PayPal and USD Income for Unfiled Years: Rebuilding Records

Do I have to report PayPal income in US dollars for years I never filed?

A person in Canada who earned business income reports all of it for the year it was earned, in Canadian dollars, whether it arrived through PayPal, a bank or cash. In short: report what each client paid, not what PayPal deposited, convert each payment at the Bank of Canada rate for its own date, and claim PayPal's fees as an expense. Each missed year is its own return, and the platform's deposits are only one record that supports it.

A return was required for a year if, among other reasons, you owed tax, had to contribute to the CPP or were paying EI premiums on self-employment income, or the CRA asked you to file (CRA: who has to file). Owing no income tax does not end the duty: contributing to the CPP is a separate reason, and it can apply to a small net self-employment income (see How self-employed income is taxed). Quebec residents also file with Revenu Québec; this page covers the federal return only.

Five things make a rebuild more than a clean-up job:

• A CRA letter has arrived, the CRA has already assessed a missing year, or you are deciding whether to come forward before the CRA contacts you.
• Two or more years are open, so the same records have to serve every year.
• Platform and bank totals will not reconcile.
• US-dollar sales may have passed the GST/HST small-supplier limit.
• A lender or an immigration file needs assessed years by a date.

Gather first: platform and bank statements for every year, invoices and contracts, client names, and any old notice of assessment (the CRA's letter with the result for a filed year) or CRA letter. For the general method with no books at all, see Catching up on overdue books.

What does a CRA letter or an estimated assessment change?

The duty to file already existed before any letter. When the Non-Filer Program, the CRA's program that enforces filing requirements, writes to ask for outstanding returns, you are legally required to file them under subsection 150(2) of the Income Tax Act, and an officer who calls gives a deadline (CRA: unfiled tax returns). A demand under that subsection is the trigger in the repeat-penalty row below: if a late-filing penalty was also payable for any of the 3 preceding years, a demanded year can draw the higher penalty. The CRA may consider prosecution if other attempts to get returns filed fail. If the records will not be ready by the deadline, contact the CRA using the letter's details before it passes. Order of years, refunds and penalties are in Catching up on unfiled returns.

An estimated assessment does not close a year. If you must file and do not, the CRA may assess tax owing under subsection 152(7). It estimates business expenses from earlier filings and leaves out voluntary deductions you may have been eligible for. Filing a year already assessed this way leads the CRA to review your income and deductions and issue a notice of reassessment (CRA: unfiled tax returns). Your rebuilt records are what the CRA reviews. To dispute the assessment itself, an individual's objection deadline is the later of 1 year after the filing due date and 90 days after the notice was sent (Income Tax Act, section 165); do not wait for the full rebuild if that date is near.

Which records rebuild income when the money passed through PayPal, a bank and client invoices?

Start with the platform's transaction-level activity report for each year, then match it to bank statements and invoices. No single record is complete.

If the platform history or old bank statements are gone, ask the platform and the bank for copies first, then ask clients for their payment records. If the pieces still do not add up to the platform's year-end balance, have a preparer review the gap: a total you cannot support is a risk, not a rough figure.

Count each client payment once. Money moved from the platform balance to your bank is a transfer, not new income. For each year, the opening balance plus payments, minus fees, refunds and withdrawals, should equal the balance left on the platform at year end. A balance left on the platform was still income when you earned it.

Form T2125, the business-income form in a self-employed person's return, counts a sale whether or not the money has arrived (Part 3A for business income, Part 3B for professional fees), so a December invoice paid in January belongs to the earlier year. Only farmers, fishers and self-employed commission agents may use the cash method (CRA: T2125 Part 3A; CRA: Guide T4002, Chapter 1; December sales paid in January).

Download and save every report now. Records must be kept at your home or business in Canada, and records kept outside Canada and reached electronically do not count. For a late return, keep them six years from the date you file it (CRA: where to keep your records).

Is my income the amount the client paid or the net amount PayPal deposited?

Income is the gross amount the client paid. The fee the platform takes out is a separate expense. The T2125 starts from gross sales, and a reasonable current cost of earning income is deductible (CRA: T2125 Part 3A; CRA: Guide T4002, Chapter 3).

