Foreign Exchange Gain or Loss on a USD Account: Journal Entry

How do I record a foreign exchange gain or loss on a US dollar bank account?

Record every US-dollar line in both currencies: US dollars coming in at the Bank of Canada rate for that day, US dollars going out at their carrying amount. Book a gain or loss when US dollars leave the account (converted, spent or used to pay a bill): the Canadian dollars received or paid, less the carrying amount of those US dollars, which is the Canadian-dollar cost your books show for them (CRA bulletin IT-95R, archived). A customer's US-dollar payment on an invoice also gives one: its value that day against the Canadian amount booked on the invoice. Canadian tax converts each foreign amount at the rate for the day it arose (Income Tax Act, s. 261).

A balance you still hold gives no realized gain; revaluing it at year end is a separate step, covered below.

A case stops being simple when:

• The account has not tied to the books for a year or more, or exchange entries for earlier years were never booked. Each year's closing Canadian-dollar carrying amount is the next year's starting amount (original cost if year-end revaluations are reversed), so an old error carries into every later gain or loss.
• A return was already filed on figures that do not reconcile, or a T2 or T2125 is about to be prepared on these books.
• Customer payments, transfers and investment trades all pass through the same US-dollar account.
• The corporation keeps its books in US dollars or has elected to report in them. The entries here assume Canadian-dollar reporting.

Gather the US-dollar statements for every month, the bank's confirmation of each conversion showing the Canadian dollars received, the rate source and rate for each date, last year's closing Canadian-dollar balance of the account, and the US-dollar invoices and bills still open at year end.

What is a realized and an unrealized foreign exchange gain or loss?

A realized gain or loss comes from an event: US dollars converted, spent or used to pay a bill. An unrealized one is only a change in the Canadian-dollar value of US dollars still held or amounts still open. The CRA's bulletin says a gain or loss can arise when each conversion is made and when foreign funds pay for purchases or settle accounts payable, and that, on capital account, funds on deposit are not disposed of until converted. The bulletin is archived: the CRA no longer updates it and keeps it online for reference.

When do I record the gain or loss, and what is the journal entry?

Record it on the day the US dollars leave the account, in the same entry as the conversion or payment. For a customer's US-dollar invoice, record it on the day the payment lands. Every event has one shape: enter the other side at its Canadian-dollar value for the day, move the US dollars at their carrying amount (out for a conversion or payment, in at the day's value for a receipt), and let the exchange line balance the entry.

Add the exchange line last: a credit (gain) if the debits are larger, a debit (loss) if the credits are larger. A bank spread or fee not booked on its own line sits inside the gain or loss; the transfers guide shows how to split it out.

How do I find the carrying amount of the US dollars I sold or spent?

Use a running average: the account's total Canadian-dollar carrying amount, divided by its total US dollars, times the US dollars used. Recalculate after every deposit. First-in, first-out is another consistent method, though for a capital holding the Act averages the cost of identical properties (s. 47); whether a deposit balance counts is a point for the accountant. The CRA material cited on this page prescribes neither method, so choose one, use it every time and write it down. The CRA's audit manual tells auditors to check how past gains and losses were treated and whether the method is applied consistently.

Which exchange rate do I use, and what proves it?

Use the Bank of Canada rate for the day the amount arose, or for the closest earlier day with a quoted rate, such as after a weekend (s. 261; CRA folio S5-F4-C1). The Bank of Canada publishes one indicative rate each business day, averaged from price quotes of financial institutions, and offers the data for download.

The folio says the CRA will generally accept another source only if every one of its conditions is met, including that the rate is verifiable, independently published, used in the financial statements and used consistently. For average rates and the rate on US-dollar sales, see US-dollar sales and marketplace payouts.

What proves a line: the US-dollar statement for the amount and date, the bank's confirmation for the Canadian dollars received, and a dated copy of the Bank of Canada rate. The bank's own rate shows what you received; it does not value the US-dollar side of other entries. For retention, see how long to keep business records.

Do I run a currency revaluation at year end, and does the CRA require it?

Revalue in the books if your financial statements follow accounting standards (IFRS or ASPE). A sole proprietor whose books only feed the T2125 may have no such statements; ask the preparer. For tax, section 261 has no year-end step. The CRA does not require income recognition of a paper gain on a capital holding; for working funds, the tax method should match the one used in the statements. The accountant settles which case yours is.

• Accounting standards. The audit manual says IAS 21 and Section 1651 call for an exchange gain or loss on unsettled amounts to be recognized at each period end (section 27.7.2).
• Working funds (income account). The archived bulletin says any of its methods may be used for a foreign-currency bank account into which customer receipts are deposited (IT-95R, paragraphs 8 and 9). Under the current-rate method, current accounts are adjusted to the year-end rate and the result goes into income; under the settlement method, a gain or loss is recognized only when the account is settled. The audit manual says the method should follow accepted accounting practice and be the same for the statements and the return, so a year-end difference booked in the statements may belong in income.
• Capital holdings. Subsection 39(2) deems certain currency gains and losses to be capital (s. 39). The audit manual reads it as applying only where a transaction produced the gain or loss, and so says the CRA does not require income recognition of a mere paper gain or loss on capital account.

Which case yours is, and what the return does with the difference, is in foreign exchange gains on a corporate return.

