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A. Godin (613) 995-2455
March 4, 1986
Dear Sirs:
Re: Conversion of U.S. Source Income
We are writing in response to your letter of February 4, 1986, wherein you asked us to address the following questions:
1. Whether corporations with a December 31, 1985 year end can use the 1.3475 rate to convert U.S. source income into Canadian funds, and
2. Whether Revenue Canada furnishes average annual or monthly exchange rates for corporations with fiscal year ends other than December 31, and whether companies can use the average of the twelve monthly rates to convert its U.S. source income?
We shall address your questions in the order posed.
1. In your first question, you have referred to the 1.3475 conversion rate supplied by our Department. This rate is an average rate for converting U.S. funds into Canadian dollars. It was determined to be used only in special circumstances primarily where a taxpayer has received during the year regular payments (weekly or monthly payments of salary or other income) and has not maintained a record of the Canadian dollar equivalents of those amounts. The rate was not intended to be used indiscriminately in all situations requiring a conversion of U.S. source funds. Generally, transactions on income account should be recorded according to Generally Accepted Accounting Principles, i.e. in the Canadian dollar equivalent determined according to the rate of exchange prevailing at the time of the transactions. As explained in IT-95R , paragraph 8, however, the Department recognizes that this is not always practical. It will therefore accept the recording of transactions by a taxpayer at a fixed rate (which does not necessarily approximate the prevailing rate at the time) or at an average rate provided the actual foreign exchange gain or loss is accounted for at the time of the settlement and an adjustment is made of all unpaid accounts at the prevailing rate at year end. Generally, therefore, the use of an average rate should not be regarded as an acceptable method. This should not preclude its restricted use by individuals and corporations who find themselves in circumstances similar to those for whom the rate was determined.
2. In answer to your second question, we are not aware of any average annual or monthly exchange rate publications for the general public; this presumably could be construed as the acceptance by the Department of the general use of average conversion rates. Companies should therefore refrain from using average rates of any kind; their use should be restricted to the situation described above. Given however that an average rate is required by a corporation whose fiscal year end is not December 31 in special circumstances such as those described in 1) above, an average rate for the year could be calculated by averaging the mid-month buying rates for the United States dollar for the months in the period under review.
We trust that the above will be of some assistance.
Yours truly,
for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch