[andrewsco]

Hi all,

I have a question regarding the most efficient way to manage money located in savings accounts in the UK. At the minute we have some money from the sale of our house split between 3 bank accounts in the UK. As I am currently non resident for UK tax purposes (live in Middle East), some money is earning interest tax free in one account (an account specific for UK non residents) and we have a couple of other regular accounts that have tax deducted before interest is paid.

When we move to Canada we are not planning on transferring much of our savings across to Canada as we are unlikely to ever want to buy in Canada – things may change but that isn’t in our current plans. The idea is that we should be able to live off my salary in Canada so don’t need to transfer the money across and don’t really want to gamble on FOREX swings – we will likely be heading back to the UK to buy a house in 5 years or so. From a quick search on the internet it appears that interest rates in UK bank accounts seem much better than in Canada anyway?

In terms of tax - if I have earned the interest tax free (as in the case of one of my accounts) then I will have to declare any earnings that I make on my Canadian tax return. However if UK tax has already been deducted from the interest then I would be able to apply a tax credit in Canada for this amount (meaning I only pay tax on the interest once). Is this correct?

Does anyone have any advice as to the best thing to do in this situation? I don’t have an ISA as I’m non resident and don’t currently have any stocks, shares or other investments that could be taxable.

Thanks
Andy

[Aviator]

Report interest as it is taxable, you can claim foreign tax credit.
When you take up tax residency, savings are valued in CDN$ at the prevailing FX, if the rate goes up when you leave Canada and they are worth more, you may well get dinged capital gains tax, deemed disposition.
http://www.cra-arc.gc.ca/tx/nnrsdnts.../lvng-eng.html

You also have to report assets valued at over $100k on your annual tax return, even if they are not taxable. big fines if you get caught not doing this.
All depends on circumstances, may want to talk to an accountant before arriving.

[JonboyE]

Originally Posted by andrewsco In terms of tax - if I have earned the interest tax free (as in the case of one of my accounts) then I will have to declare any earnings that I make on my Canadian tax return. However if UK tax has already been deducted from the interest then I would be able to apply a tax credit in Canada for this amount (meaning I only pay tax on the interest once). Is this correct?

Yes, you get a tax credit that, in most cases, equals the UK tax deducted. You then pay the Canadian government the difference between the tax due in Canada and the amount withheld in the UK.

As a non taxpayer in the UK you can arrange for the interest to be paid without deduction of UK tax. Complete form R105 and give this to your bank(s). This is preferable. If the Canada Revenue Agency (CRA) decide to look into your affairs (and foreign tax credits are one of their favouite targets) they will ask you to prove that the amount claimed as a foreign tax credit is your final tax liability in the UK, and for this they want to see your UK tax return.

Some people at the local offices of the CRA find it hard to accept that most people in the UK do not file tax returns. If you say that you cannot give them a copy of your UK tax return they think you are being difficult and obstructive. It is not a happy situation and one to avoid if at all possible. Claim the foreign tax credit if you have to, but get the interest paid without tax deduction if you can.

[Luckyone]

Originally Posted by andrewsco Hi all, As I am currently non resident for UK tax purposes (live in Middle East), some money is earning interest tax free in one account (an account specific for UK non residents) and we have a couple of other regular accounts that have tax deducted before interest is paid. Andy

Slightly off topic but I also have GBP funds in a couple of savings account in the UK, and receive the interest tax free by using the R105 form that Jonboy refers to, all works out just fine.

However, the number of banks, building societies, that will permit non UK residents to hold accounts has got less and less over the last few years.

May I ask which bank and account you have that is specific for UK non-residents?

Thanks

[andrewsco]

Originally Posted by Luckyone Slightly off topic but I also have GBP funds in a couple of savings account in the UK, and receive the interest tax free by using the R105 form that Jonboy refers to, all works out just fine. However, the number of banks, building societies, that will permit non UK residents to hold accounts has got less and less over the last few years. May I ask which bank and account you have that is specific for UK non-residents? Thanks

Alliance & Leicester International.

[andrewsco]

Originally Posted by Aviator Report interest as it is taxable, you can claim foreign tax credit. When you take up tax residency, savings are valued in CDN$ at the prevailing FX, if the rate goes up when you leave Canada and they are worth more, you may well get dinged capital gains tax, deemed disposition. http://www.cra-arc.gc.ca/tx/nnrsdnts.../lvng-eng.html You also have to report assets valued at over $100k on your annual tax return, even if they are not taxable. big fines if you get caught not doing this. All depends on circumstances, may want to talk to an accountant before arriving.

I do NOT like the sound of that. Seems a bit ridiculous if I never plan on taking that money over to Canada. Maybe it is best to try and speak to an accountant as I want to try and ensure that a) my UK money is not subject to FOREX swings and b) not taxed more than the usual UK tax on interest payments.

