Replies to Queries

Readers' Forum

Replies to Queries — 3

Canadian credits

My client, a United Kingdom national aged 71, recently returned to this country, but still has investments in Canada. A Canadian tax return is not prepared and withholding tax is deducted from dividends and interest.

I was not aware until this year that, on 1 April 2002, my client deposited 100,000 Canadian dollars at five per cent compound interest per annum. (Interest of C$5,250 was received on 31 March 2004, being five per cent of C$105,000 dollars.) The investment, with interest, will be repaid on 1 April 2007. If encashed earlier, the interest actually obtained would be much less.

While my client cannot draw the interest earned each year, it is being credited to the account annually to calculate future interest, so I would have thought that the Inland Revenue would expect it to be declared each year. However, if that is done, there may be a problem when the final year's interest is credited, because only in 2007 will Canadian tax at ten per cent be deducted from all the interest earned during the five years.

Thus, if only one year's interest has to be declared to the Inland Revenue in 2007, the Canadian tax will be over 50 per cent of that amount, so this may not be fully allowed, especially if the sterling value improves by then.

I presume that, in Canada, the interest on such an investment would only be declared for tax purposes in the year of encashment. I did consider claiming a 10 per cent tax credit each year, but there would be no proof of deduction until 2007.

Any suggestions which readers can make on how I should proceed would be appreciated.

(Query T16,486)

Issue: 3977 / Categories: