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Realized vs. Unrealized Gains and Losses

August 10, 2020

Tax Question:

What is the difference between realized vs. unrealized gains and losses on foreign exchange?


Foreign currency transactions need to be reported in Canadian dollars when they are recorded in the general ledger and on the T2 corporate tax return. The gains and losses that result from the exchange can be either realized which are taxable or unrealized which are not taxable.


When a foreign currency transaction is recorded on a particular date, it needs to be converted into Canadian dollars using the spot rate. For example, if you are entering a purchase order for $1,000 US dollars and the current spot rate of conversion is 1.35, the recorded transaction should be entered as $1,350 Canadian dollars.

At the Balance Sheet date, the account balances should be converted to Canadian dollars after adjusting for the current exchange rate. For example, if your year-end date is September 30th, all account balances such as US bank account and Accounts Receivable in US dollars need to be converted at the September 30th exchange rate. The foreign exchange difference between the rate you acquired those US dollars or originally recorded the receivable in US dollars and the year-end rate should be adjusted to the Income Statement to an account called “Unrealized Gain or Loss on Foreign Exchange”. As the foreign exchange of the account balance will fluctuate after the year-end, it is considered unrealized. As a result, an adjustment may be required on Schedule 1 of the corporate tax return for gain or loss on foreign exchange that should not be taxable.

During the year, there may be foreign exchange differences that occur on actual purchases and revenue or transactions that have been completed. These adjustments can be recorded to an account called “Realized Gain or Loss on Foreign Exchange” or you can adjust the individual transaction accounts which may be more difficult and time-consuming to do. Please note that accounting software varies in how they deal with recording foreign exchange on these realized transactions.

If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.

Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.

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