We pay tax not only on our Canadian-source employment, business or investment income, but on our total worldwide income, including foreign income, such as a foreign pension, which must first be converted to Canadian dollars before it’s reported on our returns annually.

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The result is that Canadian tax is payable on this foreign income, which is also included in your “annual net world income” used to determine eligibility for certain government income-tested benefits, such as the Guaranteed Income Supplement (GIS) and Old Age Security (OAS).

A recent Tax Court case involved a taxpayer who was forced to repay some of his GIS as a result of his foreign pension income. The taxpayer filed an appeal with the Social Security Tribunal after the Employment and Social Development Canada (ESDC) determined he had been “overpaid” GIS because of “an incorrect calculation of his income.”

As with other OAS-type appeals, the court’s jurisdiction is limited to determining whether the taxpayer’s income was correctly calculated. In this case, the question before the court was whether the taxpayer’s income for the period of July 2014 to June 2018 was properly determined for the purpose of his GIS entitlement.

The taxpayer is both a Romanian and Canadian citizen who collects pension income in both countries. He receives the GIS and OAS. From July 2014 through June 2018, however, ESDC determined he had been overpaid $2,044 in GIS income.

GIS eligibility is based on income and is available to low-income OAS pensioners. For example, in the fourth quarter of 2023, a single senior whose annual income is below $21,456 receives up to $1,057 of GIS per month. GIS benefits are generally reduced by 50 cents for every dollar of income, other than OAS and GIS.

In the current case, the dispute wasn’t whether the taxpayer’s Romanian pension was taxable, but whether he could deduct the banking and cost-of-currency-exchange fees he paid to repatriate his Romanian pension to Canada as part of this calculation. The taxpayer also felt ESDC incorrectly converted his pension income to Canadian dollars.

The judge reviewed the law, which is clear: for GIS purposes, a taxpayer’s net income is calculated according to the Income Tax Act, which includes worldwide income and any foreign pension income. The judge said the provisions of the Old Age Security Act simply do not provide for a deduction of banking fees or currency-exchange costs when calculating net income for GIS purposes, and, as a result, was unable to accept the taxpayer’s argument that his income should be reduced by these amounts for GIS purposes.

The taxpayer then argued ESDC incorrectly applied the foreign exchange rate to convert his Romanian pension payments from Romanian leu to Canadian dollars. But the judge could find no basis for this argument. Citing the Canada Revenue Agency’s Federal Income Tax and Benefit Guide — in the section entitled Report foreign income and other foreign amounts — taxpayers are instructed to use the Bank of Canada exchange rate in effect on the day foreign income is received to convert the amounts to Canadian dollars.

This seems to be what ESDC did, so the judge concluded the foreign exchange calculation was done appropriately. As a result, the taxpayer lost his appeal and was forced to repay part of his GIS.

It should be noted that for foreign income, the CRA will also generally accept a rate for a particular day from another source if it meets all the following conditions: it’s widely available, verifiable, published by an independent provider on an ongoing basis, recognized by the market, used in accordance with well-accepted business principles, used to prepare financial statements (if applicable) and used regularly from year to year. Other sources the CRA will generally accept include rates from Bloomberg LP, Thomson Reuters Corp. and Oanda Corp.

In certain circumstances, however, the CRA does permit an average rate to be used to convert foreign currency amounts to Canadian dollars for tax purposes. This is particularly convenient if a foreign amount is paid to you evenly throughout the year.

For example, if you received dividends from the United States throughout 2023, you can apply the average annual Canada/U.S. foreign exchange rate to the total U.S. dollar dividends received, rather than hunting down the individual rate on each specific dividend payment date.

But just because the average annual exchange rate is convenient doesn’t mean it’s always the best result. In a 2007 technical interpretation letter, the CRA was asked whether a taxpayer was required to use the Bank of Canada’s annual average exchange rate to convert pension and investment income to Canadian dollars. The taxpayer wanted to know if she could ignore the average annual rate for the year and use the actual exchange rates she received from her bank when she deposited her foreign pension and investment income into her Canadian bank account.

The CRA responded that there was nothing in the Income Tax Act or the agency’s published material that requires a taxpayer to use the Bank of Canada’s annual average exchange rate to convert pension or investment income to Canadian dollars, since you are technically supposed to use the rate on the date the income was received.

You are also required to use the actual foreign exchange rate that was in effect on the day of the transaction when it comes to the calculation of a gain (or loss) on the sale of foreign property, such as U.S.-denominated stocks, bonds or foreign real estate.

In other words, to properly report a gain (or loss) on a foreign property, you would convert the proceeds to Canadian dollars using the exchange rate on the date of sale, and compare that to the adjusted cost base (ACB) or tax cost of the property using the foreign exchange rate on the date of purchase of the property.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com.

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