# Accounting for Unrealized Foreign Exchange Gains



## Ann

How does a Canadian corporation account for unrealized foreign exchange gains and losses?

A Canadian corporation receives payment in US dollars and deposits the money to their US$ bank account. They calculate the Canadian dollar equivalent, do their bookkeeping in Canadian dollars and pay taxes accordingly. 

My question pertains to the US dollars that are now in the company’s US$ bank account. Each year the foreign exchange rate changes, does the company pay tax on the foreign exchange gain? Or does the company simply treat it as an “unrealized gain”. Where is this recorded in the company’s accounting records (balance sheet)?

Are there any books or articles that explain this scenario? It's probably Accounting 101. Thanks for your kind help.


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## domelight

Your Balance sheet should be reported in Cdn $ so lets say you have a dec 31 year end, and there's $100 us in the bank and the US dollar is worth 1.10

Then your adjusting entry is Debit the Us Bank $10 and Credit Gain on exchange $10. You can reverse the entry on Jan 1 to bring the bank account balance back in line. You should use bank of Canada rates. 
http://www.bankofcanada.ca/rates/exchange/exchange-rates-in-pdf/

Although it will generally wash out , Correct accounting would require you do this with every US transaction. (A program like quickbooks Multi currency edition is capable of doing this automatically for you) So for example if you incur a $10 service charge on your US bank account, and the exchange rate is 1.10 then you should debit bank service charges $ 1.00 and credit gain on exchange $ 1.00

The benefit of doing things this way is it gives you a more accurate reflection of your true costs. So if you buy product for resale and pay US but then sell in Cdn. You are not getting a true cost of goods picture. If you need to make 50% mark up on your product and your accounting info is telling you numbers in US then your not accounting for the exchange and your actually only making 45% markup (for example) depending on the days exchange rates.


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## Ann

When a Canadian corporation has US$ sitting in a bank account, year after year, it doesn't calculate a tax loss or gain until those US$ are actually converted.

http://www.cra-arc.gc.ca/E/pub/tp/it95r/it95r-e.html
"The Department considers that a taxpayer has "made a gain" or "sustained a loss" in a foreign currency only where there has been a transaction resulting in a gain or loss."


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## domelight

Ann said:


> When a Canadian corporation has US$ sitting in a bank account, year after year, it doesn't calculate a tax loss or gain until those US$ are actually converted.
> 
> http://www.cra-arc.gc.ca/E/pub/tp/it95r/it95r-e.html
> "The Department considers that a taxpayer has "made a gain" or "sustained a loss" in a foreign currency only where there has been a transaction resulting in a gain or loss."


 I would suggest you are misinterpreting. The quote you are referencing is specific to section 13 which is addressing deposits on capital assets which states no transaction has taken place when you place a deposit on capital purchase 
You should be reading section 8 where it states
(b) a taxpayer may record his transactions throughout the year at an average rate of exchange during the year. If either method (a) or (b) above is used by a taxpayer, an adjustment of all accounts to Canadian funds must be made at the end of the year at the prevailing exchange rate at that time.
Additionally section 7 states the same method used for f/s will be the same method for tax provided its in accordance with gaap. Gaap would state all funds are reported in the same currency and the case of foreign currency use the current rate to convert 
And factor any unrealized gains or losses


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## Ann

Most tax jurisdictions in the world say that tax is only payable on realized gains. In that case, the Balance Sheet would include a deferred tax liabilty or asset for unrealized gains/losses.

For example, at year end, the corporation's bank has C$2,000 and US$1,000 and the US/CAD exchange rate is 1.20. For year end accounting purposes, the bank holds C$3,200. That includes C$200 in unrealized f/x gain. On the Balance Sheet, under Liabilities and Equities, show an "Amounts Payable & Accrued Liabilities" equal to C$200. This will bring the Balance Sheet into balance. 

This example is simplified because it doesn't account for the f/x rate at the time when the US$1,000 was first received.


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