Foreign pension counts toward income but taxpayer finds another catch

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We pay tax not solely on our Canadian-source employment, enterprise or funding revenue, however on our whole worldwide revenue, together with overseas revenue, akin to a foreign pension, which should first be transformed to Canadian {dollars} earlier than it’s reported on our returns yearly.

The result’s that Canadian tax is payable on this overseas revenue, which can be included in your “annual internet world revenue” used to find out eligibility for sure authorities income-tested advantages, such because the Assured Revenue Complement (GIS) and Old Age Security (OAS).

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A latest Tax Court docket case concerned a taxpayer who was compelled to repay a few of his GIS because of his overseas pension revenue. The taxpayer filed an enchantment with the Social Safety Tribunal after the Employment and Social Growth Canada (ESDC) decided he had been “overpaid” GIS due to “an incorrect calculation of his revenue.”

As with different OAS-type appeals, the courtroom’s jurisdiction is restricted to figuring out whether or not the taxpayer’s revenue was appropriately calculated. On this case, the query earlier than the courtroom was whether or not the taxpayer’s revenue for the interval of July 2014 to June 2018 was correctly decided for the aim of his GIS entitlement.

The taxpayer is each a Romanian and Canadian citizen who collects pension revenue in each nations. He receives the GIS and OAS. From July 2014 by June 2018, nonetheless, ESDC decided he had been overpaid $2,044 in GIS revenue.

GIS eligibility is predicated on revenue and is accessible to low-income OAS pensioners. For instance, within the fourth quarter of 2023, a single senior whose annual revenue is under $21,456 receives as much as $1,057 of GIS per 30 days. GIS advantages are typically diminished by 50 cents for each greenback of revenue, apart from OAS and GIS.

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Within the present case, the dispute wasn’t whether or not the taxpayer’s Romanian pension was taxable, however whether or not he may deduct the banking and cost-of-currency-exchange charges he paid to repatriate his Romanian pension to Canada as a part of this calculation. The taxpayer additionally felt ESDC incorrectly transformed his pension revenue to Canadian {dollars}.

The choose reviewed the legislation, which is obvious: for GIS functions, a taxpayer’s internet revenue is calculated in line with the Revenue Tax Act, which incorporates worldwide revenue and any overseas pension revenue. The choose stated the provisions of the Outdated Age Safety Act merely don’t present for a deduction of banking charges or currency-exchange prices when calculating internet revenue for GIS functions, and, in consequence, was unable to simply accept the taxpayer’s argument that his revenue must be diminished by these quantities for GIS functions.

The taxpayer then argued ESDC incorrectly utilized the overseas alternate price to transform his Romanian pension funds from Romanian leu to Canadian {dollars}. However the choose may discover no foundation for this argument. Citing the Canada Income Company’s Federal Revenue Tax and Profit Information — within the part entitled Report overseas revenue and different overseas quantities — taxpayers are instructed to make use of the Bank of Canada exchange rate in impact on the day overseas revenue is obtained to transform the quantities to Canadian {dollars}.

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This appears to be what ESDC did, so the choose concluded the overseas alternate calculation was completed appropriately. Because of this, the taxpayer misplaced his enchantment and was compelled to repay a part of his GIS.

It must be famous that for overseas revenue, the CRA may even typically settle for a price for a selected day from one other supply if it meets all the next situations: it’s broadly obtainable, verifiable, printed by an impartial supplier on an ongoing foundation, acknowledged by the market, utilized in accordance with well-accepted enterprise rules, used to organize monetary statements (if relevant) and used often from yr to yr. Different sources the CRA will typically settle for embody charges from Bloomberg LP, Thomson Reuters Corp. and Oanda Corp.

In sure circumstances, nonetheless, the CRA does allow a median price for use to transform overseas foreign money quantities to Canadian {dollars} for tax functions. That is significantly handy if a overseas quantity is paid to you evenly all year long.

For instance, in case you obtained dividends from the USA all through 2023, you’ll be able to apply the typical annual Canada/U.S. overseas alternate price to the entire U.S. greenback dividends obtained, moderately than looking down the person price on every particular dividend fee date.

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However simply because the typical annual alternate price is handy doesn’t imply it’s at all times the perfect end result. In a 2007 technical interpretation letter, the CRA was requested whether or not a taxpayer was required to make use of the Financial institution of Canada’s annual common alternate price to transform pension and funding revenue to Canadian {dollars}. The taxpayer needed to know if she may ignore the typical annual price for the yr and use the precise alternate charges she obtained from her financial institution when she deposited her overseas pension and funding revenue into her Canadian checking account.

The CRA responded that there was nothing within the Revenue Tax Act or the company’s printed materials that requires a taxpayer to make use of the Financial institution of Canada’s annual common alternate price to transform pension or funding revenue to Canadian {dollars}, since you might be technically supposed to make use of the speed on the date the revenue was obtained.

You’re additionally required to make use of the precise overseas alternate price that was in impact on the day of the transaction in terms of the calculation of a acquire (or loss) on the sale of overseas property, akin to U.S.-denominated shares, bonds or overseas actual property.

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In different phrases, to correctly report a acquire (or loss) on a overseas property, you’d convert the proceeds to Canadian {dollars} utilizing the alternate price on the date of sale, and examine that to the adjusted value base (ACB) or tax value of the property utilizing the overseas alternate price on the date of buy of the property.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Personal Wealth in Toronto. [email protected].

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