Canadian Freelancer with US Clients Paid in USD: Books and T2125

Do I report USD income on my T2125 in Canadian dollars, and at which rate?

Yes. The T2125 is the CRA form for self-employment income, and it is in Canadian dollars. A US client sends no Canadian slip, but income from a source outside Canada still counts (Income Tax Act, s. 3). An amount in another currency is converted at the exchange rate for the day it arose (Income Tax Act, s. 261(2)). The Act defines that rate as the one the Bank of Canada quotes for the day, or for the closest earlier day when none is quoted; another rate counts only if the CRA accepts it (s. 261(1); Folio S5-F4-C1).

Self-employment income must be reported on the accrual method: income counts in the period it is earned, whenever it is paid. Only farmers, fishers and self-employed commission agents may choose the cash method (Guide T4002). For services, the Act treats an amount as receivable on the day you invoice, or the day you would have invoiced without undue delay, whichever is earlier (Income Tax Act, s. 12(1)(b)). A freelancer therefore converts each invoice at the rate for that day, and holding an invoice back without good reason does not move the income into a later year. The T2125 sales figure is the sum of those Canadian-dollar amounts.

Averages and other rate sources are narrow exceptions. The CRA may accept an average for certain income items, but generally not when rates swing widely, and another source only if every condition in the folio is met. The Bank of Canada daily rate for each invoice date avoids both questions. Exchange-rate rules and marketplace payouts covers the exceptions.

A freelancer invoicing finished work and paid within days has a simple case. It stops being simple when:

• your total sales, US clients included, are near or over $30,000 and you have no GST/HST account;
• clients pay deposits before the work is done;
• a platform pays out in a currency other than the one invoiced;
• earlier years were never filed;
• personal and client money share one account.

Gather every invoice, the bank and platform statements behind each payment, the rate you used for each date, the receipts for expenses paid in US dollars and, if you are near that limit, a list of sales by calendar quarter.

How do I set up invoices so each USD payment shows its invoice date, payment date and CAD value?

Invoice in the agreed currency, US dollars here, then keep one row per invoice that carries three dates and the Canadian value at each. The invoice itself can stay in US dollars; the Canadian-dollar value belongs in the books. The CRA says income records must show the date, amount and source, supported by original documents such as sales invoices and bank deposit slips (Guide T4002).

The CRA's archived bulletin puts a foreign exchange gain or loss on business accounts into income and accepts different methods for when it is measured, such as when an account is settled or when US dollars held in a foreign-currency account are converted (IT-95R, paras 7 to 9). Track each difference on its own line, apart from sales, so none is dropped. For when and how it is booked and taxed, see exchange gain or loss on a US-dollar account.

Each row of the log needs:

• client, invoice number and invoice date;
• US-dollar amount, the Bank of Canada rate for that date and the Canadian-dollar value;
• payment date, US dollars received, rate and Canadian-dollar value;
• fees taken, and the net amount that reached the bank.

Do I need a US-dollar bank account, and does holding one change what I report?

No. The conversion rules apply whatever currency the money sits in, and nothing in them requires a US-dollar account. Income is reported in Canadian dollars either way (s. 261(2)), and a sole proprietor cannot elect to report in US dollars (s. 261(3)).

A US-dollar account lets you receive and pay in US dollars without converting each time. The cost is bookkeeping: the balance changes in Canadian-dollar value as rates move, and each conversion or US-dollar payment creates an exchange difference. For entries between your own accounts and the bank's spread, see transfers between CAD and USD accounts. Mixing personal and client money in one account is what makes the log hard to prove; doing your own books or hiring a bookkeeper covers whether a separate business account is required.

Form T1135 is a separate foreign-property report. A US-dollar account held at a Canadian bank does not count toward it: only funds situated, deposited or held outside Canada do, whatever their currency (s. 233.3(1)). An account at a US bank can count toward the $100,000 total cost of specified foreign property at any time in the year; the CRA's T1135 questions use a US bank account in their own example. Property used or held exclusively in an active business is excluded, and whether a given account qualifies depends on how it is used. See which holdings count on Form T1135.

How do I record bank, platform and conversion fees?

