This week, on the night US primary results came in from Super Tuesday, Citizenship and Immigration Canada reported an increase in its normal website traffic from the US. Google reported a spike in the search term “moving to Canada” in the hours and days after. US citizens moving to Canada need to consider many issues such as immigration, health care, employment and skate size. Our tax laws are different than the US too and below we summarize some of the more common differences between Canadian and US income tax law for US citizens resident in Canada:
No Joint Tax Returns – Each spouse is required to file their own Canadian income tax return which can result in higher tax liabilities compared to the US when one spouse has income and the other doesn’t. To lower a families overall Canadian income tax rate, a couple often plans to split income between them so that each spouse can take advantage of their own lower marginal Canadian tax rates. There are easy ways to do this for such items as pension income. There are more complicated ways to do this with investment assets and business income.
Higher Income Tax Liabilities – Canada’s top marginal tax rate varies from province to province and can range anywhere from 47 to 59%. This rate includes both the Canadian federal and provincial income tax rates and can be comparable to the top marginal US tax rates for individuals who are also subject to state income tax. However, while the rates can be comparable, the top marginal tax rate starts sooner in Canada compared to the US. A Canadian resident of British Columbia will pay a top marginal income tax rate of 47.7% on taxable income over C$200,000. In contrast, a single US resident of California doesn’t hit the top US federal income tax rate until income exceeds US$415,000 at which point their combined marginal US federal and California tax rate would be 50.6%.
Lower Payroll Taxes – Canada’s equivalent to US Social Security and Medicare Taxes is Canada Pension Plan and Canadian Employment Insurance. An individual employed in Canada pays approximately C$3,300 per year in Canadian payroll taxes on income of C$60,000 and nothing on income exceeding this amount. US payroll taxes are not only approximately C$1,200 higher on a similar amount of income, they can be two to three times larger on higher incomes since the US has a higher maximum on Social Security and no maximum on Medicare taxes.
Use of Corporations – US resident small business owners often use flow-through entities such as US Limited Liability Companies and US “S” corporations to be taxed personally on the business’ income as this generally achieves the best overall US tax result. Canada provides a low corporate income tax rate of 13 to 15% on the first C$500,000 of profits for certain small businesses. Furthermore, the taxation of corporate and personal income tax is integrated so that individuals are generally indifferent between earning income in a corporation compared to personally.
As a result, small business owners often use Canadian corporations that are not flow through entities which results in corporate taxation of profits at lower rates and an incentive to leave money in the corporation. US citizens resident in Canada need to be alert to the US tax considerations of ownership of a Canadian corporation.
Continuing US Tax Issues – US citizens are subject to US federal income tax on their worldwide income, regardless of where they reside. As a result, US citizens resident in Canada need to be mindful of both Canadian and US income tax law. Many of the choices and strategies available under Canadian tax law have very different US tax implications.
Our firm specializes in US and Canadian cross-border taxation and we see these issues and others often. We work with our clients on all these issues on a regular basis. Anyone from the US considering a move to Canada should seek out tax advice and we can assist with that.
 Excludes Net Investment Income Tax of 3.8% and does not include potential deduction of state income tax against US federal income tax.