Reporting deposits only understates both sales and expenses by the fees. That matters for the GST/HST limit below, which counts revenue before expenses, and for tying your return to the platform's totals. A rate gap between the platform's conversion and the Bank of Canada rate is a separate difference. The CRA's line instructions do not single out payment-platform fees, so which expense line they go on is a preparer's decision.

Which exchange rate do I apply to each past payment?

If PayPal converted a client's US-dollar payment into Canadian dollars, that rate is PayPal's own conversion price, not the tax rate. For the return, convert each US-dollar amount at the Bank of Canada rate for the day the amount arose. If the Bank of Canada quoted no rate that day, such as on a weekend, use the closest preceding day that has one. For a day before March 1, 2017, the CRA's folio on reporting currency says to use the Bank of Canada noon rate (CRA: Folio S5-F4-C1).

1. List every payment with its date, client, gross US-dollar amount and fee.
2. Look up each date on the Bank of Canada's daily exchange rates lookup, which lets you search and download US-dollar rates. For a weekend date it shows the closest business days; use the preceding one. For a day before the noon-rate date above, use the noon rates on the Bank of Canada's historical noon and closing rates page, which lists the US dollar. If your year is not listed there, ask a preparer which Bank of Canada source to use before converting.
3. Multiply the gross amount and the fee separately, and keep the rate and date beside each line.
4. Add the Canadian-dollar lines to get each year's sales and fees.

Shortcuts are limited. The CRA may accept an average rate over a period, but generally not when rates fluctuate significantly. It accepts another source only if every folio condition is met, including that an independent provider publishes the rate and you use it consistently.

The folio does not define the day income "arises." When the invoice date and the payment date differ, their rates can differ too, so have the date settled before converting. More on rates and entries is in US-dollar sales and marketplace payouts.

How do I rebuild expenses when receipts are missing?

Claim an expense only if it was a reasonable current cost of earning the income and you can support it. The CRA requires records that are reliable, complete and supported by documents (CRA: record-keeping responsibilities).

Rebuild in this order:

1. The platform fee lines, which the activity report already documents.
2. Bank and card statements, which prove payment but not what was bought.
3. Supplier emails, account histories and reissued receipts, which show what was bought and why.

A figure with no record behind it does not meet that requirement. If a year was assessed without your return, the CRA already estimated your business expenses from earlier filings. What to record when no receipt exists is in Business expenses without receipts; sorting a full year from statements is in Rebuilding books from bank statements.

Did I have to register for GST/HST, and do US-dollar sales count toward the limit?

US-dollar sales count toward the small-supplier limit, the revenue level past which you must register for GST/HST. The limit is $30,000 of revenue, before expenses, in a single calendar quarter or over the last four consecutive calendar quarters. It counts zero-rated supplies (sales taxed at a zero rate) and supplies made inside and outside Canada, together with the revenue of associates (CRA: RC4022).

Many exports are zero-rated, so no GST/HST is charged on a qualifying sale. A zero-rated sale still counts toward the limit, and passing it can require registration even when no GST/HST was charged. GST/HST you were required to charge on a taxable sale but did not charge is still owed by you. In Quebec, Revenu Québec generally administers the GST/HST, and businesses there generally file their returns with it (CRA: RC4022). Whether a given US sale qualifies is in Charging GST/HST to US customers.

To test your years, total sales by calendar quarter, adding Canadian clients and any associate's sales. GST/HST has its own foreign-currency conversion rule, based on the day the tax is payable (Excise Tax Act, section 159), so the totals can differ from the income-tax figures. If a total crossed the limit, the registration date and the missed returns are a separate rebuild: see When to register for GST/HST and Unfiled GST/HST returns and estimated assessments.

What penalties and interest apply, and can I come forward before the CRA contacts me?

The late-filing penalty applies only to tax still unpaid on the filing due date, so the rebuilt numbers set it. Interest runs on unpaid tax from the day after the balance-due day, April 30 of the following year, even though a person with business income has until June 15 to file (Income Tax Act, section 161; section 150).

Sources: Income Tax Act, section 162; CRA: interest and penalties. The CRA can cancel or waive penalties and interest when circumstances beyond your control kept you from meeting your obligations, but a request for penalty relief has to be made within 10 years after the end of the calendar year in which the tax year ended (CRA: relief time limits); see Penalties, interest and relief.

