How do I record a US$ or other foreign currency transaction?

Staff Post
By Heather Young

Accounting logic says that your financial statements must be denominated in one currency. Many organizations make regular payments to foreign artists, suppliers and others – so how can they record the transactions correctly?

Let’s take two cases.

In the first instance, let’s assume you only have a Canadian dollar bank account. That means you’re purchasing foreign currency (e.g. bank drafts or wire transfers) as needed. The bank calculates the cost in Canadian dollars by applying today’s exchange rate. This becomes your expense.

Suppose you’ve engaged an American soloist and agreed to pay them $2,500. The day you purchase the US draft, the US dollar is trading at 1.23. Your artist fee expense becomes 2,500 x 1.23 = $3,075.00, and you’ll see that amount being withdrawn from your Canadian bank account.

In this instance, the $2,500 US dollars don’t appear in your accounting records: the only value that counts is the Canadian equivalent. And, yes, that amount depends on the day! Yesterday the US dollar might have been worth 1.22 and tomorrow it might be 1.24! That doesn’t matter: what counts is the prevailing rate on the day of the transaction, because that determines how many Canadian dollars came out of your account. It is important to add a memo/note to the journal entry to indicate that the fee was $2,500 US dollars. This will create a link between the original fee agreement and the amount withdrawn from the bank, in case it is ever in question.

The process is different – and a little more complicated – if your organization owns a US dollar bank account. Now, the $2,500 US dollars must be part of your accounting entry, because that’s the number of US dollars you’re expending. Your accounting system must accomplish the following:

Record the number of units of the foreign currency you hold. (So, if you have $3,456 US dollars in the US bank account, that’s the number you should be looking at on your balance sheet.)
Record the correct value of that asset. (So, if you have $3,456 US dollars and today’s rate is 1.23, those US dollars are presently worth $3,456 x 1.23 = $4,250.88 Canadian.)
Record US revenues and expenses at the Canadian equivalent. (So, if you’re using $2,500 of those US dollars to pay your soloist, you must record an expense of $3,075 as calculated above.)

Many organizations deal with the problem by pairing the US bank account with a second asset account, named “Revalue US Dollars” or something similar. The foreign bank account captures the number of units of the foreign currency you hold. The paired account captures the difference in value to the Canadian dollar.

Thus, if your organization held $3,456 US dollars and the exchange rate was 1.23, the Revalue US Dollars account would contain $794.88.

Your entry to pay the American soloist would look like this:

How to record a US$ transaction - journal entry 1

This entry states the true cost of the soloist; it updates your US bank balance correctly; and it revalues your asset (those US bucks) according to today’s exchange rate.


Let’s take another example – a deposit. Suppose an American visitor paid for their ticket in US dollars. If they paid $45.00 US a day when the US dollar was worth 1.23, your entry would look like this:

How to record a US$ transaction - journal entry 2

Now: the face value of that ticket may have been some other amount. But, as a matter of fact, at today’s exchange rate you made $55.35 Canadian – so that becomes your revenue. 

As the month proceeds, you might have any number of transactions, each valued at the day’s exchange rate. Because the rate floats up and down, the amount in your “Revalue US Dollar” account eventually becomes inaccurate. For that reason, it’s important to “true up” the value of your US dollars from time to time. 

Many organizations would make a separate entry on the last day of the month to update their US currency to the month-end rate. 

Using the examples above, we started with $3,456.00 US dollars. We spent $2,500.00 and deposited $45.00 – bringing the account balance to $1,001.00. 

And, the Revalue US Dollar account started at $794.88; we subtracted $575.00 and added 10.35, bringing the account balance to 230.23.

Let’s say that the exchange rate on the last day of the month was 1.25. At that rate, our $1,001.00 is actually worth $1,251.25. Our month-end balance sheet misstates the value of the US dollars. The following entry “trues up” to the current Canadian equivalent. 

How to record a US$ transaction - journal entry 3

Note that this adjustment isn’t tied to any particular transaction: it simply corrects for the month-end exchange rate. The “pick-up” is allocated to a revenue account that specifically captures currency gain or loss. In months when the US dollar increases in value, you show a gain, because your “greenbacks” are worth more. But, when the Canadian dollar surges, you show a loss on your American currency.

