Buying inventory in USD: cost and exchange rate in CAD books

What cost goes in my inventory when I buy in US dollars?

Stock bought in US dollars goes into your books at its landed cost in Canadian dollars: the supplier's price converted to Canadian dollars, plus what you spent to get the goods to your business and ready to sell (CRA on cost), leaving out any GST/HST you claim back. Canadian tax results are worked out in Canadian currency, with each foreign-currency amount converted at the spot rate for the day it arose (Income Tax Act, s. 261). The CRA does not say which event in a purchase is that day (see the date section). A corporation that elected to report in a functional currency, such as the US dollar, is the exception; see US-dollar sales and payouts.

A case stops being simple when:

• You import in several shipments a month, so one product carries several Canadian-dollar costs.
• A broker or courier invoice mixes duty, GST and its own fee.
• A shipment is in transit at year end.
• Your software's margins do not match your selling prices (it may hold the US-dollar price as Canadian dollars).
• Your year-end stock figure is an estimate, not a count tied to shipment costs.
• Past years' cost of goods sold was built on any of the above.

Any of these can make the cost per item wrong, which flows into cost of goods sold and gross profit.

Gather for each shipment: the supplier invoice, any freight invoice, the broker or courier invoice, the customs statement and the bank record of the payment.

Which exchange rate converts a US-dollar purchase to Canadian dollars?

For income tax, use the Bank of Canada rate for the day the amount arises. The CRA's currency folio points to the rate the Bank quotes that day, and to the closest earlier day with a quoted rate when there is none, such as a weekend or holiday.

Another published rate is accepted only if it meets every condition the folio lists (see US-dollar sales and payouts), including that you use it for your financial statements and consistently from year to year; the Bank of Canada rate is the simple choice. The CRA may accept an average over a period to convert certain income items, but generally not when exchange rates fluctuate significantly, so a monthly or yearly average is not a safe default for stock bought while the rate is moving.

The Bank of Canada calls its published rates indicative rates only.

Which date's rate: the invoice, the shipment, the delivery or the payment?

The rule is the rate for the day the amount arose (Income Tax Act, s. 261(2)). The CRA's currency folio does not say which event in a purchase that day is, and the Act gives no choice between dates, so the date follows from your purchase terms. Each candidate date records something different:

Work out from the purchase terms (price, shipping terms, when the goods become yours) which event fixes the amount, apply it to every shipment on the same terms, and keep the document that proves it. A written, consistent rule is easier to explain than a date chosen for its rate, but consistency alone does not make a date correct.

Get advice before you file if the rate moved a lot between two of these dates, if you pay deposits and balances on different days, or if a shipment sits across year end and it is unclear whether the stock was yours yet and which year the purchase belongs to.

Do freight, brokerage and customs duty belong in the cost of what I buy?

Yes, the costs of getting the stock to you and ready to sell belong in its cost. The CRA's guide says the cost of goods bought to resell includes delivery, freight and express charges. The CRA's archived inventory bulletin also lists customs and excise duties and other acquisition costs.

A broker or courier invoice often shows duty, GST and a fee together. Split them before you book it; the import GST guide shows how.

I paid GST at the border: does it go in the inventory cost?

Not if you claim it back as an input tax credit (the GST/HST credit a registrant takes against the tax it owes). Otherwise it generally stays in cost.

A purchase on which the GST/HST became payable before the Quick Method election took effect can still earn an input tax credit if the claim time limit has not expired (CRA: RC4058); leave the recovered tax out of cost, and check the time limit in the import GST guide before putting it in.

Under the Income Tax Act, s. 248(16), an input tax credit you claim is treated as government assistance in respect of the property. The CRA's T2125 instructions leave GST/HST out of cost of goods sold when it has been remitted or an input tax credit claimed, and include the GST/HST paid or payable under the Quick Method. They do not spell out the unregistered case for inventory; the last row is a reading of that note, so ask before you file if it is yours.

Border GST is calculated on the Canadian-dollar value of the goods, including duty, not on your book cost. Who can claim it, and what proof supports the claim, belongs to the import GST guide.

Why does the customs rate or total differ from the rate in my books?

Because customs picks the rate by shipment date and builds its value by its own formula. The Canada Border Services Agency (CBSA) requires the value for duty (the Canadian-dollar value customs charges duty on) to be declared in Canadian dollars, using the Bank of Canada rate prevailing on the date of direct shipment, the date the goods began their journey to Canada (CBSA). The regulations use the rate communicated to ports of entry. Your books use the rate for the day the amount arose.

The CBSA starts from the price paid or payable and adds or deducts set items, so its Canadian-dollar total is not your landed cost. A value for duty must be declared even when no duty is owed, so the border paper shows a Canadian-dollar total either way.

The customs paper and the books answer different questions, so they need not match. Duty and GST are charged in Canadian dollars and appear on the customs statement; the supplier's price is converted at the rate for the day the amount arose.

How do I value inventory at year end in Canadian dollars?

