Americans Moving to Canada
Moving to Canada? Here are some things you should know
The Canadian government’s immigration website crashed on election night. That might have happened regardless of which candidate won the election. Even if politics in the U.S. was not so polarized, moving to Canada might still be worth some thought. A recent cover of The Economist touted Canada as “liberty gone north”.
While Canada has many similarities to the U.S., the differences are more significant than French and English on cereal boxes. The following are some of the differences between Canada and the U.S. when it comes to taxes.
Who is Taxable?
Canada only taxes its residents on their worldwide income. Canadian tax residency does not require an individual to have legal status in Canada. The US taxes its citizens on their worldwide income regardless of where they live.
U.S. citizens living in Canada must file U.S. and Canadian tax returns reporting their worldwide income in both countries. Double taxation can be avoided in most cases with offsetting tax credits.
Appreciation of assets acquired before moving to Canada will not be taxable in Canada, although U.S. citizens will still be taxable in the U.S. when these gains are realized.
Renunciation of Citizenship
U.S. citizens living outside the U.S. can avoid US tax where they renounce their U.S. citizenship and have no income from the U.S. Renunciation of U.S. citizenship may result in a U.S. tax liability for individuals with over $2 million net worth, averaging $161,000 of US tax or unfiled or incomplete U.S. tax returns. It would be inadvisable to renounce U.S. citizenship without previously becoming a citizen of Canada or another country.
No Joint Tax Returns
Residents of Canada must separately file Canadian tax returns where their gross income exceeds certain levels even if they are married. In Canada, married couples go to great lengths to split income between them so that each spouse can take advantage of their own graduated Canadian tax rates.
Limited Itemized Deductions
Mortgage interest and property tax on personal residences are not deductible for Canadian tax purposes, nor are provincial income and sales taxes. The good news, charitable contributions are deductible and medical and dental expenses are more likely to be deductible than in the U.S. Canada converts deductible expenses to credits so that taxpayers get the same benefit regardless of their income.
Canada’s top marginal combined federal and provincial tax rate varies from 46 to 59% depending on the province of residence. Capital gains are taxed at half that rate. There is no requirement to hold capital assets 12 months or longer to get preferential tax rates as in the U.S. Preferential tax rates also apply to dividends from Canadian corporations.
Tax Rate Structure
A resident of British Columbia will pay a top marginal income tax rate of 47.7% on taxable income over C$200,000 (US$150,000). In contrast, a married resident of Washington doesn’t hit the top U.S. federal income tax rate until their taxable income exceeds US$466,950 (C$622,600).
Special Tax Breaks
Gains on the sale of principal residences are exempt from Canadian tax, as are lottery winnings. Stock options are preferentially taxed in Canada. Qualifying gains of up to C$824,000 (US$618,000) on the sale of small business corporations can be excluded from Canadian income tax.
Lower Payroll Taxes
Canada’s equivalent to US Social Security and Medicare Taxes, Canada Pension Plan contributions is a bargain for both employees and employers. An individual employed in Canada pays approximately C$2,540 (US$1,910) in 2016 on wages up to C$54,900 (US$41,176). No additional tax is payable on amounts exceeding the threshold. In contrast, US employees earning the maximum US$118,500 (C$158,000) would pay US$9,065 (C$12,086).
Yes, Canada has government health care. Most of it is paid through the income taxes (British Columbia also charges a monthly fee of C$136 for a family of two). It covers most basic health care costs excluding dental and vision care. Long wait times for non-emergency care is a common complaint.
Goods and Services Tax
The GST is Canada’s value added tax that applies a 5% tax to the consumers of both products and services. Exclusions apply to food, medical services and certain other categories.
Use of Corporations
Canada’s top marginal corporate tax rates range up to 31% including provincial tax rates compared to the maximum U.S. federal tax rate of 35% plus state income tax rates which can result in a combined US corporate tax rate of 40% or more. The difference is greater for Canadian corporations controlled by residents of Canada which are eligible for tax rates of 15% or less on taxable income of less than C$500,000 (US$375,000).
The Bottom Line
Most Americans will find Canada different but familiar. Personal taxes are generally higher in Canada but corporate tax rates are very attractive. The costs of forming and operating businesses in Canada is attractive without the paper blizzard from 10,000+ taxing jurisdictions in the U.S. Finally, Canadians are generally polite and courteous to a fault, when they are not playing hockey.
Steven Flynn and Warren Dueck are certified public accountants in Washington and chartered professional accountants in Canada. They are both partners of W.L. Dueck & Co. LLP specializing in U.S. and Canadian cross-border taxation. Anyone considering a move to Canada from the U.S. or other countries should seek out cross-border tax advice.