Record the sale at the full invoice amount, then record each fee as its own expense. Booking only the net deposit understates sales: the T2125 starts with gross sales, commissions or fees before expenses (Guide T4002).

1. Sales: the invoice amount, converted at the invoice-date rate.
2. Platform or processor fee: a business expense, converted at the rate for the day it was charged. The CRA allows a reasonable current expense incurred to earn business income (T2125 expenses).
3. Bank or wire fee listed on its own: the T2125 line for interest and bank charges, line 8710.
4. Conversion spread: the gap between the Bank of Canada value of your US dollars and the Canadian dollars the bank credited. Track it on its own line; the transfers guide covers how it is treated.

The pieces should add back to the deposit: invoice amount, plus or minus the exchange difference between the invoice date and the payment date, less platform fee, less bank fee, less spread. A gap that none of these explains points to a missing record. For which T2125 line each expense belongs on, see self-employed expense lines.

How do I record expenses I pay in US dollars?

Convert each expense at the Bank of Canada rate for the day it arose, keep the US-dollar receipt, and claim the Canadian-dollar amount on the line for that type of expense. The same section 261 rule that converts income converts expenses.

If you paid with a Canadian-dollar card, the statement shows the Canadian dollars charged. The folio does not say whether that figure may replace the Bank of Canada rate for income tax, so keep both the statement and the rate you used for the day, and ask a professional before relying on the statement figure. Expenses paid in foreign currency covers the receipt-versus-statement choice, and invoices from foreign suppliers covers GST/HST on services bought from outside Canada.

Does USD income from US clients count toward the GST/HST registration limit?

Yes. The small-supplier limit is $30,000, and the CRA counts revenue from taxable supplies including zero-rated supplies (taxable supplies on which no GST/HST is charged), and those of your associates, such as a corporation you control (CRA: when to register, RC4022). A service supplied to a non-resident is generally zero-rated, under the general rule or, for advisory, consulting and professional services, a separate provision, with exclusions in both (CRA: exports of services). Either way the revenue still counts.

The test is not an annual one. It is met by exceeding the limit in a single calendar quarter or over the last four consecutive calendar quarters, so checking at tax time can come too late. In the first case you stop being a small supplier on the sale that crosses the limit; in the second, at the end of the month following the quarter in which you exceed the limit. Count each amount when it falls due, or when it is paid if that comes first, converted to Canadian dollars; GST/HST has its own conversion rules, so the figure can differ from your T2125 one.

For which US clients qualify and what proof to keep, see charging GST/HST to US customers. For the effective date, the usual 29 days to apply, late registration and registering voluntarily below the limit, see when to register for GST/HST.

What records do I keep for each client payment, and for how long?

Keep the documents that connect the invoice, the payment and the rate, for six years from the end of the last tax year they relate to (CRA: business records). If you file late, that period runs from the date you file (CRA: where to keep records).

For each payment, keep:

• the contract or written terms, and the invoice;
• the bank or platform statement showing the gross amount, fees and net deposit;
• the conversion statement, if the money was converted;
• a saved copy of the Bank of Canada rate for each date used;
• for a zero-rated sale, whatever shows the client is outside Canada;
• the original US-dollar receipt for each expense.

Records must be kept at your place of business or residence in Canada. Records held outside Canada and reached online from Canada are not treated as kept in Canada, and keeping electronic records outside Canada needs the CRA's permission, so an online tool hosted abroad is not enough on its own. See how long to keep business records and what to give your accountant.

How much tax do I set aside, and do I owe instalments?

Set aside a share of every payment, based on an estimate of your net profit; no fixed percentage fits everyone. Tax is charged on net profit, which is income less expenses, converted to Canadian dollars, at federal and provincial rates, plus CPP outside Quebec. Quebec workers, the self-employed included, are covered by the QPP instead (Guide T4002, Chapter 3).

Your payment log already gives year-to-date net profit. Moving a share of each payment into a separate Canadian-dollar account, set from an estimate of the tax on that profit, gives a working reserve. The tax guide covers the CPP rates and how self-employed income is taxed.

Instalments apply when net tax owing is more than $3,000 ($1,800 of federal net tax owing for Quebec residents; Revenu Québec has its own instalment rules) in the current year and in either of the two previous years (CRA: instalments). A freelancer in a first big year of US-dollar income may owe none that year, then face the full balance on April 30 of the following year. The return is due June 15, but the balance is still due April 30 (Guide T4002).