For the books: post the year-end entry, the Bank of Canada rate on the last day times the US-dollar balance, less the account's carrying amount, as its own dated entry. Debit the US-dollar account and credit unrealized exchange gain if the balance is worth more; reverse that if it is worth less. Open US-dollar invoices and bills get the same treatment against the Canadian amount booked: a receivable worth more is an unrealized gain, a payable worth more is an unrealized loss. Separate accounts for unrealized and realized keep any tax adjustment to one figure. Settle with the accountant whether the entry is reversed on the first day of the next year: reversing keeps the carrying amount at original cost, so later realized gains are measured from it. For the rest of the year-end clean-up, see the year-end close checklist.

Where does the foreign exchange line sit in the financial statements and GIFI?

On the income statement it is its own line. In the CRA's General Index of Financial Information (GIFI), the income-statement item for exchange is 8231, Foreign exchange gains/losses, in the Other revenue block, so a net loss is a negative amount there. The index describes it as covering realized gains and losses on foreign currency and amortization of deferred exchange gains and losses. It names no foreign exchange item for an unrealized difference. Item 9980, unrealized gains/losses, is described as revaluation of asset book values and sits with the extraordinary items, so where a year-end revaluation is reported is a point for the accountant.

The US-dollar balance itself sits in cash and deposits: item 1003 (foreign-currency deposits in Canadian banks) or 1005 (foreign-currency deposits in foreign banks).

A sole proprietor has no GIFI schedule. The CRA's T2125 expenses page names no foreign exchange line, so where it goes is a question for the preparer. Keep the exchange result in its own account so it can be moved.

Why does my USD account balance not match the Canadian-dollar balance in my books?

The US-dollar balance must tie to the bank statement in US dollars. The Canadian-dollar figure is a carrying amount built from past rates, so it will not equal the balance times today's rate; that gap is the unrealized difference, not an error.

If the account is off, a plug entry hides the cause. Reconcile in US dollars first. Then list every conversion and payment with its US dollars, rate and Canadian dollars, and rebuild the carrying amount from the oldest month that is wrong.

Does the book entry decide how the gain is taxed?

Not by itself. The entry records the exchange result; the tax character, income or capital, is decided separately, and for income-account items the audit manual ties the tax method to the statements. The Act has no simple rule on income versus capital, and the character of the transaction that produced the gain or loss decides (CRA bulletin IT-95R; audit manual). A gain or loss from buying or selling goods or services used in the business is generally income; one from capital assets is capital.

The $200 amount in subsection 39(1.1) applies only to an individual's capital-account currency gains and losses, not to a corporation. Where the exchange result goes on the T2 is covered in foreign exchange gains on a corporate return.

Example

These examples are illustrative. Figures are in Canadian dollars unless marked US$.

A corporation converts some of its US dollars

A corporation holds US$20,000 carried at C$26,000 (1.30 each). It converts US$10,000 when the rate is 1.38, and the bank pays C$13,800. The carrying amount of the US$10,000 is C$26,000 ÷ US$20,000 × US$10,000 = C$13,000. Bank fees are ignored here.

The C$800 is realized and belongs to the year of the conversion. Had the rate been 1.25, the bank would pay C$12,500: debit Canadian-dollar bank account 12,500, debit foreign exchange loss 500, credit US-dollar account 13,000.

The rest of the balance at year end

The remaining US$10,000 is carried at C$13,000. The year-end rate is 1.40, so the balance is worth C$14,000.

The statements show the C$1,000. Whether the tax return keeps it in income depends on whether the balance is working funds or a holding and, for working funds, on the method used, as the year-end section explains. If the entry is reversed on the first day of the next year, the next conversion is measured from C$13,000 again.

A sole proprietor invoices in US dollars

A sole proprietor invoices US$3,000 at 1.35, which is C$4,050. The client pays 20 days later at 1.38, so the payment is worth C$4,140.

The C$90 is booked when the payment lands. Had the invoice still been open at year end, the difference would have been unrealized.

Different for you?

• The account has not tied to the books for a year or more, exchange entries for earlier years were never booked, or a T2 or T2125 is about to be prepared on these books: the carrying amount rolls forward, so every later gain or loss depends on the earlier ones, and what the accountant adjusts for tax needs professional judgment. Get bookkeeping help and bring the statements, the bank's conversion confirmations and last year's balance. See also catching up on overdue books.
• Your corporation is considering reporting in US dollars: a corporation resident in Canada throughout the year, other than an investment, mortgage investment or mutual fund corporation, can elect on Form T1296 to report in a functional currency. The US dollar qualifies if it is the primary currency of the corporation's books throughout the year. A sole proprietor cannot elect. The filing deadline is 60 days after the first day of the tax year. The election can be made only once; a revocation cannot be filed in the first elected year and applies only to years that begin at least six months after it (s. 261(3) and (4)). Settle whether it suits the corporation with corporate tax help first.
• You need the tax result of the exchange gain or loss: see foreign exchange gains on a corporate return.
• You sell in US dollars or receive marketplace payouts: see US-dollar sales and marketplace payouts.
• You move money between CAD and USD accounts, or turn on multicurrency in software: see transfers between CAD and USD accounts and multicurrency before you turn it on.
• The account also holds investments: see adjusted cost base in Canadian dollars.
• The account is at a US bank: whether it triggers T1135 or an IRS filing is covered in US bank account for a Canadian corporation.
• You paid a business expense in a foreign currency: see expenses paid in foreign currency.