Who this is for
- Canadian sole proprietors, partnerships and corporations with both a Canadian-dollar and a US-dollar bank account
- Books that stay out of balance after money is converted between those accounts
Not covered here
- Year-end revaluation of a US-dollar balance
- Where exchange gains and losses go on the T2
- US-dollar sales, marketplace payouts and the rate to use on income
- Setting up multicurrency in accounting software
- Cost base of a corporation's US-dollar investments
- Money moved between an owner's personal account and the business
- How a partnership's currency results reach its partners
Why does my USD to CAD transfer throw off my balances?
A transfer between your own accounts is not income and not an expense. It needs one leg in each currency and one rate for the US-dollar side. Balances stop matching when the two legs use different rates, when the bank's spread and fees are never booked, or when one leg is entered as income or an expense. Canadian tax results are worked out in Canadian dollars, with each US-dollar amount converted at the rate for the day it arose (Income Tax Act, s. 261).
This page covers money moving between accounts the same business holds. Money moving between you and your corporation or partnership is a loan, repayment, draw, salary or dividend, not a transfer; see the shareholder loan account.
| What you see | Usual cause |
|---|---|
| The US-dollar account ties to its statement in US dollars but not in Canadian dollars | US-dollar lines were translated at different rates or from different sources, or the gap is only the unrealized rate move (see step 4 of the monthly reconciliation) |
| A small Canadian-dollar gap after every transfer | The bank's spread and any wire fee were never booked |
| One side of a transfer shows as income or an expense | The two legs were entered as a deposit and a payment, not as one transfer |
| A US-dollar figure sits in the Canadian-dollar account, or the reverse | A foreign amount was typed as if it were in the account's own currency |
| The Canadian-dollar account fell by a whole purchase price and the US-dollar account has not risen | A Norbert's gambit was booked as a transfer; see the gambit section below |
| A customer payment sits in the wrong account | The payment landed in the other currency's account; see the wrong-currency section below |
| Software shows a Canadian-dollar balance on a US-dollar account that is zero | The money went in and out at different rates; see multicurrency in accounting software |
A case stops being simple, and needs professional judgment, when:
- The accounts have been off for several months, or a return was already filed on the unreconciled figures.
- Prior-year balances need restating before a T2, T2125 or GST/HST return.
- 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.
Gather statements for both accounts for every month in question, the bank's conversion confirmations, the rate source you will use, and the opening balances of both accounts.
The lasting fix is to post both legs of every transfer through a transfer-clearing account (see the monthly reconciliation section below). If the accounts are already months off, rebuild from the oldest month's statements first.
What is the journal entry to convert CAD to USD between my own bank accounts?
Debit the US-dollar account for the US dollars received, translated at the Bank of Canada rate for the day; credit the Canadian-dollar account for the Canadian dollars sent; and put the difference in a conversion-cost account. This is a bookkeeping method: the Act and the CRA's folio set the rate for converting a foreign amount, not the entry.
| Account | Debit | Credit |
|---|---|---|
| US-dollar bank account | US dollars received × Bank of Canada rate | |
| Currency conversion cost | Canadian dollars sent, less the line above | |
| Canadian-dollar bank account | Canadian dollars sent |
If the bank gave more than the published rate implies, the middle line becomes a credit. Post each leg on the day it reaches its account, so a transfer that takes two days has two dates.
Converting US dollars back to Canadian dollars is the event that realizes an exchange gain or loss, so that entry has one more line:
| Account | Debit | Credit |
|---|---|---|
| Canadian-dollar bank account | Canadian dollars received | |
| Currency conversion cost | Bank of Canada value of the US dollars sent, less the Canadian dollars received | |
| US-dollar bank account | Canadian-dollar amount at which those US dollars sit in the books | |
| Exchange gain or loss | Loss: that book amount less the Bank of Canada value | Gain: the Bank of Canada value less that book amount |
Over a round trip, these lines net to the Canadian dollars received less the Canadian dollars paid. The Act and the CRA publications cited here do not say how the spread is measured for tax, so keep conversion cost and exchange gain or loss in separate accounts.
If the software holds foreign amounts, enter the US-dollar amount and the rate on each line. If it holds only Canadian dollars, keep the US-dollar amount and rate on the line or in a side list, because the bank statement is in US dollars. Finding the book amount when several conversions are mixed in one account belongs to the exchange gain or loss guide.
Which rate goes on the entry: the bank's rate or the Bank of Canada rate?
Translate the US-dollar side at the Bank of Canada rate for the day, or at one other source that meets the CRA's conditions below and that you use every time. The bank's own rate tells you what you actually received; the entry uses the published rate and shows the gap separately.
