Currency conversion, tax treaties, and U.S. retirement income

When you earn, invest, or receive retirement income outside of Canada, you must not only report that income—but also understand how to convert it, how international tax treaties apply, and how specific income like U.S. pensions is treated.

This matters because improper currency conversion, missed treaty benefits, or misunderstanding how pensions are taxed can lead to overpaying tax or underreporting income, both of which can trigger CRA scrutiny.

This article will guide you through the three most critical areas when dealing with foreign income: converting it into Canadian dollars, applying tax treaty benefits, and understanding the rules for U.S. pensions and Social Security.

How to Convert Foreign Income to Canadian Dollars

All foreign income must be reported on your Canadian tax return in Canadian dollars. You cannot report foreign currency directly—even if the income was earned, received, or spent entirely outside Canada.

Acceptable methods for conversion:

• Use the Bank of Canada exchange rate for the date of the transaction, or

• Use the annual average rate for the tax year if the income was earned regularly throughout the year (e.g. salary or pension)

You can find official exchange rates on the Bank of Canada’s website. CRA accepts both the daily and annual average rates, as long as you're consistent.

Tax Treaties and How They Help

Canada has tax treaties with dozens of countries, including the U.S., U.K., Germany, France, Australia, and many more. These treaties exist to prevent double taxation—where the same income is taxed in both countries.

Tax treaties can help by:

• Exempting certain types of income (e.g. U.S. Social Security benefits are partially exempt in Canada)

• Reducing foreign tax withholding on dividends, interest, or pensions

• Allocating taxing rights (deciding which country gets to tax a particular income type)

• Resolving residency conflicts when two countries claim you as a resident

To apply treaty benefits, you must usually report the gross amount of income and then claim an exemption or foreign tax credit based on treaty rules.

How U.S. Pensions Are Taxed in Canada

Many Canadians have worked in the U.S. or receive income from American retirement plans. Each type of pension is taxed differently under the Canada–U.S. Tax Treaty.

Common types of U.S. retirement income:

• Social Security benefits

  • Only 85% of the benefit is taxable in Canada

  • You report the full gross amount and apply a 15% deduction on your return

  • You do not pay U.S. tax on it if you're a Canadian resident

• 401(k) or 403(b) distributions

  • Fully taxable in Canada as regular income

  • May be subject to U.S. withholding tax (often 15–30%)

  • You can claim a foreign tax credit to offset Canadian taxes

• U.S. Individual Retirement Accounts (IRAs)

  • Taxed in Canada as income when withdrawn

  • Early withdrawals may also incur U.S. penalties—these are not deductible or creditable in Canada

• U.S. employer pensions (private or public)

  • Fully taxable in Canada

  • You may claim a foreign tax credit if U.S. tax was withheld

Example: If you receive $10,000 USD in U.S. Social Security, you would report $10,000 × average annual exchange rate as gross income, then only include 85% of that amount in your taxable income on your Canadian return.