QuickBooks Canada or US: which file for a two-country business

Do I need one QuickBooks file or two for a business in Canada and the US?

Most businesses keep one file per business, not one per country. A sole proprietor selling into both countries keeps one file and records foreign customers' invoices in their currency. A Canadian corporation and a US corporation or LLC it owns have a file each. Neither country's law names the file: the CRA's record rule applies to every person carrying on a business, and the IRS asks for a complete and separate set of books and records for each business a person owns.

Home currency is the currency a file's reports are in; every other currency is converted into it. Multicurrency is the feature that lets one file hold invoices and bank accounts in other currencies.

The setup stops being simple when a second company is added, when one company has accounts and tax numbers in both countries (a US return is expressed in US dollars, so a Canadian-dollar file must also produce US-dollar figures), or when the books already sit in the wrong file. Per the vendor's help, the home currency cannot be changed once multicurrency is on, so a wrong choice can mean a rebuilt file. Which edition fits each file is the vendor's product question; the file count, home currency and records come first. Before the first entry, have an entity chart, the last filed returns, every account by currency and each entity's tax numbers.

Does where the owner lives pick the file?

No, in either direction. The company picks the file, not the owner's address or the bookkeeper's. A US company owned from Canada gets its own file in US dollars, the currency a US taxpayer generally uses for all income tax determinations. A Canadian corporation owned from the US or abroad keeps a Canadian-dollar file unless it elects; a US person who owns one usually also has US-dollar figures to produce, covered in turning Canadian books into Form 5471 figures.

Which home currency should each file use?

Most businesses use the currency the entity's tax return is prepared in. For a Canadian taxpayer that is Canadian dollars unless a corporation elects otherwise; for a US taxpayer it is generally US dollars.

A Canadian entity that keeps its books in US dollars but has made no election still reports in Canadian dollars. The CRA's folio says a taxpayer whose functional currency for financial accounting is Canadian dollars will not have a functional currency for income tax purposes simply by keeping its books in a qualifying foreign currency (paragraph 1.15), and the Canadian tax results are figured in Canadian currency unless the election applies. Such a file still has to convert every amount to Canadian dollars for the return. For the rate and the entries, see US-dollar sales and marketplace payouts.

Can a Canadian corporation report its tax in US dollars (a functional currency election), and what does that mean for the file?

Yes, if it meets every condition and files Form T1296, signed by an authorized officer and mailed to the CRA, within 60 days after the first day of the tax year (the same date the CRA's page calls the first 61 days of the tax year). The election is open to corporations only; a sole proprietor cannot make it, and a partnership does not elect itself, although a partnership's results for a partner that has elected are computed in that partner's currency (subsection 261(6)). The conditions come from section 261 and the CRA's functional currency page:

• The corporation is resident in Canada throughout the tax year and is not an investment corporation, mortgage investment corporation or mutual fund corporation.
• The currency is a qualifying one: the US dollar, euro, British pound, Japanese yen or Australian dollar.
• That currency is the primary currency in which the corporation keeps its records and books of account for financial reporting, throughout the tax year. The folio calls this a question of fact.
• The corporation has not filed or revoked an earlier election.

For the file, the books must be kept primarily in US dollars, for financial reporting, throughout the first year the election covers. Because that is a question of fact, the file's home currency is the starting point, not the proof. The folio says the condition is generally met where US dollars are the corporation's functional currency for financial accounting purposes (paragraph 1.15). A US-dollar file with no election filed leaves the corporation reporting in Canadian dollars anyway.

On the return, the CRA says to use the standard T2, show the currency on line 079, and enter instalments on line 840 in Canadian dollars. The rest of the return mechanics are in US-dollar sales and marketplace payouts, and exchange gains and losses in foreign exchange gains on a corporate return.

The election covers income tax only. Amounts a corporation withholds for others, such as payroll source deductions, are outside its elected-currency results (paragraph 1.2), and GST/HST is still valued in Canadian dollars. A US-dollar file therefore needs Canadian-dollar figures for those. Because an earlier election, filed or revoked, rules out a new one, the choice is hard to undo: a revocation can be filed only after the first election year and applies to tax years that begin at least six months after it is filed (subsection 261(4)).

Can I change the home currency after I turn on multicurrency?

No. QuickBooks Online's help, in its US and Canadian editions, says that once multicurrency is enabled you can no longer change your home currency; it can be changed only while multicurrency is not yet enabled.

The same pages list two more limits:

• Multicurrency cannot be turned off once it is on.
• An account's currency cannot be changed once a transaction posts to it.

No official source covers these limits, so check the help for your own plan before relying on them. The US page also says the software sets the home currency automatically at setup, so check it before anything is entered. If a file is already locked to the wrong home currency, the usual remedy is a new file started at a clean date with opening balances, which is a decision about filed returns and GST/HST periods. The old file's records must still be kept for at least six years. For turning multicurrency on for a US-dollar bank account, see QuickBooks multicurrency: decide before you turn it on.

What does the Canadian file have to hold for GST/HST and sales to US customers?

It has to hold records that let the GST/HST owed be worked out, including every sale to a US customer, even though most exports carry no tax. The Excise Tax Act requires every person who carries on a business or is engaged in a commercial activity in Canada, files a GST/HST return or claims a rebate to keep records necessary to determine liabilities and obligations.

