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taxmanrog
taxmanrog, Certified Public Accountant (CPA)
Category: Canada Tax
Satisfied Customers: 612
Experience:  Licensed CPA, MA, MST with 31 years' experience. Teach Accounting and Tax courses at Masters level.
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I have a question regarding bookkeeping when it comes to

Customer Question

I have a question regarding bookkeeping when it comes to Foreign Exchange Gain/Losses through ecommerce sales.
I am a Canadian corporation, and if I did business in the U.S. as a foreign entity, I would have to record the transaction at the daily exchange rate from U.S. to Canadian funds for Canadian tax reporting purposes. However, whenever Amazon pays me or when C.C. transactions are settled, I receive the fund at later date and different exchange rate, thereby requiring me to realize a foreign exchange gain/loss.
This is insane, especially when it comes to potentially 100's of units sold per day.
How would one efficiently solve this bookkeeping issue? Are there services / software out there that can help?
Thanks.
Submitted: 1 year ago.
Category: Canada Tax
Expert:  taxmanrog replied 1 year ago.

Welcome to Just Answer! Thank you for giving me the opportunity to assist you. I will do my best!

I have over 28 years' international tax experience and I have seen almost everything. Your best answer here is to use the US dollar as your functional currency. Since you are a small business (or appear to be) you do not require GAAP financial statements. You are a Canadian corporation, but you only have to file your income taxes once a year. So the easy answer is to maintain your books in US dollars, and get a bank account that accepts US dollars (they are common). This would save you the exchange rate fees that the credit cards charge, and you would not have daily gains and losses from the transactions. At the end of the year, when you go to fill out your Canadian T-2, you translate all of the items in the income statement and balance sheet at the average annual rate. You will wind up with a translation gain or loss, but it will be a one-time item. You will have a Cumulative Translation Adjustment as part of your retained earnings, but again, this is one-time and on the Canadian books only.

I hope this helps! If you have any more questions, please feel free to ask and I will be happy to answer.

Thanks! Have a great week!

Roger

Customer: replied 1 year ago.

Hi,

Thank you very much for your answer. That makes complete sense.

Are there any other tax complications that I should be aware of operating as a foreign entity in the U.S. under the U.S. - Canada tax treaty?

I plan on having no permanent establishments in the U.S., and thus not subject to U.S. federal income tax; a nexus in the state where I plan to keep inventory (but I will not sell in that state - thus, no sales tax / income tax requirements).

OR

Should I just keep it clean and setup a Wyoming LLC and transfer the dividends to my Canadian company which will act as a holding company?

Expert:  taxmanrog replied 1 year ago.

Let me do a bit of research on this, if I can get back to you tomorrow. The Wyoming LLC would be a disregarded entity. If it were owned by you, as a Canadian individual, it would be ECI, effectively connected income, and taxed in the United States. You would have to file a Form 1040NR. If you simply sell into the US to customers, as you state, you won't have NEXUS in any state. Several are now trying to tax Internet sales, but if you are careful and are able to avoid a PE, you should be OK.

I know that if you elect Corporate status for your LLC (by filing Form 8832) you will have a 5% withholding rate when paying dividends from the US LLC to the Canadian corp. I will have to check, but if you make the election to be treated as a corporation, you may be able to treat the US LLC as a branch for Canadian tax purposes. That could allow you to charge intercompany admin fees, interest, etc., which would be deductible for US tax purposes, but would not be income for Canada.

I will get back to you tomorrow.

Thanks!

Customer: replied 1 year ago.

No problem, thank you. Take the time necessary.

In reference to the second paragraph (electing Corporate status), is this what is referred to as foreign affiliation in the tax code?

If the LLC is treated as a U.S. branch, are there complicated cross-border tax issues involved?

What is the alternative to being a branch, and the tax implications of that?

It would be best to keep cross-border tax issues as simple as possible.

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