Canadian Investing in the UK? Caution on Dividends and Taxes

If you are an expat Canadian working or living in the UK but still subject to Canadian taxes because of ties to Canada and you are in a lower tax bracket, such as up to $72k in taxable income, then it might be wise not to invest in UK investments that pay dividend income ... unless you don't mind paying extra taxes. Here how and why this happens.

The first thing to note is that in the UK 10% tax (termed a tax credit) is automatically deducted from dividends paid out, no matter what tax bracket you are in, or whether you are a UK taxpayer or a foreign tax payer. The amount cannot be reclaimed or recovered, whether you are a native in the nil rate band, or you hold the investment in a tax-exempt account like an ISA or a PEP, or you are a foreigner considered to be a tax resident of another country under terms of a Double Taxation Convention like the Canada-UK treaty I wrote about yesterday.

The second factor at play for a Canadian is the fact that dividends are taxable at a much lower rate for the lower tax brackets than is the case in the UK. I have made a comparative chart of 2008 rates (modified in the February Canadian federal budget) for an Ontario taxpayer.

(Thanks to TaxTips.ca for the basic info on Canada. The UK rates, as updated following the March 2008 budget are from the HMRC page on Rates and Allowances.) Note the areas highlighted in green under the dividends column where the Canadian rates are lower than those of the UK.

Thus if you intend to obtain income from dividends on ordinary or preferred shares and you are not a higher rate taxpayer, then there is a tax penalty from investing through the UK stock exchange. For the highest rate expat Canadian taxpayer, with more than $75k in taxable income, there is no significant tax penalty since the maximum UK withholding tax on dividends is only 15% according to the Canada-UK Convention, Here is a table I have compiled of the various types of income and how they are handled in the treaty.


Of course, there is also no tax advantage since you must report your worldwide income and you must therefore pay Canadian tax on UK investments if the Canadian calculation works out to more than the 10% already paid at source in the UK. There will always be a minor penalty since 10% of whatever tax is owing is paid immediately instead of following the completion of the tax year, which means the money cannot be used for the extra length of time.