These techniques allow you to have a foreign currency bank account – while still ensuring that your asset, and your revenues and expenses, are properly stated at their Canadian values. 
 

ONCA on track for 2020

The Ontario Not-for-profit Corporations Act (ONCA), the proclamation of which has been delayed over the past several years, is in track to come into force in early 2020. 

According the the Government of Ontario, they are upgrading technology to support the changes and service delivery, and aiming for proclamation of the Act in early 2020. An announcement now gives not-for-profits 24 months' notice before enforcement.

The Government promises to provide further details and a 3 year transition period after ONCA is in force, for organizations to make necessary changes to their governing documents. They also promise to help support a smooth implementation.

Source: Government of Ontario Rules for not-for-profit and charitable corporations

New Creative Facilities Tax Class in Toronto

On December 6, 2017, Toronto City Council voted to establish a new property tax class for "Creative Co-Location Facilities". This is intended to provide some arts facilities (e.g. 401 Richmond, Artscape) in Toronto significant relief against property taxes pegged to market values, and to ensure that creative hubs are able to maintain their activity in vibrant and developing neighbourhoods. The new property tax class is in effect as of the 2018 taxation year. 

Read more herehere, here, and here

By the end of 2018 charities will be able to manage CRA filings online

Staff Post
By Anna Mathew

By the end of 2018 charities will finally be able to do most of their government submissions and communications online. The improvements are part of the Charities Modernization Project (CHAMP) which came out of funds earmarked in the 2014 Federal Budget for IT improvements at the CRA. 

From the CRA:

The 2014 Federal Budget provided the Directorate with $23 million to modernize its IT systems over a five year period. Improving these systems will allow charities to apply for registration and file their annual returns electronically, reducing their administrative burden.

As part of CHAMP, by the end of 2018:

  • Form T2050, Application to Register a Charity under the Income Tax Act, will be replaced by a new online application for registration e-service.
  • Registered charities will be able to file their annual returns online through the CRA's My Business Account.
  • The Charities Listings will be improved to help Canadians make informed choices about charitable giving.

Drache Aptowitzer has a September 2017 article which discusses the implications and how charities should prepare for the change to online submissions and communications. They advise:

  1. Assigning a person inside the charity to be the main authorized user;
  2. Ensuring that person is subscribed the the Charities Directorate e-lists and visits the Charities Directorate website regularly for updates;
  3. Ensuring that person is aware of what information about charities is publicly available on the CRA website and understands the concept of 'garbage in garbage out' (if a charity gives bad quality data to the CRA, that bad quality data is what will be displayed in the publicly accessible CRA systems); and,
  4. Ensuring that person is aware that all documents filed by the charity with the CRA will be available to all authorized users, so the charity should assess who currently has authorization and maintain their policy and update their authorization lists regularly.

Visit the full Drache Aptowitzer article here

New Seminars! Take the Lead: Principles for Administrative Leadership in the Arts

Young Associates is thrilled to be partnering with WorkInCulture to launch Take the Lead: Principles for Administrative Leadership for the Arts, a new two day seminar series for increasing managerial and governance skills in arts administration. Running October 12 & 13, 2017, instructors from Young Associates and WorkInCulture will deliver sessions on understanding financial statements, payroll, WSIB, and HR. Get more details here

T4 slips can now be distributed electronically

In an attempt to encourage efficiency and reduce administrative burden for filers, the 2017 Federal Budget allows employers to electronically issue T4 slips to active employees, even without obtaining prior consent. Until this announcement, employers could send one copy of the T4 electronically, provided they had the employee's consent ahead of time, (as well as still providing one paper copy), or they could send two paper copies to the employee's mailing address or provide two paper copies in person. 

The Budget announcement means that for 2017 T4 slips (and those for any subsequent year), employers now do not have to obtain consent from an employee to distribute their T4 electronically, provided the following considerations are met:

  • the employee is currently active (not on leave, has not left the company)
  • (by the last day of February in the year following the calendar year to which the T4 applies) the employer provides the employee

    • a secure electronic portal through which the employee can obtain access their T4 slip,

    • a secure site for printing the T4 slip, and

    • an option to receive paper copies of the T4 slip, upon request.

