Get Paid by US Clients Through a Canadian Corporation: USD Books

How do you get paid by a US client through a Canadian corporation?

A Canadian corporation gets paid by a US client when the corporation itself signs the contract, sends the invoice and receives the money, and then records each step in Canadian dollars. Canadian tax results are worked out in Canadian dollars, with each foreign amount converted at the Bank of Canada rate for the day it arises (Income Tax Act, s. 261; CRA folio S5-F4-C1). Invoicing in US dollars does not change that.

The order of work:

1. The contract, invoice, bank account and tax form all name the corporation.
2. The invoice describes the services and, if the corporation is registered, shows no GST/HST only when the sale qualifies as zero-rated (GST/HST applies at zero).
3. The books record the invoice as a sale and a receivable (money the client still owes) in Canadian dollars, with the US-dollar amount beside it.
4. When the payment lands, the receivable is cleared, bank charges are booked and any exchange difference is booked apart from the sale.
5. At year end the sales ledger becomes the revenue on the T2, and a registered corporation files its GST/HST returns.

A case stops being simple when:

• the first invoice has not gone out, so the currency, the bank account and GST/HST registration are still open, and the deadline to elect US-dollar reporting, which runs from the start of the tax year, may already have passed;
• sales pass the GST/HST small-supplier limit, so registration and returns can follow even though no tax is charged;
• the service is one the export rules exclude, such as work on property in Canada;
• the owner, not the corporation, is named on the contract, invoice or bank account;
• the client withheld US tax or sent an information return;
• US dollars sit in a US-dollar account or processor balance at year end;
• the books are already behind.

Gather the signed contract, every invoice, bank and processor statements, the client's legal name and address with a signed residence declaration, the corporation's business number and GST/HST status, its year-end date, and the dates of the first invoice and first expected payment.

What goes on an invoice to a US client?

Put the corporation's full legal name, the client's full legal name and address, a date and number, a plain description of the services, the amount with its currency, and payment terms on every invoice. A corporation under the Canada Business Corporations Act must set out its name in legible characters on its invoices (CBCA, s. 10); keep "Inc.", "Corp." or "Ltd." as registered.

Do I charge GST/HST to a US client, and what record shows why not?

A Canadian corporation usually charges a US client no GST/HST, because a service supplied to a non-resident is zero-rated (GST/HST applies at zero), unless an exclusion catches it. A supplier does not charge GST/HST on services it performs wholly outside Canada (CRA: imports and exports). Work done in Canada for a non-resident is zero-rated under Schedule VI of the Excise Tax Act, and both kinds of sale count toward the small-supplier limit below.

Which rule applies depends on the kind of service. Advisory, professional and consulting services fall under section 23; most other services to a non-resident fall under section 7 (Schedule VI, Part V; CRA Memorandum 4.5.3). Both exclude, among other things, work on real property or tangible personal property in Canada and acting as an agent or soliciting orders. Section 7 also excludes a service made to an individual who is in Canada when in contact with the supplier, and a service rendered to an individual while in Canada even when a US company is the customer, such as management training for its staff in Canada. If your work touches any of these, GST/HST may apply: see charging GST/HST to US customers, which lists the exclusions and the proof that supports zero-rating.

The customer is the party that contracted for the service (Memorandum 4.5.1). The proof that supports the zero rate is described under "What proves each client is a US resident" below. These are federal rules; Quebec's QST and provincial sales taxes have their own. Zero-rated sales are still taxable supplies, which matters for registration below. If a service treated as zero-rated turns out to be taxable, the corporation may owe the tax it did not charge. If a corporation fails to remit net tax, its directors may also be liable under section 323, subject to collection conditions and a due-diligence defence; the CRA must assess a director within two years after that person last left office.

Which currency should I invoice in, and does it change my T2?

Invoicing in US dollars does not change the T2: the corporation reports in Canadian dollars unless it elects to report in US dollars (the CRA calls this a functional currency). The choice is about who carries the exchange risk and how the books are kept. The table assumes Canadian-dollar reporting; a corporation that elects US-dollar reporting instead translates Canadian-dollar invoices and payments into US dollars and can have an exchange difference on them.

A Canadian-resident corporation that meets the CRA's conditions can instead elect to report in US dollars by filing Form T1296, signed by an authorized officer, no later than 60 days after the first day of the tax year (the CRA's page words the same window as the first 61 days). The election then carries into later years and can be revoked only after the first US-dollar year, so it is hard to undo (CRA: functional currency; Income Tax Act, s. 261). The window runs from the first day of the tax year and is short, so an existing corporation may already have missed it for this year; decide before the books start. The guide on US-dollar sales covers the conditions, which rates are allowed, year-end balances and US-dollar books.

Whose name goes on the contract, invoice, bank account and Form W-8BEN-E?

