Foreign exchange gains and losses: receivables, payables and the capital-versus-income line

Where the gain comes from

A Canadian business reports in Canadian dollars even when it invoices and pays in another currency. That single requirement creates foreign exchange gains and losses out of nothing but the passage of time. Invoice a US customer in June, get paid in September, and if the exchange rate moved between those two dates, you have realised an FX amount that has to be recognised somewhere.

The same applies in reverse on the payables side, and again on any balance held in a foreign-currency bank account. Three different exposures, and they are not all taxed the same way.

Which rate to use

The general rule is the spot rate quoted by the Bank of Canada for the day of the transaction. If the Bank of Canada ordinarily quotes a rate but did not on that particular day, the closest preceding quoted day is used. Where neither currency in the conversion is Canadian, the rate is derived by reference to the Bank of Canada rates for each currency against the Canadian dollar.

CRA will also accept a rate from another source, but only if it meets every condition on a defined list: widely available, verifiable, published by an independent provider on an ongoing basis, recognised by the market, used in accordance with well-accepted business principles, used to prepare the financial statements, and used consistently from year to year. Bloomberg, Thomson Reuters and OANDA are named as examples of acceptable sources. In certain circumstances an average rate over a period may be used instead, which matters for businesses with high transaction volumes. The relevant technical guidance is Income Tax Folio S5-F4-C1.

Receivables and payables: income account

The governing principle is that an FX gain or loss takes the character of the transaction that gave rise to it. A trade receivable arose from selling goods or services in the ordinary course of business, so the FX movement on that receivable is ordinary business income or loss — fully taxable or fully deductible, not half.

Mechanically: record the sale at the rate on the invoice date, record the receipt at the rate on the settlement date, and the difference is an FX gain or loss in the income statement. The same applies to a payable to a foreign supplier. This is why accrual bookkeeping matters more for a business with foreign customers than for a domestic one: the gap between the invoice date and the payment date is where the tax consequence lives.

Loans are a common trap. FX on a borrowing used for business purposes generally follows the income account, while FX on a loan taken on capital account does not. Where a corporation has a shareholder or intercompany balance denominated in a foreign currency, the analysis is fact-specific, and the answer is often not the one the bookkeeping software chose by default.

Holding currency: capital account

Foreign exchange gains or losses arising from capital transactions in foreign currency — that is, from holding the money itself — are treated as capital gains or losses. Simply keeping a US-dollar balance and converting it later is a capital transaction, not a business one.

For individuals there is a de minimis rule: only the amount of the net gain or loss for the year that exceeds $200 has to be reported. Where the net amount is $200 or less, there is no capital gain or loss to report at all. That threshold is a practical relief for people who travel or hold small foreign balances; it does not apply to a corporation, and it does not apply to income-account FX.

Year-end and unrealised amounts

Two questions come up every year end. The first is whether unrealised FX on balances still outstanding at year end is recognised. For accounting purposes, monetary balances are typically retranslated at the closing rate. For tax purposes the treatment does not always follow, and the difference between the two is a reconciling item on the corporate return rather than something to be ignored.

The second is documentation. If CRA reviews the file, the question will be which rate was used and whether it was applied consistently — which is why choosing a rate source and staying with it is worth more than choosing the theoretically optimal one. This sits alongside the other reporting obligations that attach to foreign holdings, notably the T1135 foreign income verification statement where specified foreign property crosses the reporting threshold.

Practical policy for a small business

Set the policy once. Pick a rate source and document it. Record every foreign invoice at the transaction-date rate rather than converting at month end. Reconcile foreign bank accounts in the foreign currency and let the software post the FX difference, rather than reconciling the converted Canadian figure. And keep the income-account and capital-account exposures visibly separate in the chart of accounts, because at year end someone has to tell them apart.

For an exporter, this also connects to the sales-tax side, where the treatment of foreign customers has its own rules — see our guide to GST/HST on exports and non-residents. The two are handled separately, but they arise from the same invoices, and it is efficient to review them together.

This article is general information for Canadian business owners and is current as of July 2026. It is not tax, legal or accounting advice, and it does not create a client relationship. Tax rules change and your situation is unique — please speak with a CPA before acting on anything here.