The employer must distribute 2 paper copies of the T4:

  • if the employee has requested that method
  • if the employee is on leave or no longer with the company
  • if the employee can not reasonably be expected to access the T4 electronically
  • if the employer cannot meet the above conditions for secure electronic transfer (unless the employee had previously provided consent to receive the T4 slip electronically)

It is important to note that Budget 2017 does not consider email to be a secure method of transferring sensitive information included in the T4 slip, and it does not permit employers to use email as a method of distributing the T4 to employees without their prior consent. So, the only case in which a T4 slip is permitted to be distributed to an employee by email is if the employee has previously provided (written or electronic) consent to receive one copy of the T4 by email. 

Visit this page on the CRA website for more information.

Should my company capitalize and amortize the costs of sets and costumes?

Capital assets generally include items of significant value that are owned for longer than a year, and used in operations. Spending on production can vary widely from show to show and company to company. If you are spending significant sums in these areas, it’s worth exploring this issue.

Let’s take the example of an opera company that has adopted an accounting policy of capitalizing its sets and costumes and amortizing them over 7 years, based on the fact that it draws from a “canon” of works, and therefore remounts shows from time to time.

One way to look at capital assets is as a deferred expense. You pay all the bills in Year 1, but (through amortization) you recognize the expense over the estimated useful life of the asset (in this example 7 years), so that each year of use bears its proportional estimated share of the cost (in this example 1/7 per year).

The argument in favour of capitalizing and amortizing sets and costumes would be that you expected to use them actively over the estimated 7 years, either in your own shows or as rental properties. 

Let’s work through the accounting effect, step by step. In the first year of adopting this policy, you would record your sets and costumes as assets, not expenses. This would have the effect of improving your bottom line. You would of course need to record one year of amortization expense – that is, 1/7th of the purchase price. The remaining 6/7ths of the expense would be postponed to future years. 

Onward to Year 2, and a new year of programming with (potentially) a new group of directors and designers. Will those artists be content to reuse Year 1’s sets and costumes? It seems likely that, in most cases, while they may reuse some “stock” items, they would prefer to create something new and different. In that instance, the company would incur new expenses for set and costume purchases. Once you set up an amortization policy, you need to follow it -- so you would amortize Year 2’s production items in the same way. Financially, the result would still feel pretty sweet, because in this year you recognize the cost of 1/7 of Year 1 purchases plus 1/7 of Year 2 purchases... but you can see where this is heading.

By the time you hit Year 7, the bottom-line advantage has disappeared because you've got seven active amortization cycles. You're also saddled with a certain amount of extra bookkeeping – and, more importantly, production expense becomes difficult to interpret. Imagine looking at the Year 7 income statement. You know for a certainty what your box office revenue was, but because related expenses and revenues are no longer matched within a fiscal period, it becomes trickier to interpret the financial result. The set and costume expense in Year 7 does not capture the cost of Year 7 shows, but rather 1/7 of the costs for each of the previous seven years.

The real "bottom line" to this story is that you can't out-run expense. You need to recognize it sooner or later. Our opera company might have been tempted to adopt the amortization policy as a gambit to improve the bottom line at a point when things weren't going well – but over the longer haul this approach doesn't put you any further ahead.

Now – let’s look at the other side of the coin. If you expense sets and costumes during the year of the show for which they were created, expense recognition is clear. That's very helpful for the purpose of evaluating financial results. But, it's also true that companies, especially larger companies in the opera and ballet worlds, DO remount productions and rent productions to other companies. If you don't amortize the cost, those future uses have no cost attached to them – and the financial statements for those years could be seen as misstated by the amount of expense that perhaps should have been attributed to them.

Expensing items in the year of the production means that companies may own a lot of stock – sets, costumes, props, etc. – that's not acknowledged on the balance sheet as an asset. However, that is how the set and costume expense is typically handled, in the experience of Young Associates staff. 

The question for management is which treatment best reflects the company’s financial results? And, which treatment best applies generally accepted accounting principles (GAAP) such as cost-benefit and materiality? Managers need to evaluate whether the advantage of matching revenue and expense recognition outweighs the possible misstatement of future bottom lines. 

