Modern businesses are part of a global economy, and as such they have to be ready to do business in a variety of currencies with overseas partners. Even small businesses need to be able to adapt to make and receive payments in a variety of currencies. However, you probably don’t need to open a checking account in South Sudanese pounds, Eastern Caribbean dollars or most of the world’s 180 currencies. However, there are basic currencies you should be ready to deal with and tax consequences that you need to be aware of.
The Most Popular Currencies
As a Canadian small business, the first foreign currency you need to be able to handle is obviously the U.S. dollar. In 2016, the Canadian dollar has traded somewhere near 30 percent below the U.S. dollar, a major change from 2007 and 2008, when the loonie was actually trading above the greenback. If you are selling products and services to Americans, this can have a major positive influence on your bottom line. If you are a purchaser of U.S. goods and services, then it is the other way around.
The United States is by far Canada’s largest trade partner, and Canadian banks normally offer several types of U.S. dollar-based accounts for small businesses that allow you to take advantage of fluctuations and mitigate your risks. In tourist-oriented areas of Canada, it is fairly common to see U.S. dollars accepted as cash payment. If that is your case for your business, keep up with exchange rates to adjust your prices correctly.
The euro, used by the member countries of the European Union, is also a currency you are likely to encounter frequently. In light of the United Kingdom’s June 2016 Brexit vote, small businesses need to be careful how they deal with euros as well as the British pound. Keep yourself up to date and see your bank to find out if any hedging products are available in your line of business.
There are many other currencies that are currently used in international business: the Japanese yen, the Chinese renminbi, the Swiss franc and Australian dollar are all frequent. Depending on where your particular business takes you, make sure you understand the local realities and remain aware of exchange rates.
Tax Consequences of Dealing in Foreign Currencies
In Canada, the rule is that the Canadian dollar has legal tender, and all transactions are presumed to be made in that currency. For tax purposes, it must be used to determine your income tax and related taxes.
Any transactions you make must therefore be converted to Canadian dollars using the Bank of Canada’s official rates at noon on the day of the transaction. This can place a large administrative burden on small businesses with large volumes of small transactions. Recognizing this, the Canada Revenue Agency can accept the use of a reasonable conversion method, such as an average exchange rate for ongoing transactions. Check with the CRA to determine the best method for your particular situation.