Pre-Tax Questions

[misa 2]

Hoping Zyggy sees this!

Here's the dealio... I'm self-employed with my main clients being Canadian. I maintain a Canadian bank account since they pay me in Canadian funds. So I deposit the money in Canada and transfer to my US account through Custom House. I do NOT transfer it right away or in full though since I still have bills to pay Canada. I only transfer some of it every month or so or when needed. I also have a big chunk of the money still sitting there because it's being "saved" for taxes come tax time (I'm putting away 40% btw).

For tax time, when I calculate my income... how do I calculate with the exchange rate? Do I use the Canadian/US exchange rate at the time of filing? When I transferred the money over? Should I transfer the remainder of what's sitting in there ALL over now and then use that exchange rate to calculate my income in USD? Do I actually have to transfer the money over?

Help?

Edited October 19, 2007 by misa

[Emancipation 2]

Here’s my 2 cents on this one: (I’m assuming you are filing US taxes on the income for this year).

While in Canada I worked for a CDN Company who had mostly US clients. We always invoiced in USD but received funds in CDN dollars from our USD bank account. Accounting wise it should be the same principle I’m figuring though just in reverse. Note it’s not a self-employed situation, but the converting of invoicing should be similar in my thinking.

Since your business is based in the US the accounting will be done in US funds no?

Therefore you would invoice your CDN customers in CDN dollars and create (based on the date of the original invoice) a US equivalent Invoice based on the date of the invoice's exchange rate for your records/accounting software(for your records and piece of mind tie a copy of the CDN invoice and the rate of exchange for that day to the new USD invoice). I often used http://www.bank-banque-canada.ca/en/rates/converter.html but it is essential that you use the CASH rate not the nominal rate because no bank will ever give you the nominal rate.

Then when you receive the monies for the transaction and transfer them into your US account - you will have a difference in the exchange on the day of the invoice vs. the exchange on the day of the funds being received. This difference is to be put in an exchange gain or loss account (singular account), which probably this year will be a loss account because of the low USD.

But this would keep all your income in USD and then at tax time you won’t have to be bothered with tax conversions etc. and all your income would be recorded in USD.

Now how all that is affected if you leave some funds in the CDN account and never transfer them to the US account.. I'm not sure on that one.. cause we always transferred as soon as the rates looked okay (always within a couple of weeks).

Not an accountant.. but those are my thoughts and experience from past employment!

[misa 2]

Ah, okay, very helpful. So now what do I do about the already invoiced and paid amounts? Should I go back and see if I can find the cash rates at the time of invoice? I only have like 14 invoice dates so far, so there's really not that many to go back and look for rates.

And yup, filing U.S. income this year. Well and Canadian since I was resident in Canada earlier this year.

Now the gain/loss part will have me stumped since I left a bulk of it in Canada... hrm...

It would have been MUCH easier if U.S. banks easily accepted Canadian cheques without hassles or fees...

I need an accountant!

Edited October 19, 2007 by misa

[trailmix 77]

Hoping Zyggy sees this!

Here's the dealio... I'm self-employed with my main clients being Canadian. I maintain a Canadian bank account since they pay me in Canadian funds. So I deposit the money in Canada and transfer to my US account through Custom House. I do NOT transfer it right away or in full though since I still have bills to pay Canada. I only transfer some of it every month or so or when needed. I also have a big chunk of the money still sitting there because it's being "saved" for taxes come tax time (I'm putting away 40% btw).

For tax time, when I calculate my income... how do I calculate with the exchange rate? Do I use the Canadian/US exchange rate at the time of filing? When I transferred the money over? Should I transfer the remainder of what's sitting in there ALL over now and then use that exchange rate to calculate my income in USD? Do I actually have to transfer the money over?

Help?

When I did my tax return and did the coversion they did have a link to the federal reserve to look at the exchange rate to use.

From what I read they don't seem to mind which one you use but probably appreciate if it is consistent.

Anyway I found this page on small business and down at the bottom it gives links to different exchange rate sites etc - if you decide to maybe use one of them for the cash that is still in Canada. I can't see any reason why you would be required to transfer the money over if you don't want to.

IRS Page - Foreign Currency and Currency Exchange Rates

[Emancipation 2]

Ah, okay, very helpful. So now what do I do about the already invoiced and paid amounts? Should I go back and see if I can find the cash rates at the time of invoice? I only have like 14 invoice dates so far, so there's really not that many to go back and look for rates.

And yup, filing U.S. income this year. Well and Canadian since I was resident in Canada earlier this year.

Now the gain/loss part will have me stumped since I left a bulk of it in Canada... hrm...

It would have been MUCH easier if U.S. banks easily accepted Canadian cheques without hassles or fees...

I need an accountant!

Misa,

it really shouldn't cost very much to have an appointment with an accountant in the US just to make sure sure that you are on the right track with your invoicing.. and to pick his or her brain about the gain/loss bit.. It might be worth the cost to have peace of mind..

[misa 2]

When I did my tax return and did the coversion they did have a link to the federal reserve to look at the exchange rate to use.

From what I read they don't seem to mind which one you use but probably appreciate if it is consistent.

Anyway I found this page on small business and down at the bottom it gives links to different exchange rate sites etc - if you decide to maybe use one of them for the cash that is still in Canada. I can't see any reason why you would be required to transfer the money over if you don't want to.

IRS Page - Foreign Currency and Currency Exchange Rates

THANK YOU! I'll be reading up on self-employment and small businesses with the IRS next week and will check out your linked page too. Yeah, I don't really want to transfer all the money over since I still have big bucks to pay back for my Canadian student loans. Doesn't make sense to me to have to transfer it to the US and then back to Canada.

I'm a few months early on this stuff but I want to be prepared since I'm clueless with IRS stuff.

If I'm reading this correctly I should use the exchange rate on the date of payment regardless of whether I transferred it or not... yes?

it really shouldn't cost very much to have an appointment with an accountant in the US just to make sure sure that you are on the right track with your invoicing.. and to pick his or her brain about the gain/loss bit.. It might be worth the cost to have peace of mind..

Oh I definitely will! In the meantime I'd better go back and track down exchange rates.

[trailmix 77]

If I'm reading this correctly I should use the exchange rate on the date of payment regardless of whether I transferred it or not... yes?

That's how I read it too

[Vox 0]

Hi Misa,

I am in the exact same shoes as you are

Please post what you find out, I have not even started thinking about next year tax because I know it is gonna be a long and messy project. Just taking a break after receiving my GC.

Thanks!

Vox