The Income Tax Act's definition of the relevant spot rate is the Bank of Canada rate for the day, or for the closest earlier day with a quoted rate, such as after a weekend. The CRA's currency folio generally accepts another source only if it meets every one of its conditions, including that it is verifiable, published by an independent provider on an ongoing basis, used for the financial statements and used consistently from year to year. It does not address the rate a bank gave you in a particular conversion.
The Bank of Canada rate is an indicative daily average of price quotes from financial institutions, published once each business day. A bank converts at its own rate at its own moment, so the gap against the published rate can be a cost or, occasionally, a benefit. Dividing the Canadian dollars by the US dollars from one transfer and using that rate in the books is hard to keep consistent: every transfer would carry its own rate and nothing would tie to one published source.
A transfer between your own accounts carries no GST/HST. The rate for a US-dollar invoice follows a wider GST/HST rule (Memorandum 3-6), covered in US-dollar sales and payouts.
Where do the bank's conversion spread and wire fees go?
Book the spread to its own conversion-cost account and any separate wire or transfer fee to bank charges. The spread is the gap between the Bank of Canada value of the US dollars and what the bank credited; it shows on no fee line, so it appears only when you compare the two figures. The Bank of Canada rate is a daily average, so the gap also holds any rate movement within the day and measures the bank's markup only roughly.
A fee the statement lists on its own goes to bank charges: line 8710, Interest and bank charges, on the T2125, and GIFI code 8710, which covers bank charges. When an intermediary takes a fee out of the incoming amount without showing it, the fee and the spread arrive as one gap; book the whole gap to conversion cost.
The Act and the CRA publications cited here do not say whether the spread is a bank charge on the return or part of the cost of the US dollars. Keep it in its own account so it can go either way.
The Excise Tax Act defines the exchange or transfer of money as a financial service, and a supply of a financial service is generally exempt. A spread or wire fee therefore usually has no GST/HST to claim as an input tax credit. If the statement shows GST/HST on a fee, record that amount separately.
When is a currency gain or loss realized: when I move the money or when I spend it?
A currency gain or loss is realized when the US dollars leave the account by being converted, spent or used to pay a bill, not when Canadian dollars first move into it. The CRA's archived bulletin says a gain or loss can arise when each conversion is made from a foreign-currency bank account or when the foreign funds are used to pay for purchases or settle accounts payable, and that foreign currency funds on deposit are not considered disposed of until they are converted into another currency. The bulletin is archived and no longer updated; it remains online for reference.
| Event | Exchange gain or loss? |
|---|---|
| Canadian dollars to US dollars, between your own accounts | None in Canadian dollars; only the conversion cost |
| US dollars to Canadian dollars, between your own accounts | Yes, in the books: the value on the day against the amount the US dollars sit at |
| Paying a US-dollar bill from the US-dollar account | Yes, measured the same way, plus any difference on the bill itself |
| A US-dollar customer payment settling an invoice | Yes, on the invoice: payment against the invoice's Canadian value |
| A balance still sitting in the account at year end | Not realized, but the tax result depends on the method: working funds may be adjusted to the year-end rate and taken into income, while a capital holding waits for a conversion; see the exchange gain or loss guide |
What do I do when a payment lands in the wrong-currency account?
A payment that lands in the other currency's account is recorded in the account where it landed, in that account's currency, at the amount the bank credited, and the invoice is settled against it. It is not a transfer from the other account, because no money moved between your accounts.
- A US-dollar payment that the bank converted into the Canadian-dollar account: debit the Canadian-dollar account for the Canadian dollars credited, clear the receivable at its booked Canadian value, and book the difference as exchange gain or loss. The CRA's archived bulletin says a gain or loss on settling an account is reflected in income for that year. The difference mixes the rate move since the invoice date with the bank's spread.
- A US-dollar payment that stayed in US dollars: record it in the US-dollar account. Moving it later is an ordinary transfer.
- A Canadian-dollar invoice that the bank converted into the US-dollar account: clear the receivable at the invoice amount, debit the US-dollar account at the Bank of Canada value of what was credited, and book the difference as conversion cost, not as a gain.
How do I book Norbert's gambit, and what does it do to my balances?
Norbert's gambit, a currency conversion done by buying a security listed in both currencies in one account and selling it in the other, is booked as the purchase and sale of a security, not as a transfer. A corporation buys the units in its Canadian-dollar account, has the broker move them to its US-dollar account, and sells them there. The conversion happens inside the trade, so the result is a gain or loss on the units. The CRA publications cited here do not name the gambit; the ordinary rules for buying and selling securities apply.
- Purchase. Debit investments at cost in Canadian dollars and credit the Canadian-dollar account. A commission paid to acquire the units adds to their cost.
- Move between the broker's accounts. The units keep their Canadian-dollar cost; only where they sit changes.
