Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Is interest income earned by a person resident in Canada for the purposes of the Act, in a U.K. ISA taxable in Canada?
Reasons: Under the Act, Canadian residents must report their worldwide income, including interest income earned in an U.K. ISA.
September 6, 2013
Re: Interest Income earned in a U.K. Cash Individual Savings Account
(a "UK Cash ISA")
This is in reply to your letter dated August 31, 2012, wherein you requested our comments in respect of how interest income earned by an individual resident in Canada in a UK Cash ISA is treated for Canadian tax purposes and whether there is any treaty relief available under the Canada-United Kingdom Tax Convention ("Treaty"). We apologize for the delay in responding to your letter.
As described in your letter, a UK Cash ISA is a type of savings account that may be opened by a resident of the U.K. Under U.K. tax law, a UK Cash ISA is treated much like how a Tax Free Savings Account ("TFSA") is treated under the Canadian income tax rules. A resident of Canada may have a UK Cash ISA if that person had previously been resident in the U.K. and had opened such an account at that time.
We provide our comments in the context of the following hypothetical scenario. An individual resident in Canada has a UK Cash ISA, consisting of a deposit savings account and term investments such as GICs, with a U.K. financial institution. There are no periodic payments paid out from the UK Cash ISA but, rather, withdrawal of funds can be made by the owner from the UK Cash ISA whenever desired. For the purposes of our response we assume that the UK Cash ISA arrangement described herein is not a trust for Canadian tax purposes.
Although income earned in a UK Cash ISA is not subject to taxation in the U.K., under the Canadian Income Tax Act ("Act") Canadian residents (as determined based on the factors described in Income Tax Folio S5-F1-C1, Determining an Individual's Residence Status) must report their worldwide income, including income earned on investments held in the U.K., for Canadian tax purposes. As such, the interest received or receivable in the year from the investments in a UK Cash ISA must be included in a Canadian resident's income tax return pursuant to paragraph 12(1)(c) of the Act.
Furthermore, while Article 11 of the Treaty provides relief from the taxation of interest income in certain circumstances, there are no provisions under Article 11 that will exempt the interest income earned by a resident of Canada in a UK Cash ISA from being taxed in Canada. Paragraph 1 of Article 11 of the Treaty clarifies that interest arising in the U.K. and paid to a resident of Canada may be taxed in Canada.
You also asked whether the interest earned would be exempt under the Treaty if the UK Cash ISA had been opened for retirement purposes. There are no provisions in Article 17 (Pensions and Annuities) of the Treaty that would restrict Canada from taxing the income derived by a Canadian resident from a UK Cash ISA.
Since the interest income in a UK Cash ISA is taxed in Canada as it is earned, when funds are withdrawn from a UK Cash ISA such as the one described herein, the funds withdrawn will not be subject to tax for Canadian income tax purposes. While the hypothetical scenario described herein only refers to a UK Cash ISA with a deposit savings account and term investments, such as GICs, it should be noted that UK Cash ISAs may also include other types of investments such as shares in companies that fail to meet the qualifying conditions for a U.K. Stock and Shares (Investment) Individual Savings Account. In the latter case, should there be dividends on such shares or should such shares held in a UK Cash ISA be disposed of, the dividends or resulting capital gain or loss will need to be reported for Canadian income tax purposes. As is the case for the interest, since the dividends and the capital gain or loss must be reported for Canadian tax purposes when realized, when the related funds are withdrawn from the UK Cash ISA after the disposition of such shares, the funds withdrawn will not be subject to tax for Canadian income tax purposes.
We trust these comments to be of assistance.
Olli Laurikainen, CPA, CA
Income Tax Rulings Directorate
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