Foreign currency expenses: which exchange rate and amount to book

Which amount goes in the books for an expense paid in foreign currency?

Book each expense in your reporting currency (US dollars on a US return, Canadian dollars on a Canadian one), converted at the exchange rate for the day you paid it (or the day it accrued, if you booked it before paying), from one documented rate source used every time. The IRS says to translate foreign-currency expenses at the rate prevailing when you receive, pay or accrue them. The Income Tax Act uses the rate for the day the amount arose.

One purchase leaves three amounts:

Book the converted amount. If the card was charged more or less, post the gap to a card and exchange fees line so the account still matches its statement, and keep both documents. Neither the IRS nor the CRA says which of the two amounts takes priority; what they state is conversion at a documented rate for the day, so this is a bookkeeping method, not a rule.

A case is not simple when foreign spending runs through several cards or accounts, receipts do not tie to statements, staff bring back many receipts, or the business files in both countries. Gather the receipts, card and bank statements, trip dates and purpose, the name of the rate source used, and a short note of what each foreign-language receipt shows (vendor, items, amount).

Which day's exchange rate applies: the purchase, the card posting or the reimbursement?

Use the purchase day, the date on the receipt. Both rules tie the rate to the day the expense was paid or arose. Neither mentions a card's posting date, so use the purchase date for every card.

A supplier invoice paid later is different. The IRS says to use the rate when you "receive, pay, or accrue" the item. For a US business that books the expense before paying, the regulation sets the rate on the date the expense "is accrued or otherwise taken into account", which is not always the invoice date. The rate change by the payment day is then a separate exchange gain or loss (see foreign-currency accounts in US books and exchange gain or loss on a USD account). A US business that deducts expenses when paid converts on the payment day. In Canada the Act uses the day the amount arose, and the CRA folio does not say whether that is the invoice date or the payment date for an unpaid invoice; choose one documented method and apply it every year.

A reimbursement is a later payment in your reporting currency for an expense already incurred. The rules tie the rate to the day the expense was paid or arose, not to a later reimbursement.

If the Bank of Canada quotes no rate for the day (a weekend or holiday), the Income Tax Act uses the closest earlier day that has one. The IRS has no written equivalent; use the same convention in US books and keep to it.

Which exchange rate source do the IRS and CRA accept?

The US accepts any posted rate used consistently. Canada defaults to the Bank of Canada rate and accepts another source only when set conditions are met.

Bank of Canada rates are indicative and published once each business day. Save the rate, its source and its date with each entry.

Can I use a monthly or yearly average rate instead of each day's rate?

For expenses, convert each one at its own day's rate. Averages are narrow exceptions.

• United States: the general rule is the rate on the day you pay. The IRS publishes a yearly average table and accepts "any posted exchange rate that is used consistently", but its pages do not say whether a yearly average is acceptable for each expense. Using each day's rate avoids the question. A regulation allows a rate convention of a quarter-year or less for exchange gain or loss on certain payables and receivables, not for converting an expense paid on the spot; see foreign-currency accounts in US books.
• Canada: the CRA folio says it may accept an average for certain income items, but not generally when exchange rates fluctuate significantly.
• GST/HST: Memorandum 3-6 has its own rules, including a monthly average, for a GST/HST amount stated in foreign currency.

What proof do I need for a foreign receipt with no tax detail?

A receipt is not required to show a tax line to support an income-tax deduction. The sources ask for what was bought, when, where and for how much.

• United States: Publication 463 treats a receipt as ordinarily adequate when it shows the amount, date, place and essential character of the expense. Travel records also need trip dates and business purpose, and amounts you estimate are not deductible. Publication 583 lists account statements, credit card slips and invoices among supporting documents.
• Canada: the CRA says a receipt shows the date, the seller's and buyer's names and addresses, and a full description. The seller's business number is needed only when the seller is a GST/HST registrant (a price threshold applies); an unregistered seller, as many sellers outside Canada are, has none to show. With no receipt, write the details in the expense journal.

Add the foreign amount, currency, rate and rate source to each entry. Keep the receipt, statement and rate record together: generally six years in Canada and 3 years in the US, longer in some cases. For the full receipt rules, see the IRS receipt guide and the CRA receipt guide.

Can I claim GST/HST or a sales tax credit on a foreign purchase?

Only for GST/HST that was paid or became payable. A seller outside Canada often charges none, but check tax paid on importation or self-assessed on a service or software bought from abroad. A foreign VAT or sales tax is not GST/HST. If a foreign seller charged GST/HST under the simplified registration system, a registrant cannot claim it as a credit.

• Canada: an input tax credit arises from GST/HST that became payable or was paid, and needs supporting documents before the return is filed. The CRA says no credit may be claimed where no GST/HST is payable. Tax collected from a registrant by a non-resident supplier under the simplified system is barred from credits and rebates (section 211.17); the CRA says to give that supplier proof of your registration, and the route for tax already charged is a refund or credit from the supplier.
• United States: Publication 334 treats sales tax you pay on a business purchase as part of the cost of what you bought, not as a separate credit. It covers US sales tax and does not address a foreign VAT. A foreign VAT that the country refunds to foreign businesses may change what the trip really cost; raise it before the books are closed.

Whether a business must self-assess GST/HST on a service or software bought from outside Canada (CRA), and can claim a credit on it, depends on registration and how it uses the purchase; see invoices from foreign suppliers.

How do I reimburse an employee for business travel receipts in foreign currency?

Convert each receipt at its own day's rate, pay the total in your reporting currency and keep the employee's records. Neither the IRS nor the CRA sets a rate for a reimbursement claim; the conversion rule above governs the business's expense.

1. The employee lists each receipt: date, place, business purpose, foreign amount and currency, with the receipt attached.
2. The employer converts each line at that receipt's date from its chosen rate source and writes the rate and source on the report.
3. The employer pays the total, and the employee returns any advance not spent.
4. The employer keeps the report, receipts and rate record.

Decide in writing whether staff are repaid at the documented rate or at the amount their card was charged, and apply the same rule to everyone. The tests below turn on the employee's actual expenses, so keep the card statement with the report. For cash bought at a currency exchange, keep the exchange slip.

How do I reimburse myself or an owner for foreign trip costs?

The conversion is the same; the route back to the owner depends on the entity.

A trip that mixes business and personal days splits first; see business travel with personal days.

Is per diem different for foreign travel?

The method is the same; the rate table is not.

• United States: Publication 463 says the Department of State sets per diem rates for foreign areas. For your own deduction, the standard meal allowance covers meals and incidentals only; there is no standard lodging amount, so foreign lodging is the actual cost at the day's rate. The usual 50% meal limit applies to the standard meal allowance.
• United States, employer's per diem: it satisfies adequate accounting only if, among other conditions, it is similar in form to and not more than the federal rate and the employee proves dates, place and purpose. An owner of more than 10% of a corporation's stock is related to the employer and must be able to prove the expenses to the IRS.
• Canada: the CRA asks whether an allowance covers what you reasonably expect the employee to pay and whether you can justify it. Its travel-expenses page gives no foreign per diem rates, so reimburse actual receipts or be ready to justify the allowance. Meals are generally deductible at 50% (Act).

What if the expense came out of a foreign-currency balance or the wrong-currency account?

Book the expense at the converted amount for the day it was paid (or accrued, if you booked the bill first), then settle the difference against the account that paid.

• Paid from a balance in the same currency (a euro bill from a euro balance): the expense is the bill at the day's rate. The balance's own exchange gain or loss is a separate entry, and the IRS notes that the US rule on exchange gains and losses (section 988 can require recognizing it). See foreign-currency accounts in US books and exchange gain or loss on a USD account.
• Paid from an account in another currency (a euro bill paid from a dollar account): the bank converted at its own rate. The amount debited is what left the account. Book the expense as the bill at your documented rate; the difference goes to a bank and exchange fees line so the account matches its statement.
• Paid from a personal account: see business expenses paid personally.

A customer paying you into the wrong-currency account is income, not an expense; see multi-currency balances in the books.

Example

The rates below are round and illustrative, not real quotes.

A Chicago LLC pays a Berlin hotel

The LLC pays a hotel invoice of €300 on May 12 with its business card. The rate source shows 1.10 US dollars per euro that day. The card statement posts US$335.

One workable way to book it: US$330 to travel and the US$5 gap to a card and exchange fees line, so the card account matches the statement. The statement does not say whether the gap is the issuer's rate or a fee, and neither the IRS nor the CRA ranks the statement against the rate. The file holds the invoice, the statement and the rate record.

A Toronto corporation's employee returns from London

The employee brings £1,200 of receipts. Each is converted at the Bank of Canada rate for its own date, and the employee gives the corporation copies of the receipts and the expense report.

The corporation reimburses C$2,210 and keeps the report, receipts and rates.

An Ontario sole proprietor buys software from a US vendor

The invoice is US$800, paid the day it is booked, and the vendor charges no GST/HST, so there is no supplier-charged tax to claim. At 1.40 the expense is C$1,120, before any self-assessed tax. Whether the proprietor must self-assess GST/HST, and can claim a related credit, depends on registration and use; see invoices from foreign suppliers.

Different for you?

• Foreign spending runs through several cards or accounts, or past entries were booked at different amounts (some at the card charge, some converted): the books need one rate method before the return or a reimbursement is prepared; see bookkeeping help.
• A reimbursement or year-end claim has dozens of foreign receipts that do not tie to the statements: convert and tie them out before the claim is paid, with bookkeeping help.
• You operate in both countries and the books and returns disagree: see books for a Canadian company and its US company, books for a US LLC owned by a Canadian and bookkeeping help.
• Your books are months behind: see catching up on overdue books in Canada or in the US, with bookkeeping help.
• The business keeps its books mainly in another country's currency (a foreign branch or office, or a Canadian corporation that elected functional-currency reporting): the IRS lets some such units make their determinations in that currency; see a business abroad's balance sheet. A Canadian corporation can elect to report in the US dollar, euro, pound, yen or Australian dollar, by filing within 60 days after the first day of the year it starts (Act, s. 261(3)); then this page's Canadian-dollar conversion does not apply. See exchange gains on a corporate return.
• A receipt is lost or was never issued: see lost receipts or expenses without receipts in Canada.