Thursday, 21 June 2007

Canada vs UK Tax Comparison Updated for 2007 and 2008

Back in March I posted a comparison of various personal tax rates for Ontario Canada and the UK using 2006 rates. Here's an update based on the 2007 rates.

This chart shows the rates for 2008-09. Not much change , the UK is still lower for every level of employment income except for a narrow sliver at around $75,000 taxable income where the top UK rate of 40% is a tiny bit higher than the Canadian 39.41% rate. Woohoo!

This time I've coloured cells green where one country or the other has better / lower rates. I've made a correction on the dividend tax for the UK - there is actually no exemption, the 10% rate applies as soon as tax kicks in up to the start of the highest band where it becomes 32.5%. This correction changes the advantage such that Canada generally comes out ahead with respect to dividends for almost every income level. With virtually everything else, the UK is better and usually by quite a bit, a seen by the content of the green cells. With respect to capital gains, though the rate is lower in Canada in low to middle income brackets, the availability of an annual exemption of almost Cdn$20,000 probably means the effective tax rate for a large proportion of UK investors is zero. For example, if a £100,000 portfolio has net 10% of £10,000 gains in a year, the £9200 exemption would mean almost no tax to pay. Adding the availability of tax-exempt ISA accounts in which up to £7000 can be placed annually, it is likely that all but the rich won't pay any capital gains tax in the UK.

A lot of UK interest income would likely be effectively tax-exempt within ISAs too, though not dividends because the tax is deducted before payment is made to the investor and it is not recoverable / claimable. The comparative Canadian RRSP account temporarily shelters interest, dividends and capital gains from tax of course. However, when I came to the point in my career/life where I could start saving larger amounts for retirement, my RRSP was maxed out so I had to put most of the annual savings into a non-registered taxable account. I really have been paying tax on those investments. Were I a UK taxpayer, my savings could have been absorbed by an ISA.

The conclusion I reached in March still holds - the UK is the clearly superior country when it comes to personal taxes.

Source for UK tax information: UK DirectGov website.
Source for Canadian tax rate: TaxTips website.


Anonymous said...

Hi there,

Could you refer some magician to help me sort out my 2007 tax year? Canadian lived and worked in the UK and now needs to do Canada/Quebec/UK taxes to get returns. Also needs to understand what to do with RRSP equivalent stuck overseas? Many thanks! Chantale

CanadianInvestor said...

If you worked in the UK, you most likely had tax deducted at source by your employer. The same income is subject to tax in Canada unless by some miracle the CRA considers that you were not a tax-resident of Canada during 2007. That UK tax counts as a credit against Canadian taxes that might be owing so you don't pay twice, though you don't get any back from Canada (or the UK) if the tax deducted is more than you owe in Canada. To get help in filling out the forms you might try some of the accountants writing articles in Canadians Resident Abroad website linked in the Resources section in the right-hand column of my blog. You might even try the author of the tax material in the book also titled Canadians Resident Abroad Garry R. Duncan, who the dust cover says works for BDO Dunwoody in Toronto. He would most surely know the answer to any questions.

If the RRSP-equivalent is an ISA, it can simply be cashed in. If it is an actual pension plan, it would have to be a UK pension specialist or accountant to tell you how or if you can withdraw the money early.

Does that help?

Olivia said...

Hi there, Great post. I was wondering if you could do another post on Canada vs UK Tax Comparison Updated with the current data?

In your option, do you see an advantage of being a resident of both Canada and UK for tax purposes? Thanks.


CanadianInvestor said...

Hi Olivia,
I don't expect there to be a massive change but can do an update.
wrt any advantage I don't think there is any; being subject to the two regimes means paying the minimum of all types of tax in the two two countries. e.g. there's no estate tax in Canada but there is in the UK, so your dead self would end up paying that.

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