing savings and claim opportunities available through tax law; additionally, they may recommend qualified tax professionals as necessary for specific situations.