Calculating Canadian Capital Gain or Loss After Loan and Investment

1. I take out a \$100,000 USD loan on Jan/01 - (\$150,000 CAD)
2. I lose all of it immediately in the market - (\$150,000 CAD capital loss occurred)
3. I still have a \$100,000 USD loan remaining
4. I work and save up for 2 years to pay it off
5. I pay off the \$100,000 USD [+\$10,000 USD interest] - (\$200,000 CAD) [+\$20,000 CAD interest]

How exactly am I supposed to do accounting for the last line? Did I just incur an additional \$50,000 CAD capital loss with a deductible \$20,000 CAD interest expense? Is it some sort of adjustment? What exactly is it? Could someone provide some insight on what is the "right way" to do this?

Yes, the additional \$50,000 CAD that would have needed to be paid to cover the original foreign-denominated loan would be considered a foreign exchange loss when you made the payment. [source]

With a deductible \$20,000 CAD interest expense?

Basically, yes. Assuming the original loan was also interest deductible.

Whether or not the interest expense is deductible depends on the use of the originally borrowed money. If the original purpose was to "earn an investment" (i.e., to buy common shares that paid a dividend), and if the original loan qualifies for deductibility, then even if the initial money is reduced or depleted due to a capital loss, it is still considered to be deductible. [source]

Example Scenario:

Mr. A borrows \$100,000 to purchase an income-earning property. The entire amount of the loan remains outstanding and interest on the loan is deductible. Mr. A subsequently disposes of the property for its fair market value, now down to \$60,000. He uses the \$60,000 to reduce the outstanding loan. If the conditions in section 20.1 are met, the remaining \$40,000 loan balance will be deemed to be used for the purpose of earning income and interest arising on the loan will continue to be deductible. [source]