Wednesday, October 4, 2023

Crossing Borders - A Practical Guide to ISA Restructuring for UK Expats in Canada

Last updated Wednesday, May 31, 2023 18:15 ET , Source: Chase Buchanan

UK expats need to be aware that the favourable ISA tax treatment is not replicated in Canada.

Paphos, Cyprus, 05/31/2023 / SubmitMyPR /
Crossing Borders: A Practical Guide to ISA Restructuring for UK Expats in Canada
Crossing Borders: A Practical Guide to ISA Restructuring for Expats in Canada

British expatriates relocating to Canada have myriad decisions to make about their wealth and income, from restructuring investments to transferring pensions, identifying the best way to deal with overseas property ownership and managing long-term cash savings products such as Individual Savings Accounts (ISAs).

In the UK, an ISA is tax-efficient, with several categories from Cash and Lifetime ISAs to Stocks and Shares ISAs – but the favourable tax treatment available is not replicated in Canada.

Prospective UK expats in Canada benefit from independent expat financial advice to inspect their options and evaluate the likely tax exposures of retaining or reinvesting their ISA funds. Chase Buchanan Wealth Management, a global expat wealth management firm with a Canadian branch and Administrative Centre in the UK, explains some of the major considerations to be aware of.

Dealing with ISA Products for UK Expats in Canada

The tax rules around ISAs, interest income and cash withdrawals are restricted to the UK and under the control of HMRC. Overseas tax offices will usually apply different, less generous tax treatments to these investment or savings products.

While expats can opt to retain an ISA in the UK, this option carries varied risks and caveats where:

  • Overseas tax regulators are not obliged to, and do not, offer tax exemptions against drawdowns or interest earnings.
  • While resident overseas, UK citizens are not permitted to continue contributing to a UK ISA and cannot claim tax reliefs if they are no longer, or temporarily not, British tax residents.

There is no mandatory requirement to close an ISA account, remove funds and returns, or restructure savings products. Still, the resultant tax exposure may indicate that reinvestment opportunities are considerably more efficient, exchange rate risks notwithstanding.

In Canada, the closest equivalent of an ISA is a product called a Tax-Free Savings Account, or TFSA, a programme launched in 2009. This scheme is designed for residents of 18 or above with a valid SIN or Social Insurance Number who can make contributions to their TFSA at any age without attracting income tax.

However, if a British citizen living in Canada as a tax resident opts to retain a British-based ISA, they will not be eligible for the tax reliefs and exemptions associated with a TFSA since, despite the similarities, these two products are unique to their tax jurisdictions rather than directly interchangeable alternatives.

Taxes on British ISAs for Resident Canadian Expats

Within UK tax law, most ISAs are exempt from income tax or capital gains tax liabilities, and contributions are made from post-tax earnings. Limitations apply, such as against Lifetime ISAs, a product with higher government-backed returns that is only accessible for savings to be used towards retirement or a property purchase deposit.

The Canadian tax treaty with the UK does not provide any exemptions or special tax treatments for ISAs, which means the income earned and capital appreciation is fully exposed to taxation, where any Canadian resident is liable to report and pay tax against their worldwide income.

Generally, an ISA will be defined as a ‘specified foreign property’ and therefore be included within reporting requirements via the Canada Revenue Agency (CRA) Foreign Income Verification declaration if the ISA value is CAD$100,000 (GBP - £59,522) or above.

Additionally, taxpayers with more than one ISA or other foreign assets or savings products which cumulatively exceed the $100,000 threshold must be disclosed and will be subject to taxation computations, regardless of the cost amount of the individual ISA.

Mandatory ISA Reporting Requirements for UK Citizens Living in Canada

As in the UK, failure to report and disclose an asset or revenue that is subject to Canadian taxation can attract steep penalties, with the CRA able to levy fines up to 50% of the tax payable or even bring criminal charges against taxpayers they believe have deliberately obscured their assets.

Foreign nationals with Canadian residency who do not submit the appropriate Foreign Income Verification declaration are automatically fined $2,500 (£1,488) per year, up to $500 (£300) a month over 24 months, with a maximum fine of $12,000 (£7,145).

If the CRA finds that a resident taxpayer deliberately failed to file a declaration or is guilty of negligence, they can be fined as much as $1,000 (£595) a month for two years and up to $24,000 (£14,285). After that, the penalty can be revised to 5% of the value of the ISA.

Effectively, any perceived benefit of non-disclosures or non-declarations can be extremely costly and even endanger the residency status of an overseas national, with, over five years, a possible penalty as high as 50% of the total ISA valuation or the entire value over ten years.

Not reporting or paying the arising taxes is a serious situation where tax office investigations, penalties, interest charges and fines can quickly escalate to multiple times the original tax obligation arising.

ISA Savings Options for Canadian-Resident British Nationals

While this information demonstrates that the tax advantages of a UK ISA are not replicated in Canada, and the consequences of non-declarations or non-payment of taxes can be severe, there is no one universal solution that will be appropriate for every British expat relocating to Canada.

As a general rule of thumb, UK citizens relocating abroad may consider keeping an ISA as-is if they intend to return to Britain within a finite period and where a temporary loss of tax reliefs is an acceptable outcome of living in a different tax jurisdiction for a limited time.

That said, any individual living long-term in another country is likely to be considered a tax resident if they spend half of the year or more there or have other links associated with their primary residence, place of work, business location or family.

Currency risks are also an influential factor where, if you opt to withdraw the balance of an ISA from another country for reinvestment, currency exchange rates can mean the true real-world value of accumulated savings become less than expected.

Solutions rely on a thorough analysis of your circumstances and expectations, but reinvesting into private or offshore pension schemes, tax-efficient savings structures or other investment products may be beneficial.

For more information about managing an ISA when relocating to Canada or as an existing Canadian taxpayer with UK ISA products, please get in touch with Chase Buchan Wealth Management for advice from the expat financial planning professionals.

Read more about Chase Buchanan in Canada - Expats in Canada: Obligations for Residents and Non-Residents

About Chase Buchanan Private Wealth Management

Chase Buchanan is a highly regulated wealth management company who specialises in providing global finance solutions for those with a global lifestyle. We are global financial advisers, supporting expatriates around the world from our regulated European headquarters, and local offices across Belgium, Canada, Canary Islands, Cyprus, Malta, Portugal, Spain, UK and the USA. 
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Chase Buchanan Ltd is authorised and regulated by the Cyprus Securities and Exchange Commission with CIF Licence 287/15.


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