The development of new financial products has added to the complexity surrounding securities and taxation. As a result, a growing number of people have little to no understanding of their related tax obligations.

The most popular transactions for investors in recent years include foreign currency transactions (for example, buying and selling currency) and derivatives transactions.

Foreign currency transactions

Foreign currency transactions include:

• currency purchase and sales transactions
• swaps
• contracts for difference (CFD)
• currency options and futures
• foreign exchange (Forex) transactions

The laws and regulations that govern foreign currency transactions are generally tailored to type of product or transaction.

Currency options and currency futures may be subject to special tax rules. Similarly, a specific tax treatment may apply to swaps and contracts for difference.

Currency

Currency is the legal tender of the country in which it is used.

Tax consequences

Using a currency has tax consequences for you if, for example:

• You use the currency to acquire goods or services.
• You convert the currency into a different currency.
• You exchange the currency for another currency.
• You sell or donate the currency.

Business income (or loss)

If you frequently sell or exchange foreign currencies, you may be operating a business. You would then have to include the transactions converted into Canadian dollars when calculating your business income.

Similarly, if your business accepts foreign currency payments, you have to include the amount converted into Canadian dollars when calculating your business income.

For more information, see the guide Business and Professional Income (IN-155-V).

Capital gain (or loss)

If you made foreign currency transactions that are investments and those transactions resulted in capital gains (or losses), you are required to report only the portion of the net capital gain (or net capital loss) that exceeds $200.

The net gain (or net loss) from the transactions is determined by subtracting total losses from total gains, where both amounts resulted from the exchange differential between Canadian and foreign currencies.

For more information, see the guide Capital Gains and Losses (IN-120-V).

Derivatives

Derivatives are highly speculative financial products (i.e. there is a significant risk of loss involved with them).

Examples of derivatives

Options

An option gives the owner the possibility to buy or sell an underlying security at a specified price (the strike price) before a specified date (the expiration date of the option).

Futures

A futures contract is a contract between two parties for the delivery of an underlying security at a future date (the expiration date or the maturity date) based on predefined conditions.

As a rule, you have to report all income from derivatives transactions.

Tax consequences

Using a derivative has tax consequences for you if, for example:

• You use the derivative to acquire goods.
• You sell the underlying security (if you have a security option).
• You exchange the derivative for another derivative.
• You sell the derivative.

Business income (or loss)

If you frequently sell or exchange derivatives, you may be operating a business. You would then have to include the transactions when calculating your business income.

For more information, see the guide Business and Professional Income (IN-155-V).

Capital gain (or loss)

If you use derivatives to make investments, there are usually tax consequences when you sell the derivatives.

The net gain (or net loss) resulting from the sale of the derivatives is determined by subtracting total losses from total gains.

For more information, see the guide Capital Gains and Losses (IN-120-V).

To learn more

To learn more about the tax consequences of foreign currency and derivatives transactions, see interpretation bulletin IMP. 250.1/R2, Election in respect of the disposition of Canadian securities, on the Publications du Québec website and interpretation bulletin IT-479R, Transactions in securities, on the Government of Canada website.