Books for a Canadian Company and Its US Company

Do a Canadian company and its US subsidiary or sister company need separate books, bank accounts and returns?

Yes to separate books and, for corporations, separate tax returns: each company is its own taxpayer even when you own both. Canada requires records sufficient to determine taxes, and the IRS calls for a complete and separate set of books for each business, so keep each company's sales, expenses, assets and liabilities in its own ledger. A separate bank account for each is a bookkeeping control rather than a rule in these sources, but it is the simplest way to prove whose money is whose. Income Tax Act, section 230; IRS Publication 583.

A Canadian-resident business corporation files its own T2, even when inactive, plus Quebec's CO-17 or Alberta's AT1 if it had an establishment there; a US domestic corporation generally files Form 1120. Incorporation does not always settle residence: a US corporation managed from Canada can be resident in both countries, and the Canada-US treaty then treats a company created only under US law as resident only in the US, which Canada respects by deeming it non-resident. CRA: Who must file; Revenu Québec: CO-17; Alberta: corporate income tax; Form 1120 instructions; treaty, Article IV(3); Income Tax Act, section 250(5).

A Canadian corporation that owns the US company may also have to file a foreign affiliate return (Form T1134, due 10 months after its year-end). A balance owed to it by a US company that is not its foreign affiliate can instead be foreign property for Form T1135, once its foreign property costs more than C$100,000 in total, unless it is held only for its own active business: see foreign property and affiliate reporting. Income Tax Act, section 233.4; Income Tax Act, section 233.3.

A US LLC keeps its own books even where the US ignores it for income tax (a single-member LLC is generally disregarded unless it elects corporate treatment on Form 8832). The CRA treats a US LLC as a taxable corporation for Canadian tax purposes, whatever its US treatment, so the countries can classify one LLC differently: see Canadian owner of a US LLC. IRS: LLC classification; CRA: IC71-17R6, paragraph 88.

How do I set up matching due-to and due-from accounts?

Create a named receivable and payable for the other company in each ledger. Match the underlying transaction, date and amount in the currency owed; Canadian-dollar and US-dollar ledger totals will not necessarily be equal.

Use a shared reference for each invoice, collection, payment and settlement, and keep a matching schedule (the Example shows one) with the original currency and amount, event date, rate and amount posted in each ledger. Keep loans and ownership investments out of the ordinary collection account, and keep gross receipts and payments when the companies settle a net amount. These account names are practical choices, not CRA or IRS requirements. IRS Publication 583: Recordkeeping.

A customer paid the other company, or only one company has a merchant account: who records the sale?

The company that is the seller under the customer contract and invoice generally records the sale, whichever account received the cash. Who that is depends on who agreed to supply the customer, who invoiced, who bears non-payment and refund risk, and what the companies' written agreement says.

If the other company collects only as the seller's agent, it records cash and an amount owed to the seller, not revenue. If the company that collected invoiced the customer, for example because the other company has no merchant account, it is generally the seller, and its later transfer is not a collection settlement: label it as in the section below and see pricing between your Canadian and US companies.

For an accrual ledger, assume the US company is the seller and the Canadian company collects as its agent:

Reverse the company names when Canada is the seller. If the US seller uses the cash method, receipt by its authorized agent generally counts as the seller's receipt, so it records the sale and the amount due from Canada on the collection date. IRS Publication 538: Constructive receipt. If the US company is a single-member LLC, the return that reports the sale can differ between the countries: see Canadian owner of a US LLC.

Keep fees, refunds and customer taxes separately identifiable; a net payout alone does not establish sales. For payout records, see US-dollar sales and marketplace payouts and, for Form 1099-K, reconciling sales and payouts.

What if one company pays the other's bills or wages?

When one company pays an obligation that belongs to the other, the payer records a receivable from it, and the responsible company records its own cost and an amount owed to the payer. Enter the expense once: the payment shows the cash movement and the supplier document shows what was bought. IRS Publication 583. For example, Canada pays an existing US company supplier bill:

Wages differ because the employer owes payroll deductions. If the Canadian company is the employer and its staff work for the US company, payroll stays in the Canadian ledger and Canada recharges the US company:

If the US company is the employer and Canada only advanced the cash, treat it like the paid bill above; see hiring an employee across the border. For the charge and its documents, see pricing between your Canadian and US companies; for GST/HST on the invoice, see charging GST/HST to US customers.

Which currency and exchange rate should each ledger use?

Keep each ledger in its own country's currency (Canadian dollars for the Canadian company, US dollars for the US company), the default for each country's tax results. Convert each intercompany entry at that day's exchange rate (the spot rate) and keep the original-currency amount beside it.

Canadian tax uses the Bank of Canada's rate for the day an amount arose, unless the CRA accepts another. A corporation resident in Canada can report in a foreign currency only by electing functional-currency reporting on Form T1296 within 60 days after the first day of the tax year, and only if that is a qualifying currency, such as the US dollar, that it mainly keeps its books in; US-dollar books or a US-dollar bank account alone do not change the tax currency. Income Tax Act, section 261; CRA: Functional currency. US-dollar sales and marketplace payouts explains the election. A US company's tax functional currency is generally the US dollar, and US tax uses the spot rate when an item is received, paid or accrued; the IRS accepts any posted rate used consistently. 26 CFR 1.985-1; IRS: Exchange rates.

A book exchange adjustment does not automatically create taxable income or a deduction. CRA Folio S5-F4-C1, paragraphs 1.4–1.6.1.

Is the balance a trade amount, loan, capital contribution or dividend?

Classify a balance from the transaction and its terms, not from the account name. Moving an old payable into equity does not establish a contribution.

