Canada UK tax treaty

Simon Misiewicz

Simon Misiewicz

Expat & Property Tax Specialist

27th June 2022

Canada UK tax treaty & double taxation

The Canada UK tax treaty is for Canadians and British people moving between Canada and the UK who wish to avoid double taxation.

The Canada UK double taxation treaty is important for those who pay income taxes in Canada and those paying income tax in the UK to ensure they don’t pay twice.

Understanding the double taxation treaty between Canada and the UK is important if you work/invest/live in both countries.


What are the basics of the Canada UK tax treaty?

The Canada UK double taxation treaty was amended by protocols signed on 15 April 1980, 16 October 1985, 07 May 2003 and 21 July 2014.

It was first in effect on 01 January 1976 in Canada.

Double taxation treaties (referred to as double taxation agreements or DTAs) are created between two countries which define the tax rules when it comes to a tax resident of both countries.

Double taxation treaties can be complex and are created to try and ensure that an individual can claim tax relief rather than pay taxes on the same income in two different countries.

The Canada UK double taxation treaty is unique, although many tax treaties follow similar guidelines.

The Canada UK double taxation treaty ensures that income taxes in Canada and income tax in the UK are paid.

 

What changes were made to the Canada UK taxation treaty in 2014?

The Canada UK double taxation treaty came into force on 21 July 2014 with the enactment of the Protocol & Interpretative Protocol.

The important new arrangements were an attempt by the governments of Canada and the UK to clamp down on the avoidance of double taxation and the prevention of tax evasion.

Amendments were made to articles in the Canada UK tax treaty relating to business profits, shipping and air transport, associated enterprises, dividends, interest, royalties, the exchange of information and mutual agreement procedures.

In the UK, the convention took effect in respect of:

* withholding taxes, on amounts paid or credited on or after 01 January 2015

* income tax and capital gains tax, for any year of assessment beginning on or after 06 April 2015

* corporation tax, for any financial year beginning on or after 01 April 2015

In Canada, the convention took place in respect of:

* withholding taxes, on amounts credited or paid on or after 01 January 2015

* other Canadian taxes, for any tax year beginning on or after 01 January 2015

 

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Do you pay more tax in Canada or the UK?

According to the Organisation for Economic Co-operation and Development (OECD), as a percentage of GDP total tax taken in Canada is nearly 40%, while in the UK, it is less than 35%.

The 1978 Canada UK double taxation treaty was modified by the Multilateral Instrument (MLI).

The modifications made by the MLI are effective for taxes withheld at source on amounts paid or credited to non-residents from 01 January 2020.

The Canada-UK double taxation treaty covers the following:

Income taxes in Canada (called Canadian tax)

Income taxes, corporation tax, capital gains tax, petroleum revenue tax and development land tax in UK & Northern Ireland.


How long can UK citizens stay in Canada?

UK citizens can visit Canada for up to six months without a visa, but a longer or permanent stay requires filling out an application to stay in Canada.

Temporary work permits and applications for temporary and permanent residence in Canada are required for any foreign nationals who want to work or live in Canada.

Suppose you stay longer than six months under the eTA programme and your stay has not been extended by Citizenship & Immigration Canada. In that case, you will lose your travel authorisation and be unable to use the eTA for future trips.

How are UK businesses taxed if they operate in Canada?

A third protocol to the Canada UK Income Tax Convention was signed on 07 May 2003 to include the following amendments:

* The dividend withholding rate was reduced from 10% to 5% for a shareholder with at least 10% voting control. Branch profits tax was reduced to 5% for UK companies with branch operations in Canada.

* The capital gains article was amended to prevent double taxation when a Canadian resident moves to the UK. Only gains accruing after emigration can be taxed in the UK for specific properties held at the time of emigration.

* The royalties article was amended to exempt from withholding taxes payments for the use of computer software, patents and certain know-how payments.

 

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What if I am dual resident in Canada & the UK?

If an individual works for a UK employer but is a dual resident and spends their time working in the UK and Canada, it is important to determine where they are treaty residents if they work in two tax jurisdictions.

The individual may be considered treaty non-resident from a UK perspective. The Employment Income Article of the Canada UK double taxation treaty will usually restrict the UK tax liability to UK workdays only.

Income tax would only be due to HMRC for the days the individual worked in the UK.

This scenario is typical when a British ex-pat is employed on a local UK contract, whilst their family have remained at their primary residence in Europe and spent 3-4 days in the UK.

If an individual is considered a treaty non-resident in the UK, they are only liable for UK tax where the income has arisen from UK-based activities.

This shelters all non-UK investment income, and gains are sheltered from UK tax.

 


How to claim treaty residence under double taxation treaties

An individual who believes that may be a tax resident in Canada and the UK must make a claim for treaty residence via a tax treaty relief claim.

There are many rules, requirements and tests which need to be applied correctly to ensure that the correct tax residence statuses can be applied.

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