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! 🙏

Pulaski

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.

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!

Pulaski

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.

JonboyE

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.

Pulaski

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.

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. 🤔

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? 🧐

christmasoompa

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.