Who owns whom changes the label. Between sister companies a balance is normally a trade amount or a loan; money moved with no invoice or repayment terms needs an accountant's review, and a transfer for less than its value can make the receiving company jointly liable for the sender's unpaid tax, up to the shortfall (Income Tax Act, section 160). Between parent and subsidiary, money going down can be a loan or an investment and money coming up can be repayment, a dividend or a return of capital. Money passed through the owner's personal account is a shareholder loan question.

Flag aging balances in both directions, even when the account is labelled trade:

• Owed to the Canadian company. If a non-resident owes a Canadian corporation an amount for more than a year without a reasonable rate of interest, it can have to include deemed interest in income. The ordinary-trade exception needs, among other conditions, that the companies are not related, so assume it is closed for companies under common ownership; amounts owed by a controlled foreign affiliate for its active business have their own exception (subsection 17(8)). Income Tax Act, section 17.
• Owed by the Canadian company. A deductible expense it owes a related company, or another person it does not deal with at arm's length, is added to its income for the next tax year if still unpaid at the end of the second tax year after the expense year. Both companies can instead file an agreement in prescribed form by the filing due date for that next year; it treats the amount as paid and lent back. Income Tax Act, section 78.
• Owed by the US company. It generally cannot deduct accrued interest (even where a treaty exempts it from US tax), or some US-source rents and royalties, owed to a related foreign person until it pays them. 26 CFR 1.267(a)-3.

The pricing guide covers these rules and their exceptions.

What should I reconcile at month-end?

Reconcile each bank account first, then match the intercompany movements and closing balances in their original currencies. Explain each difference with evidence; do not post it to an unexplained expense account.

1. Export both intercompany ledgers through the same cutoff date.
2. Match opening balances to the previous signed-off schedule.
3. Match every invoice, collection, payment and settlement by reference, date and original-currency amount.
4. Investigate missing entries, duplicates, credit notes, fees and transfers in transit; keep each bank's actual transaction date.
5. Show opening balance, gross increases, gross decreases and closing balance for each currency and type of balance.
6. Record approved exchange adjustments separately from the matched amounts.
7. Review overdue items and agree the closing schedule with whoever keeps the other company's books.

Keep the signed-off schedule with the statements and supporting documents so another person can retrace it. IRS Publication 583. A lender that wants consolidated (combined) figures starts from each company's own statements and this schedule; combining them is an accountant's engagement, not covered here.

Where do the balances appear on returns and statements?

A receivable belongs among the creditor's assets and the matching payable among the debtor's liabilities; an ownership contribution follows the investment and equity classification instead.

If the US company is an LLC, do not assume the Form 1120 row applies to it: see Canadian owner of a US LLC. CRA: GIFI; Form 1120 instructions: Schedule L. For the forms that report a year's related-party activity (T106 and Form 5472), see pricing between your Canadian and US companies.

Which records must each company keep, where and for how long?

Keeping both ledgers with one bookkeeper does not replace either company's recordkeeping obligations.

Records stored abroad and accessed electronically from Canada are not kept in Canada, so confirm location and any written permission before relying on foreign hosting. Canadian electronic records must stay readable, and a late return, objection, appeal or CRA retention demand can extend retention. CRA: Record location and retention; Income Tax Act, section 230; Income Tax Regulations, section 5800; IRS Publication 583.

Section 6038A records must generally be kept in the US. They may be kept abroad, for example by a Canadian bookkeeper, if the company can deliver requested records to the IRS within 60 days of the request and translations within 30 days of a request for them, or move them to the US within that same period, with an index and a US custodian, and keep them there. 26 CFR 1.6038A-3(f)–(g); 26 CFR 1.6038A-1. Small-company exceptions are in pricing between your Canadian and US companies, and a foreign-owned single-member LLC's records in its filing guide. State and provincial corporate requirements need a separate check.

Keep customer and supplier invoices, collection instructions, payroll records, bank statements, intercompany agreements, exchange-rate sources, both matching schedules and the approvals for loans and capital movements.

When should I bring in a bookkeeper or cross-border accountant?

A bookkeeper can maintain the monthly match once the seller, payment arrangement and posting policy are clear. An accountant should resolve the structure when those are uncertain, balances become financing, or the books and tax currency differ.

Bring the records listed above plus year-end balances, rate sources and unmatched items, and say who owns each company and which one contracts with customers and employs staff. A matched ledger proves the arithmetic; it does not settle tax classification or the effect of an aging cross-border debt. When a Canadian business needs a cross-border accountant covers what that accountant handles and how the work splits with your bookkeeper.

Example

The US company sells services for US$10,000. The Canadian company collects the invoice solely as agent. Assume accrual books, no customer taxes or fees, that the bank converts the collection to Canadian dollars at once, and no revaluation between the two dates. All numbers and rates are illustrative.

The original-currency balance ties at each step and clears on both sides. Canada's exchange loss explains the extra Canadian cash spent; it is not a customer sale, and the accountant determines its tax treatment. Here the agreement makes the collector owe US$10,000 whatever the rate; who bears rate risk is a term of the agreement, and a collector that bears it is one fact against treating it as only an agent.

Different for you?

• Repeated cross-collections or two-currency differences: use bookkeeping support for the monthly match; bring both ledgers, statements and the unmatched-item list.
• Uncertain seller, employer, LLC classification or aging cross-border funding: use cross-border tax support to review the structure and tax consequences before changing the entries.
• Deciding whether to maintain the books yourself: see the Canadian bookkeeping decision or US bookkeeping decision.
• The balance is with you personally: see shareholder loans.
• Canadian books are months behind: see catching up on overdue books.
• You only need a US bank account for the Canadian corporation: see a US bank account for a Canadian corporation.