How do other people deal with this situation from experience? Or do most people transfer all thier money into CAD?

Thanks

[Aviator]

Originally Posted by andrewsco I do NOT like the sound of that. Seems a bit ridiculous if I never plan on taking that money over to Canada. Maybe it is best to try and speak to an accountant as I want to try and ensure that a) my UK money is not subject to FOREX swings and b) not taxed more than the usual UK tax on interest payments. How do other people deal with this situation from experience? Or do most people transfer all thier money into CAD? Thanks

You don't have to transfer money in to CAD, it can be left as GBP, however the lump sum value is treated as though it were for a CRA valuation at the point of arranging as a tax resident and at the time of leaving if one does leave permanently. You will be taxed on any worldwide income and investment growth as a tax resident of Canada. You will get a foreign tax credit for tax paid in a treaty country, however there is no getting around it legally if you live in Canada. If you don't tell CRA of your assets overseas, the finds can be significant if they find out.

[JonboyE]

When you become tax-resident in Canada (usually when you start to live here) you are deemed to have sold and repurchased all your assets so that their tax cost is their fair market value on that day. This makes perfect sense as Canada should not tax you on gains that occurred when you did not live here.

Although money can't be bought and sold its tax cost is the value in foreign currency at the exchange rate on the day you become a tax resident.

Let us assume you have £100,000 on deposit in a bank in the UK. On the day you move to Canada the exchange rate is 1.6 so it has a tax cost of $160,000. The interest you earn on the deposit is taxable in Canada. You usually use the annual average exchange rate to convert the interest into Canadian dollars.

The £100,000 is considered a capital asset so is only subject to tax if there is a realized transaction. Say that a couple of years after your move you need to spend £20,000. The exchange rate is now 1.7. You have a capital gain of £20,000 x (1.7 - 1.6) or $2,000. Half of this is added to you taxable income for the year.

In six years you decide to move back to the UK for good. The exchange rate is now 1.9. Just as when you moved to Canada you are deemed to have sold all your assets on the day you emigrate so you have a capital gain of £80,000 x (1.9 - 1.6) or $24,000. $12,000 is taxable.

One thing to keep in mind as you mentioned a five year plan. Any capital assets you own before becoming tax-resident in Canada and still own when you cease to be tax-resident are not subject to the deemed disposition rules IF your stay in Canada is less than 60 months. If you were thinking of five years then four years and eleven months might be optimal.

Alternately, if you have a lot of money at stake, you could look into establishing some sort of alter ego trust in the UK (or elsewhere) if you can be sure the trust will be resident in that jurisdiction for tax purposes. Tread carefully with this though because the CRA have a habit of determining that if the trust acts on the directions of a Canadian tax-resident then the trust is also resident in Canada.

[Animal]

Not meaning to hiack this thread but this has made me think of something !!

I arrived Mid November alst year and did a tax return for the 6 weeks I was here. My wife and family will hopefully be joining me in July/August this year after one of my sons has finished his exams.

If our house sells in the UK and we transfer that equity over to here - will I get taxed on it ?

I don't want to lose a big wedge of that equity as it is for a car, deposit on a property here etc.

What is the best way of doing this ?

[JonboyE]

Originally Posted by Animal Not meaning to hiack this thread but this has made me think of something !! I arrived Mid November alst year and did a tax return for the 6 weeks I was here. My wife and family will hopefully be joining me in July/August this year after one of my sons has finished his exams. If our house sells in the UK and we transfer that equity over to here - will I get taxed on it ? I don't want to lose a big wedge of that equity as it is for a car, deposit on a property here etc. What is the best way of doing this ?

Do you own or rent in Canada? If you rent then you have no worries. You can designate your UK house as your principal residence as long as your wife lives there. There is no tax on a gain of your principal residence. There is no tax on transferring money from the UK to Canada.

If you have purchased a house in Canada then you have to chose which one is your principal residence. However, unless you intend to hold onto your UK house for several years there is unlikely to be any significant gain.

[Animal]

Originally Posted by JonboyE Do you own or rent in Canada? If you rent then you have no worries. You can designate your UK house as your principal residence as long as your wife lives there. There is no tax on a gain of your principal residence. There is no tax on transferring money from the UK to Canada. If you have purchased a house in Canada then you have to chose which one is your principal residence. However, unless you intend to hold onto your UK house for several years there is unlikely to be any significant gain.

I'm staying a B&B (well read that as B as I don't get breakfast!) so from what you said - I'm happy

Thanks

[JonboyE]

Originally Posted by JonboyE Alternately, if you have a lot of money at stake, you could look into establishing some sort of alter ego trust in the UK (or elsewhere) if you can be sure the trust will be resident in that jurisdiction for tax purposes. Tread carefully with this though because the CRA have a habit of determining that if the trust acts on the directions of a Canadian tax-resident then the trust is also resident in Canada.