Exports are generally zero-rated: the CRA says most goods and services are zero-rated when exported. A registrant charges no GST/HST on a zero-rated sale, but it still counts as a sale. Zero-rated sales also count toward the small-supplier limit of C$30,000, so a business whose customers are mostly American can be over it; see when to register for GST/HST. A sale invoiced in US dollars is valued in Canadian dollars for GST/HST on the day the tax is payable, or another day the CRA accepts, whatever the file's home currency.

For the Canadian entity, keep in the file:

• The GST/HST account number and reporting period.
• Separate tax codes for taxable, zero-rated and exempt sales, so a US sale is not left untagged or mixed with Canadian sales. See exempt, zero-rated and out-of-scope.
• The proof behind each zero-rated sale. See charging GST/HST to US customers.
• Supplier invoices that support input tax credits.

Does a cloud file hosted in the US meet the CRA rule that books be kept in Canada?

Not by itself. Records stored outside Canada and opened from Canada are not treated as kept in Canada. The Income Tax Act requires records and books of account at the person's place of business or residence in Canada or another place the Minister designates. The Excise Tax Act adds that, unless the Minister authorizes otherwise, a GST/HST record shall be kept in Canada in English or in French.

The CRA's records page states that rule and adds that the CRA may give permission to keep electronic records outside Canada. Where a software vendor stores the data is a fact about that vendor; find out and keep its written answer with your records.

The CRA says it may accept copies of electronic records kept outside Canada if it is satisfied they are true copies, they are made available to CRA officials in Canada in a format its software can read, and they show enough detail to support the returns filed. Permission is asked for by writing to the tax services office. The CRA page does not say whether a copy kept in Canada, without that permission, meets the rule; take that to a professional before relying on it. Keep records for six years, generally from the end of the last tax year they relate to. The CRA page sets longer periods for some: six years from the filing date for a late-filed income tax return, and indefinitely for long-term property records and the share registry.

What should I decide and gather before the first entry?

The home currency and the file count are the two hardest things to change, so they come before the software. Decide and collect:

Example

These examples are illustrative. Amounts are in Canadian dollars (C$) and US dollars (US$).

Ontario corporation that owns a Delaware LLC

An Ontario corporation owns a Delaware LLC. The corporation's file is in Canadian dollars; the LLC's file is in US dollars. The corporation pays a US$2,000 supplier bill for the LLC in March, and each file records its own side. At month-end, the two intercompany balances are matched in US dollars before anyone compares the Canadian-dollar totals. The matching steps are in the intercompany guide; how each country classifies the LLC is in the LLC guide.

Alberta sole proprietor with US clients

A GST/HST-registered sole proprietor in Alberta earns C$150,000 from Canadian clients and US$40,000 from US clients. There is one person, one business and one Canadian bank account, so there is one file, with Canadian dollars as the home currency. A US$10,000 invoice issued when the Bank of Canada rate is C$1.40 per US$1 stays a US-dollar invoice in the file and books at C$14,000. Canadian sales carry GST or HST at the rate for the place of supply, so a client in Ontario is charged HST and one in Alberta GST; see which rate to charge by province. US sales are coded zero-rated where they meet the export rules, with the proof kept beside the invoice.

Corporation with US$800,000 of revenue considering the US-dollar election

A Canadian-resident corporation has a January 1 year-start and US$800,000 of revenue, mostly from US customers, with most costs and financing also in US dollars, so US dollars are its functional currency for financial accounting. It decides in the prior December to report in US dollars.

• Year 0, the year before. The return stays in Canadian dollars. Tax balances carried forward, such as undepreciated capital cost and loss balances, are converted to US dollars at the Bank of Canada rate for that December 31, and debts owed in Canadian dollars become foreign-currency debts for tax (subsections 261(7) to (10)).
• Year 1, before the first entry. The file is created with US dollars as the home currency before multicurrency is turned on, so the books are in US dollars from January 1.
• Year 1, within the election window. The corporation files Form T1296 by March 2, or March 1 in a leap year. The T2 shows US dollars on line 079, and instalments go on line 840 in Canadian dollars.
• Year 2. The corporation does not file a new election, and the books stay in US dollars. A Year 1 file kept in Canadian dollars would make the books condition harder to show, and a later move to a US-dollar file would mean a rebuild with carried-over balances.

Different for you?

• You have two companies, or one company with customers, bank accounts and tax numbers in both countries, and the books are already in the wrong file or home currency, or a US company is about to be added: which entity's books sit where, the home currency and what to carry over before a file is rebuilt is a structure decision with filed returns behind it. See bookkeeping help, and bring the entity chart, the last filed returns and every account by currency.
• A corporation may elect US-dollar tax reporting, has already filed or revoked an election, is a partner in a partnership, or is amalgamating or winding up with a corporation that reports in another currency (which can change its tax currency without a new election, subsections 261(16) to (17.1)): the conditions are factual and the election is hard to reverse. See corporate tax help, before the tax year starts.
• The balances between the two companies do not agree: see books for a Canadian company and its US company.
• Your US company is an LLC owned from Canada: see books for a US LLC owned by a Canadian.
• You are a US person who owns a Canadian corporation: see turning Canadian books into Form 5471 figures.
• A US bank account for a Canadian corporation: see the US bank account guide for T1135 and the FBAR.
• Your business is only in Canada and you are choosing software: see choosing accounting software for a small Canadian business.
• You are not sure whether you need a cross-border accountant: see when a Canadian business needs a cross-border accountant.
• Investors want consolidated statements after a flip under a Delaware parent: see investor financials after a Delaware flip.