• Due dates: March 15, June 15, September 15 and December 15.
• Amount: the CRA sends reminders to people who will likely have to pay, but the threshold decides whether you owe, not whether a reminder arrives. You may pay the amounts on the reminders (based on your latest assessed return), calculate from last year's return, or estimate the current year (options).
• Cost of falling short: the CRA charges interest on late or insufficient instalments. A penalty applies only if the instalment interest is more than $1,000 (interest and penalty).

When does a freelancer paid mostly in USD outgrow a sole proprietorship?

No income level makes incorporating a requirement; the signs are practical. Incorporating moves the work into a separate return: a corporation resident in Canada files its own T2 for every tax year, even if no tax is payable (CRA: T2 guide). The invoices, the bank account, the books and the tax-status form a US client keeps on file then move into the corporation's name. A corporation that meets the conditions can also elect to report in US dollars on Form T1296, no later than 60 days after the first day of the tax year; see getting paid by US clients through a Canadian corporation.

Signs the question is worth asking:

• the books need more than a spreadsheet;
• US-dollar income is past the GST/HST limit and still growing;
• instalments have started;
• a US client asks to contract with a company.

Each answer has costs and trade-offs on both sides of the border. See incorporating to contract for US clients and, for the books afterwards, books after incorporating a sole proprietorship.

Example

These examples are illustrative. Rates are Canadian dollars per US dollar (C$ and US$), and the figures are rounded.

A developer invoicing US$6,000 a month

An Edmonton developer invoices a US client US$6,000 a month. At 1.35, each invoice is C$8,100 and the year is C$97,200. If the invoices start in January, with no other sales and each due when issued, three make C$24,300 in the first calendar quarter, under the single-quarter limit. Six make C$48,600 by the end of the second quarter, over the four-quarter limit, so he stops being a small supplier at the end of July. The services are generally zero-rated, so no GST/HST is charged, but they count. GST/HST registration is the first question, well before the T2125.

A designer and the three dates

A Toronto designer invoices US$2,000 on March 1, when the rate is 1.34, so sales are C$2,680. The client pays on March 20 at 1.35, when the US$2,000 is worth C$2,700, C$20 more than booked. She holds the US dollars and converts on April 10 at 1.38, receiving C$2,760, a further C$60. The T2125 sales figure stays C$2,680. The C$80 in all is an exchange difference, not extra sales, and it is not ignored: the exchange guide covers when it is measured and how it is taxed.

An editor near the limit

A Vancouver editor earns US$20,000 a year from three US clients and C$5,000 from local clients. At 1.35, the US clients are C$27,000, so total sales are C$32,000. Most of that is zero-rated, but it all counts toward the limit, and the total is over it. The first step is to find the quarter in which the total passed the limit; see when to register for GST/HST.

Different for you?

• Your sales are near or over $30,000, or you have no GST/HST account yet: the registration date may already have passed. See when to register for GST/HST and get bookkeeping help.
• US-dollar payments have outgrown a spreadsheet, or personal and client money share an account: the log can be rebuilt from statements. See rebuilding books from bank statements and get bookkeeping help.
• Earlier years of US-dollar income were never reported, or the CRA has written: see rebuilding past US-dollar income and get bookkeeping help.
• A client pays deposits or retainers before the work is done: the date the income is earned can differ from the date the money arrives. See customer prepayments and unearned revenue.
• A platform pays you and keeps a share: see US-dollar sales and marketplace payouts.
• A US client asks for Form W-8BEN or W-9, withheld tax, or sent a Form 1099: see the Canadian freelancer guide for US clients.
• The US company sets your hours, supplies your tools or pays you through payroll: you may not be self-employed at all. See contractor or employee in Canada.
• You are a US citizen or green card holder: the US may also require a return on this income. See Americans living in Canada.
• You are thinking of incorporating: see incorporating to contract for US clients and getting paid by US clients through a Canadian corporation, and get business formation help.
• You live in Quebec: Revenu Québec has its own income tax and QST rules and generally administers the GST/HST there, and you pay QPP instead of CPP. This page does not cover them.