Sunday 27 April 2008

Canadian Earning UK Income and The Double Taxation Convention

A reader asks:
"I was wondering if you could help shed some light on the double taxation convention between the uk and canada. Currently I'm working in the UK for over a year, but im still a Canadian Resident. I've been paying my taxes here in the UK, however I found out my accountant wants around 9500 Canadian as well. I'm still considered a resident in Canada because I'm paying healthcare and have bank accounts, but no income made in Canada. I was wondering would the Double Taxation Convention apply to me? And would I just tell his to my accountant to work out?"

It sounds as though you would be considered resident for tax purposes of both countries. In the UK, you are Resident if you spend more than 183 days in a tax year from April 6th to the following April 5th (not the calendar year). In Canada, it depends on your ties to the country, the most important so-called primary ties being a spouse, family/dependents and a home but others like those you mention also being included. The onus and burden of proof to becoming non-Resident seems to be to actively sever ties, otherwise you are likely to be still considered Resident.

When you thus become Resident of both the UK and Canada, the Canada-UK Tax Treaty I wrote about on March 25th comes into play to determine how the two countries divvy up your tax money.

In the case of employment income, the country where you earn the salary gets first dibs and deducts whatever taxes are owing according to its rules, in your case, the UK. Then, because you are also Resident of Canada, you have to report the same income again on a Canadian return, calculate the Canadian taxes owing on the same income by the Canadian rules, claim a credit for the taxes deducted in the UK and if you owe anything more, pay that to the Canadian government. In fact, you almost certainly would owe Canada some more since Canadian tax rates on income are higher than those of the UK (see comparative table here). But that's a good thing since you cannot get a refund from either country if you overpaid according to your "home" country.

The Canada-UK Tax Convention says that the UK can tax your employment income earned in the UK in article 15.

For convenience, I've made a table that summarizes the different ways that the Treaty deals with various types of income and taxes, like dividends, capital gains, pension payments, annuities and interest.

Maybe the $9500 is the extra your accountant figures you owe the CRA. Any good accountant should be aware of the treaty so you should be able to get confirmation from him/her about the above.

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