The Voluntary Disclosures Program can reduce penalties and interest, but only if you apply before the CRA starts an audit or investigation, with information at least one year past its due date; a return that ends in a refund or no tax or penalties owing is normally outside it. The CRA lists a return not filed for a previous year, now a year late, as an eligible example (CRA: VDP eligibility). Coming forward first matters. The CRA normally gives an unprompted application, made with no CRA communication about the issue, 75% relief of interest and 100% relief of penalties. A prompted application, made after contact about the issue, a deadline to file, or third-party information the CRA already holds, normally gets 25% relief of interest and up to 100% relief of penalties (CRA: VDP review and decision; CRA: IC00-1R7, paragraphs 11 and 17 to 21). Only an audit or investigation of the issue makes an application non-voluntary. The circular does not name the Non-Filer Program, but it lists a letter that sets a deadline to file among the events that make an application prompted, not among those that end eligibility. Keep the letter, meet its deadline, and keep rebuilding the records while you decide whether to apply. Details are in Unreported income and voluntary disclosure.

How do I get proof of income for a mortgage or immigration once the years are filed?

File the missing years first. The proof of income statement is in My Account: choose "Proof of income statement" on the Tax returns tab. The CRA describes it as a simple generic version of your tax assessment and does not say when a year appears there (CRA: proof of income statement).

The CRA's processing standard applies to returns filed on time. For late-filed returns it says only that it will make every effort to process them in a timely manner, with no stated time (CRA: processing times). Plan any deadline around that.

Who asks for what varies. Sponsoring a parent or grandparent, for example, requires a CRA notice of assessment for each of the three tax years before you apply (IRCC: income requirements). A lender decides which years and documents it accepts, including whether a proof of income statement is enough or it wants the notice of assessment; ask before you rebuild. How to get CRA notices and proof of income statements is also covered, for a corporation's owner, in Getting a mortgage when you're paid by dividends.

Example

All figures are illustrative.

Three unfiled years of PayPal income (Vancouver designer)

A designer was paid US$20,000 a year through PayPal for three unfiled years. PayPal kept US$800 in fees each year and deposited US$19,200. Each year is its own return. Each payment is converted at its own day's Bank of Canada rate; those rates work out to about C$1.30, C$1.35 and C$1.27 per US dollar. No other income or expenses are assumed. Sales are spread evenly through each year, so the $30,000 small-supplier limit is not passed and no GST/HST applies.

Reporting the deposits would understate sales, and the fee expense, by about C$1,040 in year 1.

Two assessed years needed in 60 days (Calgary freelancer)

A freelancer needs two years of assessments for a mortgage in 60 days. Both missing returns are filed at once, from the rebuilt records. The proof of income statement is a version of the tax assessment, so it depends on the CRA assessing each year, and the CRA gives no processing time for late-filed returns. The freelancer asks the lender now which years and documents it will accept.

US-dollar and local income together (Toronto editor)

An editor earned US$22,000 through PayPal and C$10,000 from local clients in the same year. At about C$1.35 per US dollar, the US$22,000 is about C$29,700, so total sales are about C$39,700. That is above the $30,000 small-supplier limit over four quarters. The editor must work out quarter by quarter when the limit was passed, and the GST/HST returns become a rebuild separate from the income-tax returns.

Different for you?

• A CRA letter has arrived, two or more years are open, your platform and bank totals will not reconcile, US-dollar sales may have passed the GST/HST limit, you are deciding whether to come forward before the CRA contacts you, or a lender or immigration file needs assessed years soon: years open together are usually easier to rebuild from one set of records, and the order of filing, any CRA letter and whether to come forward first are worth settling early. See bookkeeping help.
• You have only bank statements: see Rebuilding books from bank statements.
• Receipts are missing: see Business expenses without receipts.
• A CRA demand, penalties or the order of years is the main issue: see Catching up on unfiled returns.
• You may have left income out of returns you already filed: see Unreported income and voluntary disclosure.
• GST/HST may be owing: see Unfiled GST/HST returns and estimated assessments.
• A US client asks for a W-8BEN or sent a 1099: see Canadian freelancer with US clients.
• A corporation, not you, was paid: see Catching up on unfiled corporate returns.