Put the corporation's legal name on all four: the contract, the invoice, the bank account and Form W-8BEN-E. A corporation is a separate legal entity that enters into contracts and owns property in its own name, apart from its owners (CRA: corporation). Work billed in the owner's name can be the owner's income rather than the corporation's, and fixing that afterwards is a question for a professional.

• Contract and invoice: the corporation's legal name, as above.
• Bank account: an account in the corporation's name, so the client's payment and the corporation's books agree. If the sale is the corporation's but the money lands in a personal account, the books show the owner holding the corporation's money: the owner owes it to the corporation, or it repays what the corporation owed the owner. An amount still owing can be added to the owner's income if it is not repaid in time (Income Tax Act, s. 15(2)). See corporate income in a personal account and the shareholder loan account.
• Form W-8BEN-E: the entity form a foreign corporation gives to the payer, not the IRS; individuals use Form W-8BEN instead (IRS instructions). A US client that asks for the form and does not get it may withhold tax at 30%. The place where services are performed generally decides their source, so fees for work done in Canada are generally not US-source; work done in the US changes that (IRS: personal service income). Completing the form is covered in W-forms for a Canadian corporation.

Whether to incorporate at all, and the personal services business rules, are in incorporating to contract for US clients.

Where should the US dollars land?

Have the US dollars land in a bank account in the corporation's name; the kind of account decides how much conversion the books must show.

Moving money between a US-dollar and a Canadian-dollar account of the same corporation is a transfer, not income: see transfers between CAD and USD accounts. The exchange difference on a held US-dollar balance is in foreign exchange gain or loss on a US-dollar account.

How do I record a US-dollar invoice before the money arrives?

Record a sale and an accounts receivable, both in Canadian dollars at the Bank of Canada rate for the invoice day, and keep the US-dollar amount on the same line. The relevant rate is the one the Bank of Canada quotes for the day, or for the closest earlier day when it quotes none (Income Tax Act, s. 261; Bank of Canada daily rates).

The entry has two lines: debit accounts receivable and credit sales, for the same Canadian-dollar amount. The folio does not say when an amount arises for a sale on credit; books usually use the invoice day, and the sale then keeps that rate whatever the exchange rate does later, though an invoice still unpaid at year end may need a separate exchange adjustment. If the work is done in a different period from the invoice, check which day applies. Other rate sources are allowed on conditions; see the US-dollar sales guide.

How do I record the payment, and what is the exchange difference?

Clear the receivable at its Canadian-dollar carrying amount (the invoice amount, unless a year-end exchange adjustment was booked on it), put the money in the bank at its Canadian-dollar value on the payment day, and book the gap as a foreign exchange gain or loss. The gap is not revenue and the sale does not change.

• US-dollar account: value the deposit at the Bank of Canada rate for the day it arrives.
• Canadian-dollar account: use the Canadian dollars actually credited.

Whether the gap is taxed as income or as a capital gain or loss depends on what produced it. For a business's own sales receivable it is generally income; the CRA's older bulletin IT-95R points that way, though it speaks of goods, is archived and is no longer updated (IT-95R, archived). On the T2's income statement schedule (Schedule 125), each line has a number from the CRA's General Index of Financial Information (GIFI), the standard account list for T2 returns, and the index puts "Foreign exchange gains/losses" at 8231. For an invoice open at year end, and how the gap is reported and taxed, see foreign exchange gain or loss on a US-dollar account.

Why is the deposit smaller than the invoice?

The invoice is the sale; the deposit is what is left after deductions on the way. Book the invoice in full and explain the shortfall line by line.

Revenue stays at the invoice amount in every case. A shortfall bigger than a bank fee is a reason to check for withholding and ask the client for its payment notice, which shows what it paid and what it held back, before booking it as a cost.

How do twelve months of income from US customers add up to revenue on the T2?

Each invoice is converted at its own day's rate, and the twelve months of Canadian-dollar lines add up to sales on Schedule 125 (GIFI 8000, "Trade sales of goods and services"). The T2 is due six months after the tax year ends, even if no tax is owed (CRA: corporation).

The total is neither of these:

• The bank deposits. They are net of fees and carry exchange differences.
• The year's US dollars times one rate. The CRA may accept an average rate for some income items but generally not where rates fluctuate significantly (folio, para. 1.6.1).

Each month, tie three things together: the invoice list (US dollars, rate, Canadian dollars), the sales ledger, and the bank or processor statement. Exchange differences and bank charges sit on their own lines, not inside sales.

What proves each client is a US resident, and how long do I keep it?

