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A Canadian citizen and taxpayer opens a US dollar account in Canada with a Canadian bank, to hold a small US dollar inheritance against future vacation trips to the US. The money is not used for an entire year, but because of changes in the US$-Canadian$ exchange rate, the Canadian$ value of the money increases by several thousand dollars.

Is this increase in value taxable income in Canada?

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If you hold this money in USD and spend it in the US as USD, then there is no tax liability or reporting requirement at all. You are not subject to any tax on foreign exchange gains and losses because you have not performed any foreign exchange. CRA says a foreign exchange gain or loss happens when the fx transaction occurs—not as the currency’s value fluctuates while on deposit - and since you are never performing an fx transaction, no such issues will arise. The CRA is not interested in how you spend your money, only the money that you earn.

The only possible tax liability that would arise in the circumstances that you describe would be the tax liability arising from interest earned while the cash in on deposit. If this interest exceeds the threshold of reportability, then your bank will issue you with a T-slip to be included in your tax return.

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No it's not, not until a disposition. Keep track of the CAD value on the day you receive the inheritance and get an average cost. Then every time you go to the US and spend some money, record the CAD value on the day you spend it. The difference is your profit or loss. There is no capital gain as long as you don't spend it.

Now this may seem ridiculous, especially since none of this is reported to the CRA. They realize this and say the first $200 profit or loss is not taxable.

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