Go Back  British Expats > Living & Moving Abroad > Canada
Reload this Page >

Double Taxation - Expenses & Deductions

Double Taxation - Expenses & Deductions

Old Apr 26th 2023, 5:03 am
  #1  
Just Joined
Thread Starter
 
Joined: Apr 2023
Posts: 3
mr_teapot is an unknown quantity at this point
Default Double Taxation - Expenses & Deductions

Ahoy all,

Question: In the event that an individual is tax liable in both the UK and Canada (self employed / partnership in each country) - how should expenses / deductions be handled?

In particular:

Can you choose which country to claim an expense in?
Are there expenses that can be claimed on both tax returns?

Any help / advice would be much appreciated! 🙏
mr_teapot is offline  
Old Apr 26th 2023, 5:22 am
  #2  
 
Pulaski's Avatar
 
Joined: Dec 2001
Location: Dixie, ex UK
Posts: 52,575
Pulaski has a reputation beyond reputePulaski has a reputation beyond reputePulaski has a reputation beyond reputePulaski has a reputation beyond reputePulaski has a reputation beyond reputePulaski has a reputation beyond reputePulaski has a reputation beyond reputePulaski has a reputation beyond reputePulaski has a reputation beyond reputePulaski has a reputation beyond reputePulaski has a reputation beyond repute
Default Re: Double Taxation - Expenses & Deductions

Originally Posted by mr_teapot
Ahoy all,

Question: In the event that an individual is tax liable in both the UK and Canada (self employed / partnership in each country) - how should expenses / deductions be handled?

In particular:

Can you choose which country to claim an expense in?
Are there expenses that can be claimed on both tax returns?

Any help / advice would be much appreciated! 🙏
Both countries get an independent tax computation, per the rules on revenue recognition and allowable expenses, so yes, some expenses may appear in both computations. Then you pay tax to the country that has first bite at the cherry, and claim that amount as a tax credit to the second country.

For example suppose you're tax-resident in Canada but work in the UK for a few months, earning C$15,000, with allowable professional/legal expenses of C$2,000 and travel expenses (trains within the UK) of C$1,000. You would have net taxable income of C$12,000 and pay, say C$1,500 in tax to HMRC.

Then your Canadian tax computation would include C$15,000 income, but say half the prof/legal expenses aren't allowable in Canada, but the cost of flying to the UK, for C$2,000 is allowable in addition. So your net taxable income for Canada would be C$15,000 less C$1,000 prof/ legal, less C$3,000 travel, for net taxable income of C$11,000. Now let's say that the tax on that in Canada is C$2,000 .... what you would pay in Canada is C$500, being the C$2,000 less the C$1,500 you paid in the UK.

Last edited by Pulaski; Apr 26th 2023 at 5:26 am.
Pulaski is offline  
Old Apr 26th 2023, 6:20 am
  #3  
Just Joined
Thread Starter
 
Joined: Apr 2023
Posts: 3
mr_teapot is an unknown quantity at this point
Default Re: Double Taxation - Expenses & Deductions

@Pulaski, thank you for taking the time to lay this out with such clarity. Providing a hypothetical example really helps to illustrate the situation. 🚀

I was confusing myself by imagining that the deductions are somehow shared between the two territories, whilst the calculations are of course independent - each with it's own rules, allowances, exemptions, etc, etc.

In your example, the person travels to the UK for work. In our circumstance we operate a digital business that services clients in both territories, although the business is physically located in Canada (We operate the business from our home office). Presumably the 'work-from-home' tax rules of each territory would be considered in isolation? I.e. Expenses such internet costs would be deductible in both territories, in accordance with the rules of each territory?

Thank you!
mr_teapot is offline  
Old Apr 26th 2023, 6:39 am
  #4  
 
Pulaski's Avatar
 
Joined: Dec 2001
Location: Dixie, ex UK
Posts: 52,575
Pulaski has a reputation beyond reputePulaski has a reputation beyond reputePulaski has a reputation beyond reputePulaski has a reputation beyond reputePulaski has a reputation beyond reputePulaski has a reputation beyond reputePulaski has a reputation beyond reputePulaski has a reputation beyond reputePulaski has a reputation beyond reputePulaski has a reputation beyond reputePulaski has a reputation beyond repute
Default Re: Double Taxation - Expenses & Deductions

Originally Posted by mr_teapot
@Pulaski, thank you for taking the time to lay this out with such clarity. Providing a hypothetical example really helps to illustrate the situation. 🚀

I was confusing myself by imagining that the deductions are somehow shared between the two territories, whilst the calculations are of course independent - each with it's own rules, allowances, exemptions, etc, etc.

In your example, the person travels to the UK for work. In our circumstance we operate a digital business that services clients in both territories, although the business is physically located in Canada (We operate the business from our home office). Presumably the 'work-from-home' tax rules of each territory would be considered in isolation? I.e. Expenses such internet costs would be deductible in both territories, in accordance with the rules of each territory?

Thank you!
Yup, the two tax comps are done in parallel with no overlap, and each according to their own rules, HOWEVER your scenario is for two parallel businesses, whereas I was thinking more of one business/ income source taxed in both countries.

So for two parallel businesses, there will likely be some split costs, that would need to be apportioned. For example computer/ internet costs - if that expense supports both businesses, and let's say that you do three times as much business in Canada as the UK then 75% of the cost would be deducted in Canada and 25% in the UK. In other words you cannot deduct 100% of the expense in both computations (you could probably split such expenses on "any reasonable basis" e.g. number of units sold, weight sold, etc.)