This would be an excellent topic to discuss with your accountant.

Click here for more q and a's on capital assets. 

At what point would our accumulated surplus be so large that we’d be in trouble with the Charities Directorate?

The Charities Directorate of the Canada Revenue Agency does, indeed, have rules around accumulation of property. The particular rule that charities are probably thinking about if they’re worried about the size of their accumulated surplus is the disbursement quota (DQ). The purpose of the DQ is to establish a minimum requirement for spending on charitable activities, with reference to the wealth that a charity has accumulated. As long as you maintain an appropriate level of charitable activity – measured through your spending – you are compliant with this rule.

CRA provides guidance about its spending requirements here. Note that there are separate rules for charitable organizations, which exist to deliver charitable programs and services, and foundations, which exist to support charitable programs and services.

Young Associates works with many smaller charitable organizations. Most groups in this category are unlikely to have accumulated property at a level that would cause non-compliance with the CRA. However, this is an issue that may involve complex legal and financial concepts. If you have concerns, it is wise to discuss your situation with a professional.

CRA defines its requirement for charitable organizations as follows:

If the average value of a registered charity's property not used directly in charitable activities or administration during the 24 months before the beginning of the fiscal period exceeds $100,000, the charity's disbursement quota is:
3.5% of the average value of that property.

The interpretation of this hinges on what property is not used directly in charitable activities or administration. CRA lists real estate and investments as examples. 

A charity, for instance, may hold long-term investments such as units in a mutual fund, and use the resulting interest revenue in its operations. However, the principal sits intact for multiple years, not directly used for charitable activity. (This is distinct from the case of a charity that places short-term investments to earn some interest revenue before the investment matures and the principal winds up in a chequing account, available for spending.)

A charity may also own a building that it doesn’t currently occupy; this may be the case for institutions such as hospitals, universities and churches, which may have considerable real estate holdings and needs that change over time.

Once you have identified property that meets CRA’s definition of “not used directly in charitable activities or administration,” you must calculate its average value over the two years before the start of the current fiscal year. CRA provides some latitude in how the average may be calculated. If your organization needs to make this calculation, the method for assessing value and calculating the average over time would be a good topic for discussion with your CPA.

Last step: calculate 3.5% of the average value. That yields the amount your organization is obliged to spend on its charitable activities or administration during the current year. 

Let's say your charity owns an investment portfolio, and you determined that its average value over the last 24 months was $100,000. Your DQ for the current year would therefore be $3,500.

You can see that this is actually a pretty low bar to jump over! Most organizations with the capacity to build a $100,000 investment portfolio would have operations that demanded more than $3,500 in program and admin spending. CRA’s rule is set at a level that catches inactive charities, but that is unlikely to cause compliance issues for most charities that are actively carrying out their mandates. 

UPDATED: Bureaucracy 101: Today, Class, We’ll File an RC59 Form!

Staff Post
By Heather Young

See update below on a new CRA form which allows changes to a charity’s director, trustee, or like official information .

Somehow, successfully completing an RC59 Business Consent form – which authorizes access to CRA accounts for HST, payroll and more – has often felt like a hit or miss process. Sometimes there’s no issue, and in other cases it has taken repeated attempts to get account contacts updated.

I had an illuminating conversation with a CRA officer that has helped to resolve some important misunderstandings, and I’d like to share what I’ve learned.

The RC59 form identifies two levels of authorization. Level 1 allows information-only access: that’s what your bookkeeper should have. Level 2 individuals are authorized to make changes to the account and the information it contains: that responsibility should belong to your organization’s senior staff. CRA lists the actions that can be performed by each level here.

One of the potential disconnects to understanding the process is that there’s actually a Level 3 which is not directly referenced on the RC59 form, although you’ll find its powers itemized on the preceding hyperlink. A Level 3 individual is also referred to as a Delegated Authority – a term that appears in the RC59 instructions section under the heading “Part 5 – Certification.” Only individuals authorized at Level 3 are allowed to sign (certify) RC59 forms. 

Note that, by virtue of their position, members of your board of directors automatically have Level 3 access to your CRA accounts. Your Executive Director or General Manager does not: they must be appointed by a Director. 