- Sale. Convert the US-dollar proceeds at the Bank of Canada rate for the sale day; the cost is already in Canadian dollars. The CRA's capital gains guide converts proceeds at the rate in effect at the time of sale. Debit the US-dollar account for the converted proceeds, credit investments for the cost of the units sold (identical units share an average cost), and book the difference as a gain or loss on the sale. A selling commission reduces the proceeds.
The Canadian-dollar account falls by the full purchase price at once; the US-dollar account rises only when the sale proceeds arrive. The difference is the gain or loss on the units: the price move between the listings and over the days held, less commissions. It is not an exchange spread, and it is not a transfer. Pick the trade date or the settlement date for the rate and use the same one every time; the sources cited here do not say which, and for trades near year-end the two can fall in different tax years, so have a professional settle it. For the cost base of US-dollar holdings, see adjusted cost base in Canadian dollars.
Is the gain or loss income or capital, and does the $200 rule apply to my corporation?
An exchange gain or loss tied to the business's revenues and expenses is generally income or a deductible loss, and the $200 exemption is for individuals only, so a corporation has no such floor. Section 39(1.1) counts only the part of a net capital-account currency gain or loss that is more than $200, and only for an individual other than a trust. A sole proprietor is an individual, but the exemption reaches only amounts that would otherwise be capital, not currency results on the business's revenues and expenses. A partnership is not an individual, and the sources cited here do not say how its currency results reach its partners; that is a question for a professional.
The CRA's archived bulletin treats a gain or loss that arises directly from buying or selling goods or services used in the business as income, and one that arises from capital assets as capital. Section 39(2) deems currency gains and losses that would not otherwise be income or deductible to be capital. A gain on settling a customer invoice is therefore generally income; a gain on US dollars held as an investment may be capital. The line is fact-dependent.
A gain or loss on units sold in a gambit is a securities result, and whether it is capital or income turns on whether the securities dealings are a business. For a Canadian security, such as a unit of a mutual fund trust, the taxpayer can instead elect under s. 39(4) on Form T123, filed with the return for the year of the disposition and signed by an authorized officer of a corporation, to treat those securities as capital. The election cannot be cancelled and does not apply to a trader or dealer in securities, and partners are treated as holding the partnership's securities. Whether a fund qualifies is for a professional. The CRA's archived bulletin on transactions in securities lists factors such as frequent buying and selling and short holding periods. Where exchange gains and losses go on the T2 is covered in foreign exchange gains on a corporate return.
How do I reconcile a USD account in Canadian-dollar books each month?
Reconcile the account in US dollars first, then translate. Each month:
- Tie the US-dollar balance. The books' US-dollar balance must equal the bank statement's before any Canadian-dollar figure matters.
- Post both legs of every transfer to a transfer-clearing account. For Canadian dollars to US dollars, the Canadian-dollar leg debits it and the US-dollar leg credits it at the Bank of Canada rate; what remains is the conversion cost, so move it to the conversion-cost account. For US dollars to Canadian dollars, follow the reverse entry above, which also books the exchange gain or loss. A leg that arrives next month stays in clearing until it does; find the cause of any other balance before expensing it.
- Use one rate source on every line, and write the rate on the line.
- Compare the closing balance. The Canadian-dollar value of the closing US-dollar balance at the month-end Bank of Canada rate will differ from the Canadian-dollar amount the books show for it. That difference is unrealized; do not hide it inside a transfer. Whether to book it each month is covered in the exchange gain or loss guide.
If several months are already off, do not plug the difference. List every conversion from the statements with both legs, the dates and the rate, and rebuild from the oldest month.
If my corporation reports in US dollars, do transfers still need conversion?
Yes. A Canadian corporation that has elected to work out its tax in US dollars still converts when it moves money between a US-dollar and a Canadian-dollar account. The Canadian-dollar account becomes the foreign-currency account, because s. 261(5)(g) reads foreign currency for that corporation as any currency other than its elected functional currency, and s. 261(5)(c) converts other-currency amounts at the spot rate for the day they arose. Each Canadian-dollar line is translated into US dollars at the Bank of Canada rate, and the spread is still a conversion cost, now measured in US dollars.
This applies only to a corporation that has made the election; without it, tax results are still worked out in Canadian dollars, even if the books are kept in US dollars. Among the conditions, the corporation must be resident in Canada and keep its books primarily in US dollars throughout the tax year. The election is made on Form T1296 and is due no later than 60 days after the first day of the tax year; only one election is allowed, and a revocation applies only to later years. Whether it is available or suits the corporation is a decision for a professional; see US-dollar sales and payouts.
Example
These examples are illustrative. Figures are in Canadian dollars unless marked US$. They use a corporation; a sole proprietor or partnership books the same entries in its own accounts.