You should also split/ prorate expenses only deductible in one country. For example if one country allows you to make a deduction based on the floor area set aside for your business. If only Canada allows such a deduction then you would only deduct 75% of the total cost in your Canadian tax computation.

But then, if you've had a UK tax assessment and Canada also wants to tax that activity, then my previous example would apply too.

Last edited by Pulaski; Apr 26th 2023 at 7:05 am.
Pulaski is offline  
Old Apr 26th 2023, 8:06 am
  #5  
Binned by Muderators
 
Joined: Jul 2007
Location: White Rock BC
Posts: 11,687
JonboyE has a reputation beyond reputeJonboyE has a reputation beyond reputeJonboyE has a reputation beyond reputeJonboyE has a reputation beyond reputeJonboyE has a reputation beyond reputeJonboyE has a reputation beyond reputeJonboyE has a reputation beyond reputeJonboyE has a reputation beyond reputeJonboyE has a reputation beyond reputeJonboyE has a reputation beyond reputeJonboyE has a reputation beyond repute
Default Re: Double Taxation - Expenses & Deductions

Originally Posted by mr_teapot
Any help / advice would be much appreciated! 🙏
My advice is to see an accountant who knows what they are doing. Pulaski knows **** all and following his "advice" will get you into all sorts of trouble.

Your starting point is Article 7.1 of the tax treaty.
JonboyE is offline  
Old Apr 26th 2023, 9:53 am
  #6  
 
Pulaski's Avatar
 
Joined: Dec 2001
Location: Dixie, ex UK
Posts: 52,575
Pulaski has a reputation beyond reputePulaski has a reputation beyond reputePulaski has a reputation beyond reputePulaski has a reputation beyond reputePulaski has a reputation beyond reputePulaski has a reputation beyond reputePulaski has a reputation beyond reputePulaski has a reputation beyond reputePulaski has a reputation beyond reputePulaski has a reputation beyond reputePulaski has a reputation beyond repute
Default Re: Double Taxation - Expenses & Deductions

Originally Posted by JonboyE
My advice is to see an accountant who knows what they are doing. Pulaski knows ....
Thank you for your kind words. But I do agree that tax computations of this type should not be attempted without guidance of an experienced tax accountant, and yes the details are buried in the tax treaty, but good luck making any sense of that if you don't have an accounting licence.

That said, and the reason for my previous posts, is that even accountants can get things wrong, so it makes some sense to have a general idea of what the rules are trying to achieve, so you know what records and information you will need to provide for your accountant, so you can have some expectations of how much tax you will be paying, and recognize if your accountant has made substantial mistakes.

Last edited by christmasoompa; Apr 27th 2023 at 3:29 am. Reason: Nope. Rules 1 and 18.
Pulaski is offline  
Old Apr 27th 2023, 3:21 am
  #7  
Just Joined
Thread Starter
 
Joined: Apr 2023
Posts: 3
mr_teapot is an unknown quantity at this point
Default Re: Double Taxation - Expenses & Deductions

JonboyE Pretty harsh, but thanks for the advice all the same. Article 7.1 refers to business profits, however my question refers to expenses. Would you be able suggest where I might find a suitably qualified accountant? The only ones I've found charge hundreds of dollars / hour. 🤔

Pulaski Agreed, I would like to understand how this works to the best of my ability - I am not one to blindly put faith in professionals without doing the due diligence myself and getting to know the underlying mechanics of a system. This will actually be my third year filing taxes simultaneously through the CRA and HMRC, although the previous two years were much easier as we were not declaring many expenses to improve our borrowing capacity with lenders. Do you know which article(s) in the treaty underpin the proration / apportion treatment that you mentioned in your previous comment? 🧐
mr_teapot is offline  
Old Apr 27th 2023, 3:27 am
  #8  
SUPER MODERATOR
 
christmasoompa's Avatar
 
Joined: Oct 2007
Location: In a darkened room somewhere.............
Posts: 34,164
christmasoompa has a reputation beyond reputechristmasoompa has a reputation beyond reputechristmasoompa has a reputation beyond reputechristmasoompa has a reputation beyond reputechristmasoompa has a reputation beyond reputechristmasoompa has a reputation beyond reputechristmasoompa has a reputation beyond reputechristmasoompa has a reputation beyond reputechristmasoompa has a reputation beyond reputechristmasoompa has a reputation beyond reputechristmasoompa has a reputation beyond repute
Default Re: Double Taxation - Expenses & Deductions

Originally Posted by mr_teapot
JonboyE Pretty harsh, but thanks for the advice all the same. Article 7.1 refers to business profits, however my question refers to expenses. Would you be able suggest where I might find a suitably qualified accountant? The only ones I've found charge hundreds of dollars / hour. 🤔
I'd think any good accountant will charge that amount, if they don't charge much I'd wonder why. Just FYI, JonboyE is an accountant well versed in taxes both sides of the pond and has been used by many BE members who think highly of him. He's given you a starting point on the Tax Treaty.

Good luck.
christmasoompa is offline  

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Contact Us - Manage Preferences - Archive - Advertising - Cookie Policy - Privacy Statement - Terms of Service - Your Privacy Choices -

Copyright © 2024 MH Sub I, LLC dba Internet Brands. All rights reserved. Use of this site indicates your consent to the Terms of Use.