Tax season is around the corner and that means I’ve been getting frantic emails from readers about paying taxes in the UK and whether they have to file a tax return in Canada while living abroad. It turns out this stuff really isn’t as complicated as I thought!
The short answer is yes, in most cases you must file a tax return if you are earning income abroad.
But before we get to the meat of this post, I have a few disclaimers and requests:
1. Please do not email me with questions about taxes. I love hearing from readers, but I am neither an accountant nor a tax law specialist. The UK Government website has very clear guides to EVERYTHING so if you do email me with something “Hey Alyssa, Do I need to file a self-assessment?” I will respond with a link similar to this one. You know how I wrote this post? Research. A quick Google will often solve all your problems.
2. This blog post is for guidance only. I am relating my personal experience and while I endeavour to keep the information up to date and correct, I make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the website or the information, products, services, or related graphics contained on the website for any purpose. Any reliance you place on such information is therefore strictly at your own risk. In no event will I be liable for any loss or damage including without limitation, indirect or consequential loss or damage, or any loss or damage whatsoever arising from loss of data or profits arising out of, or in connection with, the use of this website.
Now that we have that out of the way, here is all the information you need to know about dealing with taxes while on a Youth Mobility Visa in the UK:
Are you a ‘factual resident’ of Canada?
A factual resident has maintained significant residential ties to Canada. That means while you may be working outside of Canada you still have a residence in Canada or a Canadian drivers licence. Visit this page to determine whether you are a ‘factual resident’.
If you want to stop paying taxes to Canada, you must sever residential ties–you must have no place to live in Canada, have financial accounts in your new country, and have taken your family with you. The minimum time frame to be determined a non-resident is 18-24 months without residential ties. Fill out the Form NR74 or NR73 at the bottom of this page for the CRA’s opinion on your residency status.
Have you severed residential ties? If no, please continue…
UK-Canada Tax Treaty
The tax treaty between Canada and the UK overrides both countries’ domestic law. That means that when you pay tax in the UK you receive a foreign tax credit in Canada.
If you earned the equivalent of CAD $45,000 in the UK you will pay almost CAD $14,000 in taxes. If the tax in Canada would have been CAD $16,000, you would have to pay an extra $2,000 to Canada.
However, taxes are generally higher in the UK than Canada so unless you are a high earner (£200,000+) you are not at risk of being double taxed.
This means that YES, you must file a tax return in Canada.
What if you arrived midway through the fiscal year?
This is what happened to me–I arrived in September and when I started my job I did not pay PAYE. This was because 1) I already had my NI number so I was not assigned an emergency tax code, and 2) By the end of the fiscal year my income would not have surpassed the personal allowance and I wouldn’t need to pay taxes on it.
In this circumstance, you must file a return in Canada including your income made in Canada and in the UK. If you didn’t have to pay taxes on it in the UK, you may have to pay them to Canada.
How do I actually do my taxes though?
In the UK, you do not need to file a return if you are paying PAYE. That said, if you have other income (freelance work, cash jobs, etc.) or tax deductions not accounted for in your tax code, then you must complete a self-assessment.
Now, once you have received your P60 from your employer (or completed your self-assessment, or both) you can start your tax return:
- Figure out your total income in Canadian dollars. Go to the Bank of Canada website and get the annual exchange rate for the year you are filing. Use that to calculate your total income (from Canada and the UK) and add that to line 101 and 104 as normal.
- Use that Bank of Canada annual exchange rate to calculate the amount of foreign tax credit (in Canadian dollars) you can claim for the taxes you paid here in the UK.
- Complete form T2209 – Federal Foreign Tax Credits. Enter the amount from Line 12 of the T2209 into Line 405 (Deductions) of your Schedule 1. Attach your T2209 form to the return.
File the rest of your return as normal and wait to hear back as to whether you owe the GoC some money.
How does HMRC deal with my emergency tax code?
If you were assigned an emergency tax code upon starting a new job, your permanent tax code will adjust for any under- or overpayments (if any).
If you have overpaid in the previous fiscal year you must contact HM Revenue and Customs and explain that why you think you overpaid. They will either send you a refund by cheque or tell you why you’re not due a refund. You can use the HMRC tax checker if calculate if you have overpaid.
I hold investments in Canada and income in the UK and tax deductions in Canada…
I cannot help you. Talk to an accountant who is familiar with expatriate accounting.