Winnipeg corporation moves money to its US-dollar account
A corporation sends C$13,600 to its US-dollar account. The Bank of Canada rate that day is 1.36, which would give US$10,000. The bank credits US$9,900, which is worth C$13,464 at that rate. The C$136 gap is the cost of converting, not a gain.
| Account | Debit | Credit |
|---|---|---|
| US-dollar bank account (US$9,900 at 1.36) | 13,464 | |
| Currency conversion cost | 136 | |
| Canadian-dollar bank account | 13,600 |
Later, the corporation converts the US$9,900 back, with nothing else in the account, when the rate is 1.39. The Bank of Canada value is C$13,761 and the bank pays C$13,640. The US dollars sit in the books at C$13,464, so the booked exchange gain is C$297, and the conversion cost is C$121.
| Account | Debit | Credit |
|---|---|---|
| Canadian-dollar bank account | 13,640 | |
| Currency conversion cost | 121 | |
| US-dollar bank account | 13,464 | |
| Exchange gain | 297 |
The corporation paid C$13,600 and received C$13,640, a net C$40 (297 less 136 and 121). The split between gain and conversion cost is a bookkeeping presentation, so keep the lines separate.
Gambit on a dual-listed fund
A corporation buys 1,000 units of a fund listed in both currencies for C$13,600 in its Canadian-dollar account. The broker moves the units to its US-dollar account, where it sells them for US$10,050 when the rate is 1.36, which is C$13,668. Assume it owns no other units of the fund and ignores commissions; units of the same fund are identical property, so earlier units would change the cost used.
| Account | Debit | Credit |
|---|---|---|
| US-dollar bank account (US$10,050 at 1.36) | 13,668 | |
| Investments, at cost | 13,600 | |
| Gain on sale of investments | 68 |
The C$68 is the gain on the units. No conversion cost or exchange gain is booked, because the bank never converted the money.
A customer's payment lands in the wrong account
A customer owes US$5,000, booked as an invoice of C$6,700 at a rate of 1.34. The payment arrives in the Canadian-dollar account: the bank converted it and credited C$6,750.
| Account | Debit | Credit |
|---|---|---|
| Canadian-dollar bank account | 6,750 | |
| Accounts receivable | 6,700 | |
| Exchange gain | 50 |
The C$50 settles the invoice. Nothing was transferred from the US-dollar account.
Different for you?
- The accounts have been off for several months, or prior-year balances need restating before a T2, T2125 or GST/HST return: the entry method, the cleanup of past transfers and where the exchange differences belong need professional judgment, and rebuilding the accounts is bookkeeping work: bring both accounts' statements and the bank's conversion confirmations. See also catching up on overdue books.
- A US-dollar balance at year end, or a realized gain or loss to record: see foreign exchange gain or loss on a USD account.
- You need to know where exchange gains and losses go on the T2: see foreign exchange gains on a corporate return.
- You sell in US dollars, receive marketplace payouts, or your corporation is considering reporting in US dollars: see US-dollar sales and payouts.
- You are turning on multicurrency in accounting software: see multicurrency before you turn it on.
- Your US-dollar balance sits in a payment platform's wallet: see multi-currency balances in the books.
- Your US-dollar account is at a bank outside Canada: see a US bank account for a Canadian corporation and foreign property and affiliate reporting.
- Your corporation holds US-dollar investments: see adjusted cost base in Canadian dollars.
- You paid a business expense in a foreign currency: see expenses paid in foreign currency.
- You run a Canadian company and a US company: see books for a Canadian company and its US company.
Figures on this page
| Figure | Value | Source |
|---|---|---|
| Annual net foreign-currency gain or loss ignored for an individual Individual other than a trust; applies to net gains or losses from dispositions of foreign currency under subsection 39(1.1) | $200 | Justice Laws: Income Tax Act, section 39 Checked |
| Functional currency election filing deadline Form T1296; available only to corporations that meet Income Tax Act subsection 261(3) | 60 days after the first day of the tax year | Income Tax Act, paragraph 261(3)(b) Checked |
Primary sources
- CRA: Income Tax Folio S5-F4-C1, Income Tax Reporting Currency
- Bank of Canada: Daily exchange rates
- CRA: Interpretation Bulletin IT-95R, Foreign Exchange Gains and Losses (archived)
- Income Tax Act, section 39
- Income Tax Act, section 261
- CRA: Form T123, Election on disposition of Canadian securities
- CRA: Guide T4037, Capital Gains
- CRA: Interpretation Bulletin IT-479R, Transactions in Securities (archived)
- CRA: GST/HST Memorandum 3-6, Conversion of Foreign Currency
- CRA: Functional currency for corporations
- CRA: Expenses section of Form T2125
- CRA: General Index of Financial Information (GIFI)
- Excise Tax Act, section 123 and Schedule V
About this guide
Published by Cloud Accounting under standing professional approval. This version has no separately recorded personal review. It explains general rules for the tax year shown. It is not advice for your situation.
Changes
- : First published.