A dated, signed statement from the client that it is not resident in Canada, effective on the day of the supply, is the CRA's sample proof. The supplier decides and keeps the evidence; the CRA's memorandum gives a sample certification for a non-resident other than an individual, signed by an authorized individual who also agrees to report a change in residence (Memorandum 4.5.1). The CRA says it will consider other documentation too. A US client with a permanent establishment in Canada is treated as resident in Canada for activities carried on through it (Excise Tax Act, s. 132(2)), so a US address and a residence statement do not settle work that serves that establishment; check it against charging GST/HST to US customers.

Keep with each client:

• the signed contract naming the contracting party;
• the signed residence statement, replaced when the client's status changes;
• every invoice sent to that client.

Keep records for 6 years from the end of the year they relate to, and longer if the CRA asks for invoices (CRA: GST/HST records). Records belong at a place of business or residence in Canada unless the CRA gives written permission; electronic records held abroad but opened from Canada do not count as kept in Canada (CRA: where to keep records).

Do I have to register for GST/HST even if I charge none?

A corporation that is no longer a small supplier must register for GST/HST once it makes a taxable supply in Canada, even if every customer is outside Canada and it charges no tax (Excise Tax Act, s. 240(1)). A service performed in whole or in part in Canada is generally a supply made in Canada, zero-rated or not; one performed wholly outside Canada is generally made outside Canada, so it counts toward the limit but does not by itself require registration (s. 142). Zero-rated sales count toward the small-supplier limit of C$30,000. The test counts the consideration for taxable supplies made inside or outside Canada, including by associated businesses, that became due or was paid in one calendar quarter, or in the four quarters before it (Excise Tax Act, s. 148; CRA: when to register). A corporation whose only customers are in the US can pass that limit with one client.

Once registered, the corporation files a return for each reporting period even when it has no tax to remit (CRA: reporting requirements). The deadline is 1 month after a monthly or quarterly period ends and 3 months after the fiscal year-end for most annual filers. A registrant can claim input tax credits for GST/HST paid on purchases and expenses related to these zero-rated services (CRA: imports and exports); the conditions are in charging GST/HST to US customers. For the steps, see when to register and filing GST/HST.

Example

Amounts are illustrative. Rates are Canadian dollars per US dollar.

A first US client pushes sales over the limit

A Toronto software corporation with no other sales invoices a Texas company US$8,000 on the first of each month for work done in Toronto, payable on receipt. Each invoice is converted at its own day's rate:

That is over C$30,000 in one quarter, so on these numbers alone the corporation would have to register for GST/HST, effective no later than the March 1 invoice that took it past the limit. It still charges no GST/HST on the invoices, assuming no exclusion applies, and it files returns for each period. Sales on Schedule 125 are the sum of the Canadian-dollar column, not US$24,000 times one rate.

The rate moves between invoice and payment

On March 1 a corporation invoices US$10,000 when the Bank of Canada rate is 1.40, and records sales and a receivable of C$14,000. The client pays on April 5 when the rate is 1.36, so the US$10,000 is worth C$13,600. Assume no year-end falls between the two dates.

Sales stay at C$14,000. The C$400 is an exchange loss, shown apart from revenue.

The deposit is short

A new corporation's first invoice is US$2,500, and the client's payment arrives as US$2,470 after a US$30 wire cost. Take the rate as 1.35 on both days. Sales are C$3,375, the bank receives C$3,334.50 and bank charges are C$40.50. Revenue is the invoice amount, not the deposit.

Different for you?

• You signed a US client and nothing is set up yet, or a year of US-dollar entries is waiting for the T2: the currency choice, GST/HST registration, the invoice template and the monthly books are best settled before the first invoice or the year-end return, and the US-dollar election deadline follows the start of the tax year, so check it now; a professional can set them up through bookkeeping help.
• Your books are behind, invoices went out in the wrong name or currency, or client payments went to a personal account: see catching up on overdue books, corporate income in a personal account and the shareholder loan account; a professional can rebuild the books through catch-up bookkeeping.
• You passed the small-supplier limit without registering: see when to register for GST/HST; missed returns and back-dated registration are the kind of case a professional reviews, for example through the bookkeeping service.
• US dollars sit in a US-dollar account or processor balance at year end: see foreign exchange gain or loss on a US-dollar account and US-dollar sales and payouts; settle how the balance is valued before the year closes.
• Your work is on property in Canada, the person receiving it is an individual in Canada, or you license software or ship goods: different GST/HST rules can apply; see charging GST/HST to US customers and royalties and licence fees from US customers.
• The client withheld tax, sent a 1099-NEC or asks for a W-9, or the corporation works in the US or may owe a US return: see US tax withheld on payments to Canadians, W-forms for a Canadian corporation and Canadian corporation US tax return. Two-country questions like these go through cross-border tax help.
• An owner is a US citizen or green card holder: a US information return may draw on the corporation's books; see Form 5471 for a Canadian corporation.
• You are a sole proprietor, or deciding whether to incorporate: see freelancer paid in US dollars and incorporating to contract for US clients.