The US-Canada border is one of the friendliest borders in the world, despite recent debate by US presidential candidates about building a wall along it. As a result, many people move back and forth between Canada and the US. I am one of those people. I grew up in Canada, went to university and worked in the US, moved back to Canada for a few years, and now live back in the US.
Those considering a cross-border move need to understand the difference between the two countries' personal tax systems. Although the principles in each country are similar, the implementation is quite different.
In this post I will summarize some of the key differences. My goal is not to write a definitive guide. Rather, my goal is to give you a starting point for your own further research and/or discussions with your tax advisor.
The following are some keys areas of difference:
To establish the terminology, the US tax agency is called the Internal Revenue Service (IRS) and the Canada tax agency is called the Canada Revenue Agency (CRA).
This is a side note, but in my experience the CRA is much friendlier and easier to contact than the IRS. I guess that’s not surprising given the friendly Canadian stereotype. They probably say sorry while seizing all of your possessions… But I digress. On to the next difference.
When you move
Canada only taxes residents, while the US taxes all residents plus all US citizens wherever they live in the world.
The only way for US citizens to escape US tax is to move out and renounce citizenship. US citizens who move to Canada (or any other country) have to file a tax return in both countries. The IRS provides a credit for the tax paid to the country of residence (which is hopefully at least what would be owed to the US, otherwise, Uncle Sam will bill for the difference)
Those who leave Canada can drop their Canadian residency and voila, no more Canadian tax. However, there’s a catch. Canada won’t let anyone escape gains they haven’t paid tax on yet. The CRA treats most assets as if they are sold at market value on the moving day (“deemed disposition”), and tax is owed on any gains.
For example, you paid $1 each for shares in a private company, and they are worth $5 when you move. You have to pay capital gains tax on the $4 gain, even though it’s not a real gain. This can be a shocker if you don’t plan for it, so I recommend carefully reviewing your situation with a tax advisor experienced in this area.
Filing status and income splitting
In Canada, everyone files individually. Until recently, spouses couldn’t split income. This was a disadvantage for families with a sole breadwinner. One spouse pays tax on their full income at the graduated tax rates. The spouse without income can't take advantage of the lower rates on lower levels of income.
Income splitting under certain conditions was recently added to Canadian tax law, but some parties in the upcoming election are threatening to repeal it.
In the US, married couples file together. As a result, income splitting is not an issue.
Income tax rates
Both countries have a progressive tax system, which means taxpayers pay more tax on higher income levels. The tax rates on given income levels are quite similar above about $75,000 to $90,000 in taxable income.
Canada’s income tax rates are a little higher overall for two reasons.
First, using approximate 2015 numbers, Canada tax is 15% up to $45,000 and 22% up to $90,000. US tax is 10% up to $20,000 and 15% up to $75,000. Above that, rates are close to the same.
Second, Canada’s provincial rates are higher on average than US states. For example, Utah (where I live) state tax is about 5%, and Alberta (where I moved from) provincial tax is 10%.
That’s enough tax excitement for one post. In my next post I’ll tackle some more differences, including:
- Why income tax rates have little to do with how much tax you actually pay
- The type of tax that most working US residents pay the most of (hint: it’s not income tax)
Disclaimer: I am a CPA in both Canada (Chartered Professional Accountant) and the US (Certified Public Accountant), but I don’t practice tax accounting, and this post is not meant to be professional advice.