The US-Canada border is one of the friendliest in the world. As a result, many people move back and forth across the border. 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.
It’s important for people considering moving across the border to understand the difference between the two countries' tax systems and other factors impacting cost of living. Although the principles in each country are similar, the implementation is quite different.
I’ve been writing a series of posts on the topic, including tax agencies, impact of moving, filing status, and income tax rates; deductions and credits, payroll tax; and health care and other insurance.
In this post I’ll compare capital gains.
Put simply, capital gains occur when you sell certain property for more than you paid for it. This type of property is usually purchased for the intent of selling for a profit and/or generating income. For example, a rental property.
Capital gains are taxable. Both countries tax capital gains more favorably than regular income, but each countries handles it quite differently.
In Canada, you only include half of your capital gain in your taxable income. For example, if you earn a $100,000 salary and sell a rental property for $20,000 more than you paid for it, your tax is calculated on $110,000 of taxable income (only $10,000 of the capital gain is included). This means the tax rate on capital gains in Canada is half of your marginal tax rate (the rate top rate bracket your income falls into).
It doesn’t matter how long you owned the property for. It’s treated the same whether you sold it 1 day or 50 years after you bought it.
In the US, capital gains tax is more complicated.
The full amount of a short-term capital gain (property held for less than 1 year) is taxed as regular income. Long-term capital gains are taxed at a lower rate than regular income, but the amount depends on your tax bracket. Long-term capital gains in the 10% and 15% tax bracket aren’t taxed at all, those in the highest tax bracket are taxed at 20%, and everything in between is 15%.
Capital losses, obviously, are the opposite of capital gains. A capital loss is when you sell property for less than you paid for it.
In Canada, capital losses can only be used to reduce capital gains. If capital losses in one year are more than capital gains, you can use it to reduce capital gains in up to three previous years or any future year.
In the US, capital losses can reduce capital gains and up to $3000 of regular income. If losses are $3000 more than gains, you can carry them forward to future years.
Disclaimer: I am a CPA in both Canada (Chartered Professional Accountant) and the US (Certified Public Accountant), but I am not a tax expert and this post is not meant to be professional advice. 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.