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 trades in another currency, so time alone creates FX gains and losses. Invoice a US customer in June, get paid in September, and any rate movement between is a realized FX amount to recognize.

Payables work the same way in reverse, as do foreign-currency bank balances: three exposures, not all taxed alike.

Which rate to use

Generally use the Bank of Canada spot rate for the transaction date, or the closest preceding quoted day if none was published. Where neither currency is Canadian, derive the rate from each currency’s Bank of Canada rate against the Canadian dollar.

CRA accepts other sources only if they are widely available, verifiable, published independently and continuously, market-recognized, used under well-accepted business principles, used for the financial statements, and applied consistently each year. Bloomberg, Thomson Reuters and OANDA are named examples. An average rate over a period is sometimes allowed, useful for high volumes. See Income Tax Folio S5-F4-C1.

Receivables and payables: income account

An FX gain or loss takes the character of its underlying transaction. A trade receivable comes from ordinary-course sales, so its FX movement is business income or loss, fully taxable or deductible, not half.

Record the sale at the invoice-date rate and the receipt at the settlement-date rate; the difference is an FX gain or loss. Foreign supplier payables work the same way. That is why accrual bookkeeping matters more with foreign customers: the tax consequence sits between invoice and payment.

Loans are a trap. FX on business-purpose borrowing generally follows income account; on a capital-account loan, it doesn’t. Foreign-currency shareholder or intercompany balances are fact-specific, and the software default is often wrong.

Holding currency: capital account

FX on capital transactions, like holding currency, is capital: keeping US dollars and converting later is not business. So FX losses on trade receivables and payables are fully deductible business losses, while FX losses on simply holding currency are capital losses.

Individuals report only the net gain or loss above $200 for the year; at $200 or less there is nothing to report. That helps travellers and small foreign balances, but not corporations or income-account FX.

Year-end and unrealized amounts

Two year-end questions recur. First, unrealized FX on open balances: accounting usually retranslates monetary balances at the closing rate, but tax may not follow, and the difference is a reconciling item on the corporate return.

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: choose and document a rate source; record foreign invoices at the transaction-date rate, not at month end; reconcile foreign accounts in their own currency and let the software post FX differences; and separate income-account and capital-account exposures in the chart of accounts.

Exporters also face sales-tax rules for foreign customers; see GST/HST on exports and non-residents. They arise from the same invoices, so 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, so please speak with a CPA before acting on anything here.