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Currency exchange gains and losses are taxed one of two ways. If the money belongs to your business, the gain or loss is income or an expense. If it comes from a capital item, such as US dollars you held or a foreign asset you sold, it’s treated as a capital gain or loss. Which bucket you’re in decides almost everything else.
The CRA’s old interpretation bulletin on the subject (IT-95R) is archived and dated 1980. It’s no longer updated, but it’s still the plainest summary of the split, so read it with that warning attached.
Is your exchange gain income or capital?
| What caused the gain or loss | Treatment described by the CRA |
|---|---|
| Buying or selling goods and services in the business | Income account |
| Repaying money borrowed for ordinary business operations | Income account |
| Buying or selling a capital asset | Capital account |
| Selling personal-use property | Capital account |
| Changing travellers cheques on a holiday | Capital account |
The bulletin also says you only “make a gain” or “sustain a loss” when something actually happens. A drop in the value of your US dollar account on paper isn’t a loss until you spend or convert the money.
What is the $200 rule for currency gains?
For individuals, the Income Tax Act sets a $200 threshold in section 39(1.1). In plain terms, the first $200 of a foreign exchange gain on capital account is ignored, and so is the first $200 of a loss. Only the amount above $200 counts.
Take a holiday in Mexico. You change C$1,000 into pesos, spend most of it and convert a few pesos back at a different rate. Any tiny gain or loss there falls under the threshold, so nobody has to report it.
Now a bigger one. Priya buys US$10,000 at a rate of 1.30, so C$13,000, to hold for a house purchase in Arizona. Months later she sells it at 1.35 for C$13,500. The gain is C$500, and only the C$300 above the threshold counts as a capital gain. That’s a ballpark of how the rule trims small amounts, not a ruling for your own year.
The rule is for individuals. A business with exchange gains on invoices doesn’t get the $200 pass, because those amounts are income. Read the current wording of section 39 before relying on it for anything larger, since the archived bulletin predates later changes.
A worked example of a realized currency loss
A sole proprietor invoices US$5,000. The Bank of Canada rate on the invoice date is 1.40, so C$7,000 goes into income. When the client pays, the rate is 1.35 and the US$5,000 is worth C$6,750. The business has a C$250 exchange loss on income account.
That loss reduces business income. It doesn’t become a capital loss and the $200 rule doesn’t apply. (The rates are invented for the arithmetic.) If the same person had instead bought US$5,000 to hold for a trip and lost C$250 on the rate, it would sit on capital account, and only the part above $200 would count.
The self-employed tax calculator shows how a change in business income moves your tax, and the capital gains tax calculator is the one for capital items. A limit to know: the self-employed tool lowers income tax with your deductions but doesn’t lower CPP, so its result is a rough one. To see what an extra $250 of income costs at your level, try the marginal tax rate calculator.
How do you book currency gains and losses so they’re easy to defend?
Use a separate ledger line called exchange gain or loss, and don’t bury the difference inside sales. Record it when the invoice is paid, at the Bank of Canada rate on that day, unless you’ve chosen another accepted source and use it every time. The CRA’s income tax folio on reporting currency sets out the spot rate rule. Our page on foreign currency transactions walks through rates and records entry by entry.
The IT-95R bulletin says the CRA accepts several methods (current rate, historical rate, fixed rate or average rate) as long as they follow generally accepted accounting principles and you apply them the same way each year. Changing method from one year to the next is asking for questions.
What gets people in trouble?
Calling everything capital, mostly. A business can’t turn a painful exchange loss on an invoice into a capital loss by renaming it. The character follows the transaction.
Another slip is reporting unrealized movements. If you still hold the foreign cash, nothing has happened yet for tax. And some people assume the $200 rule covers a company. It doesn’t, as it applies to individuals.
Trusts, corporations holding foreign currency as an investment and crypto sit outside this page. Those cases need the current Act and a look at the facts.
What should you write down each time?
For every foreign amount, note the date, the foreign amount, the rate and its source, and the Canadian dollar result. Do it at the time, when the invoice goes out and again when the payment lands. The gain or loss is simply the difference between the two Canadian figures, so having both on one line makes the year-end sum a two-minute job.
What this page is based on
The income and capital split and the account methods come from the CRA‘s archived bulletin IT-95R. The $200 threshold comes from section 39 of the Income Tax Act on the Justice Canada website. Both were read in 2026. The exchange rates in the examples are invented.
Frequently asked questions
Are currency exchange gains taxable in Canada?
Yes. A business gain is income. A gain on capital account is a capital gain, and for individuals the first $200 is ignored under section 39(1.1).
What is the $200 rule?
It lets an individual ignore the first $200 of a foreign exchange gain or loss on capital account. Only the part above $200 counts.
Is an unrealized exchange loss deductible?
The CRA bulletin says a gain or loss is made only when a transaction actually takes place. A drop in value on paper isn't enough.
Can a business use the $200 rule?
No. The rule is for individuals on capital account. A business exchange gain or loss on invoices is income or an expense.
Which exchange rate do I use?
Use the Bank of Canada rate on the day the amount arises, or another accepted source used consistently.
- Self-employed taxes in Canada: income, CPP and GST
How tax works when you are self-employed in Canada: reporting income and expenses, paying both halves of CPP, instalments and when to register for GST