Edited to add:

This might work to shelter the income from tax but your interest in the trust is a capital asset that must be reported annually and is subject to the deemed disposition rules.

[andrewsco]

Originally Posted by JonboyE When you become tax-resident in Canada (usually when you start to live here) you are deemed to have sold and repurchased all your assets so that their tax cost is their fair market value on that day. This makes perfect sense as Canada should not tax you on gains that occurred when you did not live here. Although money can't be bought and sold its tax cost is the value in foreign currency at the exchange rate on the day you become a tax resident. Let us assume you have £100,000 on deposit in a bank in the UK. On the day you move to Canada the exchange rate is 1.6 so it has a tax cost of $160,000. The interest you earn on the deposit is taxable in Canada. You usually use the annual average exchange rate to convert the interest into Canadian dollars. The £100,000 is considered a capital asset so is only subject to tax if there is a realized transaction. Say that a couple of years after your move you need to spend £20,000. The exchange rate is now 1.7. You have a capital gain of £20,000 x (1.7 - 1.6) or $2,000. Half of this is added to you taxable income for the year. In six years you decide to move back to the UK for good. The exchange rate is now 1.9. Just as when you moved to Canada you are deemed to have sold all your assets on the day you emigrate so you have a capital gain of £80,000 x (1.9 - 1.6) or $24,000. $12,000 is taxable. One thing to keep in mind as you mentioned a five year plan. Any capital assets you own before becoming tax-resident in Canada and still own when you cease to be tax-resident are not subject to the deemed disposition rules IF your stay in Canada is less than 60 months. If you were thinking of five years then four years and eleven months might be optimal. Alternately, if you have a lot of money at stake, you could look into establishing some sort of alter ego trust in the UK (or elsewhere) if you can be sure the trust will be resident in that jurisdiction for tax purposes. Tread carefully with this though because the CRA have a habit of determining that if the trust acts on the directions of a Canadian tax-resident then the trust is also resident in Canada.

Thank you - a VERY helpful example!

I think I need to really think about whether it is best to keep the money in a UK bank or just transfer the whole sum across. That said at the minute I can put my money into a 3-4% fixed bond for a few years which seems much higher than in CAD so hmm....

Jon E - personal question, but what would you do? the 5 year plan isn't fixed or anything. It could be 3 years it could be 10 - I just have a gut feel for 5 ish. I'll speak to an accountant / tax advisor when back in the UK but would be interested in your perspective.

Thanks

[JonboyE]

I would follow the first rule of tax planning and that is not to do anything just to avoid tax. You do what makes the most personal and/or commercial sense and then find the most tax efficient way of doing it. You have £ now and expect to spend £ in the future.

a) If you leave the money is sterling then you will likely get a higher rate of interest. The down side is that if sterling strengthens against the dollar you may end up paying tax on a notional capital gain.

b) If you convert the money to Canadian dollars there will be no capital gain but if sterling strengthens against the dollar then you will have a real loss when you convert it back.

Of course, the Canadian dollar could appreciate against sterling and this would reverse the outcomes. I have no great insight into currency markets but my gut feel that the Canadian dollar is pretty much close to the peak of its value for the next few years.

Scenario a) Carrying on with the example above your £100,000 has a tax cost of $160,000. If you return to the UK when the rate is 1.9 you will pay tax on half the gain i.e. $15,000 [1/2 x 100,000(1.9-1.6)]. Exactly how much tax you pay will depend on your other income and province but in BC the maximum will be $6,555.

Scenario b) you received $160,000 when you converted the £ to $. Now you convert the $ back to £ at 1.9 you only receive £84,211.

The downside of a) is $6,555 but the downside of b) is £15,789. a) every time for me.

a) is also consistent with the old fashioned rules of treasury management that you minimize FX risk by getting money into the currency it will be spent in as soon as you can. However, these days there are some opportunities to hedge FX risk if you have enough money at stake to make the transaction costs worthwhile. If you think the Canadian dollar still has legs and the UK economy is about to slide into the North Sea you could convert your money into Canadian dollars now and buy an option to purchase sterling at an acceptable price at some point in the future.

[Steve_]

Originally Posted by andrewsco In terms of tax - if I have earned the interest tax free (as in the case of one of my accounts) then I will have to declare any earnings that I make on my Canadian tax return. However if UK tax has already been deducted from the interest then I would be able to apply a tax credit in Canada for this amount (meaning I only pay tax on the interest once). Is this correct?

How you do it is to not have the income tax deducted, you file an R105 with the bank, they stop withholding the interest.

Then you declare the full amount on your T1, using the yearly exchange rate average from the Bank of Canada website, and you pay Canadian income tax on it.