The RC59 instructions state, “This form must only be signed by an individual with proper authority for the business, for example, an owner, a partner of a partnership, a corporate director, a corporate officer, an officer of a non-profit organization, a trustee of an estate, or an individual with delegated authority.” 

The potential misinterpretation is to fail to recognize “delegated authority” as a legal term with a prescribed meaning. In the not-for-profit world, boards of directors commonly delegate a broad span of authority to their senior staff, who, for that matter, may have the term “officer” in their job title, as in Chief Executive Officer or Chief Financial Officer. The fact that you are responsible for CRA reporting, or that you sign T3010s or any other tax-related documents carries no weight, and the only officers CRA recognizes are the officers of your board of directors, such as the President, Treasurer or Secretary.

Individuals can be appointed to Level 3, Delegated Authority, upon proper completion of an RC321 form, Delegation of Authority. Since staff typically handle the nitty gritty of CRA interactions, it may be convenient for organizations to appoint their ED as a Delegated Authority, so that they have the ability to manage other account representatives. 

The whole system rests on CRA having access to a current list of directors and officers of the corporation. We’ve often been in the position of filing an RC59 after a long-serving staff member departs – and learning, after much bother, that the only other contacts on record with CRA are ancient history. 

And, here is another disconnect. Registered charities are accustomed to sending CRA a detailed board list annually as part of their T3010 Charities Return. All corporations (commercial and not-for-profit) must also file annual information returns to the appropriate jurisdiction (provincial or federal), naming their directors so that they can be added to the public record. However, CRA’s Business Number (BN) Services Unit does not employ these sources of information. 

You need to make a special request to CRA to update your board list for the purpose of BN administration. There is no official form for this task. According to the CRA officer I spoke to, you must write a letter requesting the update, listing your board members, and providing proof of their appointment; for instance, a copy of the AGM minutes including the motion electing the board. A search of the CRA website for confirmation of these verbal instructions yielded this link, which affirms the general intent, but does not specify the process. If you need to update your board list with CRA, perhaps a phone call to the Business Window (1-800-959-5525) would be the best place to start.

Note that CRA can ask board members to provide their Social Insurance Number. The Charities Directorate does not collect this information, but the CRA at large requires it because board members bear a personal liability for amounts held in trust for the Receiver General, such as unpaid payroll source deductions and HST remittances. 

With your board list up to date, you will always be able to update the RC59 as needed. Putting this on your AGM “to do” list sounds like a good addition to administrative best practices.

So, class, what are today’s main take-aways?

Well, I hope that this information helps to put RC59 woes behind us – but, really, the most important lesson to be learned is the significance of board members to what we usually classify as an administrative process. I suspect most ED’s would prefer that their board members stay out of the minutiae of CRA dealings – but in fact the law assigns Directors an essential role.

By virtue of their position, they have full access to the corporation’s dealings with CRA, and they are the gatekeepers to staff, who are typically charged with direct responsibility for tax filings, remittances and related matters.

And let’s not forget the financial liability issue. When someone joins your board, they assume personal responsibility – legally, up to the point of being held accountable for payment! – for ensuring that taxes are collected, reported and remitted according to the law.

The issues around processing RC59s serve as a good reminder of board members’ fiduciary responsibilities, the details of which may become lost or blurred in the day to day reality of their role as informed, engaged and active volunteers, supporting the paid professionals who carry out administrative operations.

Update:

Some feedback from one of our clients: 

Both Young Associates and [redacted] now have Level 1 authorization to quote "interact with the Canada Revenue Agency." 
I should give a big thank you for all parties involved, with a special shout-out to Heather for giving us very detailed instructions, and for her written column on the RC59, and for [redacted]'s assistance is helping us submit the forms 7x, or so.
I know more now than I ever wanted to do about this process.

update 2: 

As of December 2016, the CRA has created a form to change or update a charity’s director, trustee, or like official information. The form can be submitted by email, fax, or snail mail. Visit the CRA website for more information. 

Note from the CRA: 
This form does not replace the requirement to complete Form T1235, Directors/Trustees and Like Officials Worksheet, when you file your Form T3010, Registered Charity Information Return. Form T1235 is used to update the director, trustee, and like official information in the Charities Listings.