Count the stock and value it in Canadian dollars by one method, used the same way every year. The Income Tax Act values inventory at the lower of cost and fair market value at year end, or in a prescribed manner, and the regulations allow all inventory at fair market value; a corporation follows the same rules. An adventure or concern in the nature of trade values inventory at cost only (s. 10(1.01)); ask if you resell stock only occasionally. Counting and valuing the stock is covered in cost of goods sold for a sole proprietor.

In general, each shipment keeps the Canadian-dollar cost it was booked at, since s. 261 converts an amount at the rate for the day it arose; the year-end rate does not restate stock you already bought. The CRA sources read do not say how to convert a US-dollar replacement price used to test fair market value, so ask before you file if that applies.

The CRA's archived inventory bulletin says goods in transit are in your inventory or not according to whether you have title to them. Title depends on your purchase terms, so gather the supplier invoice, its shipping terms and the bill of lading for each shipment afloat on the last day of the year; if title is unclear, bring in a professional.

When shipments arrived at different rates, one product has several Canadian-dollar costs, and a cost-flow method decides which cost leaves with each sale. First-in first-out charges the oldest shipment's cost to sales first; average cost blends all shipments. The same bulletin, which the CRA no longer updates, lists specific item, average cost and first-in first-out as the methods most commonly used and does not accept last-in first-out.

A year-end figure that is an estimate, not a count tied to shipment costs, is the point to bring in a professional.

Why do my margins look wrong when the purchase price is in the wrong currency?

One common cause is a US-dollar price stored as if it were Canadian dollars. That understates the cost by the whole exchange gap, so margin and gross profit come out too high. Because the CRA has a sole proprietor claim the cost of goods in the period in which they are sold, a wrong cost per item flows into every sale and the closing inventory.

Test one item before you trust any report. Its stored cost in Canadian dollars should equal the US-dollar price times the rate, plus freight, duty and other landed costs. If it equals the US-dollar price, nothing was converted. Some systems keep item cost in one currency only; check how yours treats a foreign-currency cost, as described in multicurrency setup.

To fix it:

1. List every item whose stored cost equals the US-dollar price.
2. Rebuild each cost from its shipment file.
3. Correct stock on hand, and adjust cost of goods sold for units sold in the open year.
4. If a filed year used the wrong cost, stop and get help: see catching up on overdue books.

What records do I keep for each US-dollar shipment?

Keep one file per shipment that shows how the Canadian-dollar cost was built. The CBSA says the burden of proof lies with the importer, and lists commercial invoices, agreements, cost allocation schedules and proofs of payment as support.

Generally keep these for six years from the end of the last tax year they relate to, or from the filing date if the income tax return was filed late; an objection or appeal, or an unfiled return, can mean keeping them longer (CRA). An importer keeps customs valuation records for six years following the importation of the goods (CBSA). For the proof the CRA expects on foreign supplier invoices, see invoices from foreign suppliers.

Example

These examples are illustrative, with round figures in Canadian dollars (C$) and US dollars (US$).

Calgary online retailer, one shipment

A registered retailer buys US$20,000 of stock at a rate of 1.40, so the supplier's price is C$28,000. Freight of C$1,400 and duty of C$1,200 add to cost, making landed cost C$30,600. The GST paid at the border is claimed back as an input tax credit, so it stays out of the cost.

Winnipeg wholesaler, wrong currency

An item costs US$4 and sells for C$8. Booked as C$4, the margin looks like 50%. At a rate of 1.40 the cost is C$5.60, so the true margin is C$2.40, or 30%. Every unit sold overstates gross profit until the cost is fixed.

Vancouver importer, two shipments at different rates

Two shipments of 100 units, each at US$10: the first converts at 1.35 (C$13.50 each), the second at 1.45 (C$14.50 each). After both shipments arrive, the business sells 150 units.

• First-in first-out: 100 x C$13.50 + 50 x C$14.50 = C$2,075 cost of goods sold, and C$725 in closing stock.
• Average cost: C$2,800 / 200 = C$14.00 each, so C$2,100 sold and C$700 in closing stock.

Both methods account for the same C$2,800; the chosen one is then used every year.

Different for you?

• You import stock in several shipments, your margins do not match your selling prices, or your year-end inventory figure is a guess: the cost build, the rate rule and the count can each need a professional's judgment. Bring the shipment files to bookkeeping help.
• Past years' cost of goods sold may have been built on the wrong cost: see catching up on overdue books and bring those years to bookkeeping help.
• The rate moved before you paid, or you pay suppliers from a US-dollar account: see exchange gain or loss.
• You paid GST or duty at the border, a broker invoice mixes them, or you never claimed border GST: follow the import GST guide, which covers how far back a missed claim can go; if it was coded but never claimed or split, bring the shipment files to bookkeeping help.
• You are a sole proprietor filling in the T2125: use cost of goods sold for a sole proprietor.
• You also sell or get paid in US dollars, or a corporation is considering a US-dollar functional currency: see US-dollar sales and payouts.
• You ship goods to US customers: see tariffs and duties on goods shipped to US customers.