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I have some untaxed foreign income from contracts for the first time this year, and I understand that I have to report it converted into CAD using the Bank of Canada exchange rates (I’m using the daily rates). As per your helpful article on filing foreign business income, I also understand that I am to use Form T2125 just like I would for Canadian income.
What I’m not sure about it is whether the FX fees and transfer fees spent in order to convert my foreign income into CAD are considered expenses that should be claimed or not.
Also, do I have to report any gains or losses in terms of how my actual received foreign income in CAD compares to the reported foreign income using the Bank of Canada daily rates? And if so, how do I do this, and do the previously mentioned fees factor into this?
Thank you for your time.
Hi Luke,
Yes, in many cases the FX conversion fees and transfer fees can be claimed as business expenses, provided they were incurred to earn your self-employment income and are reasonable in the circumstances. CRA generally allows reasonable expenses incurred to earn business income, and Form T2125 can be used to report those business expenses.
As for the income itself, you would normally report the foreign business income in Canadian dollars using the Bank of Canada exchange rate applicable on the day the amount arose. CRA also states that foreign income and other foreign amounts, including expenses, should be converted to Canadian dollars.
On your second question, there can sometimes be a foreign exchange gain or loss when the amount you actually receive in CAD differs from the CAD value originally reported for tax purposes because the exchange rate moved between the invoice date, payment date, and conversion date. CRA’s published guidance confirms that foreign exchange gains or losses on foreign currency itself are generally treated as capital gains or losses, with only the net annual amount over $200 needing to be reported.
So, in practical terms:
- report the contract income in CAD using the proper exchange rate
- deduct reasonable transfer / conversion fees as business expenses
- separately consider whether you had a foreign exchange gain or loss on the foreign currency you held before converting it
The fees themselves are generally not the same thing as the FX gain or loss. They are usually just expenses of earning or receiving the income, while the gain or loss comes from the change in exchange rate.
A practical way to track this is to keep a schedule showing:
- invoice date and foreign currency amount
- CAD value using the Bank of Canada rate
- date actually paid
- date converted to CAD
- CAD actually received
- transfer / FX fees paid
That will help determine both the business income reported on Form T2125 and whether there is any separate foreign exchange gain or loss issue.
Because the treatment can get tricky if you hold foreign funds for a while, have many transactions, or mix business and personal accounts, you may want to have an accountant review your ledger before filing.