How does currency risk affect TFSA investments with foreign holdings?

• A. Currency movements do not affect TFSA holdings at all.
• B. Gains from foreign currency are taxed.
• C. Currency movements affect the value of foreign-denominated holdings, but gains inside a TFSA remain tax-free.
• D. TFSA investments cannot be in foreign currency.

Answer: (C)

When your TFSA includes holdings denominated in a foreign currency, the value you see in Canadian dollars moves with exchange-rate fluctuations. That currency risk means the CAD value of the investment can go up or down even if the asset’s price in its own currency is different.

The important tax point is that inside a TFSA, gains and income are not taxed. So currency-driven gains within the TFSA don’t incur taxes, and withdrawals are also tax-free. The effect of currency movements is about changing the account’s CAD value, not about paying taxes on that movement. When you withdraw, the amount you receive in CAD reflects the current exchange rate at withdrawal, but you won’t owe tax on the withdrawal itself.