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Foreign Currency Transactions and Tax Remittance – Assessing the Impact

02/08/2017


Did You Know…

Transactions in other currencies can impact your tax remittance when filing your GST / HST return?

With a constantly shifting technological and global economic landscape, many Canadian companies have transactions (buying or selling) in U.S. dollars or other foreign currencies. Some business find themselves in a reporting challenge because they don’t know how to report GST / HST when they file their GST / HST return to the Canadian Revenue Agency (CRA).

So why does it even matter? Why can’t you just take the exchange rate on the day you file? Well, fluctuations in the value of Canadian currency can significantly impact your net tax remittance when it comes to revenue generated from foreign currencies. If you file on a day where the Canadian dollar is higher in value to the currency exchanged than when you converted it to Canadian dollars, you may find yourself remitting more in tax than is required or obtain fewer input tax credits. The opposite is true if the dollar is lower in value to the currency exchanged than when you converted it to Canadian dollars.

To develop a balance for this, the CRA has guidelines to calculate the exchange for taxes paid on a purchasing invoice, and GST / HST received on a sales invoice in another currency. Consistently following one of these guidelines can save you tax remittance and is important to be able to demonstrate during an audit, potentially saving you penalties and interest.

The acceptable CRA conversion options to compute the GST to the Canadian dollar converted value include conversion on:

  • The day the tax is payable;
  • the day the amount for the supply is paid;
  • the day the foreign currency was acquired; and
  • the average rate of exchange for the month in which tax is payable.

Example:

A registrant makes a taxable supply and issues an invoice in U.S. dollars on May 4, 2017 which reflects US$1 million in HST collectible. The payment of the invoice is received on June 18, 2017. The return is due June 30, 2017 for the May reporting period.

Exchange Chart

If the registrant’s policy was to use the conversion rate on the day the tax was payable, they would have remitted $13,600 more in HST than if it had used the exchange rate on the average rate of exchange for the month in which tax is payable.

Generally, the CRA considers the day the tax is payable is the invoice date. But what happens when your customer later pays in foreign currency and the exchange rate has changed? The Canadian dollars you actually receive may be greater or lesser than the amount you must pay the government. Because of this, we recommend our clients to use the Average Monthly Exchange Rate as posted on the Bank of Canada website for the month in which the invoice is used.

Keep in mind the input tax credits are affected by the same foreign currency exchange policy being used. There can be advantages, overall, from using one method over another to manage the overall net tax impact when transacting in foreign currencies.

Regardless of which route you choose, you must apply this method consistently for a minimum of one year. If after a year, you would like to use a different method, you can begin doing so providing it is one of the approved methods. If a method other than those outlined by the CRA would like to be used, you must make a request in writing to the CRA, which they may or may not approve.

The CRA also provides guideline on acceptable source of foreign exchange to Canadian dollar. A person may only use the rate of exchange from:

  • the source used for an actual conversion (i.e. foreign currency is exchanged for Canadian dollars);
  • the source the person typically uses for actual conversions;
  • a Canadian chartered bank;
  • the Bank of Canada; or
  • the rate provided by the Customs Branch of the Department for purposes of converting the value for duty of imported goods.

As mentioned, it’s important to note that the CRA requires businesses to maintain sufficient documentary evidence regarding the exchange rate on the date of conversion, the method used, and the calculations for the net tax as filed on your GST / HST return.

Relative to the dollars involved, the currency exchange can have a significant impact on your business operations, in addition of having to properly account for the transactions for GST / HST purposes. As a result, it is recommended to use a tax professional to work alongside your team to determine which conversion method best suits your company.

For more information on how to effectively implement strategies that take into account any foreign currencies coming into your business, contact Anny Joshua, CPA, CA at 416.596.1711 or [email protected]​.