Getting ready to move to the Great White North?
In addition to finding housing and physically moving yourself and your belongings, you’ll want to consider the tax implications of a move to Canada. A common question that often guides these considerations is a side-by-side comparison between the Canada tax rate vs the US tax rate. Prospective US expats want to know: do Americans pay more? When considering this question, it’s important to research more beyond income taxes. There’s a lot more to consider, including sales and property taxes.
It can feel daunting to try and analyze different tax systems and ascertain how to position yourself financially. That’s why we’ve created this guide: When you’re ready to crunch some numbers, this guide will help you calculate your total tax picture when you leave the US for Canada.
Understanding the Canadian tax system
The structure of the Canadian tax system is based on a three-tier system as follows.
- Federal taxes
- Provincial taxes
- Municipal taxes
Here’s what you need to know about these three tiers.
Canadian federal taxes
The top tier of taxes that apply to most Canadian residents is federal taxes. We’ll talk about the two most common: payroll and income taxes.
Canadian federal payroll taxes
In Canada, employees and employers pay payroll taxes. ¹
- Canada Pension Plan (CPP): Similar to the US Social Security program. It provides retirement and disability benefits to workers. Note: Quebec has its own pension plan that employees and employers contribute to instead of the CPP.
- Employment Insurance (EI): Federal unemployment insurance program
Canadian federal income taxes
For individual income, like the US, the Canadian federal individual income tax rates use a progressive system. That means the more you earn, the higher your tax rate.
Also, like in the US, Canada adjusts its tax brackets annually for inflation.
To zoom in, the Canadian federal individual income tax rates for 2023 are as follows.
Canadian federal individual income tax rates for 2023²
|Tax bracket (all amounts in CAD)
|Up to $53,359
|More than $53,359 up to $106,717
|More than $106,717 up to $165,430
|More than $165,430 up to $235,675
Let’s work with a basic example
Suppose Steven, a Vancouver-based business analyst, earns an annual income of $100,000 CAD. Here’s what the Canada Revenue Agency will want in personal income tax from his salary.
- The first band of tax is the portion up to $53,359 CAD. Since Steven’s income is more than the first tax bracket, that portion is subject to tax at 15%. This chucks off $8,003.85 CAD in tax.
- The portion of Steven’s salary that is still untaxed is $46,641 CAD ($100,000 – $53,359). This will be taxed at 20.5%, the rate applicable for the next band. This means another $9,561.41 CAD in tax.
Steven’s federal income tax liability will be $17,565.26 CAD ($8,003.85 + $9,561.41) for 2023.
Canada taxes all sources of income, not just wages. So keep in mind that your taxable income may also include things like:
- Retirement and pension income
- Unemployment insurance benefits
- Rental income
- Capital gains
- Workers’ compensation benefits
- Self-employment income
Canada offers dozens of tax deductions and credits that can lower your tax bill. These include things like
- Basic Personal Amount tax credit
- Caregiver tax credit
- Homebuyer’s tax credit
- Adoption expenses tax credit
- Tuition and education tax credit
- Medical expenses tax credit
- Donations and gifts tax credit
Canadian provincial taxes
Think of Canadian provincial taxes as equivalent to state taxes in the US.
Each of these regions charges its own income taxes, and they’re in addition to the federal taxes.
Also, Canadian provinces have different numbers of tax brackets and tax rates.
Newfoundland and Labrador have eight tax brackets, while Manitoba has only three.³ And the provincial taxes follow a progressive just like the federal taxes.
🔑 Important callout
Unlike in the US, where states individually oversee their taxes and the IRS oversees federal taxes, the Canada Revenue Agency collects and administers all provincial taxes.
Canadian municipal taxes
There are many municipal taxes in Canada. Below, we discuss the most common ones you’ll likely encounter.
Canadian property taxes
The most common Canadian municipal tax is a property tax charged if you own real estate in Canada.
These taxes are used for public services like schools, police, parks, and recreation.
Property taxes rates vary based on where you live. Moreover, the rate is applied to the assessed value of your property (the amount the government thinks your house is worth), not what you paid for it.
Your property tax bill could increase each year based on the frequency of reassessments. Some municipalities reassess properties yearly, while others, like Ontario, reassess every four years.
Canadian sales taxes
While the US does not have a federal sales tax, Canada does. It’s called the Goods and Services Tax (GST).
Also, some Canadian provinces, such as British Columbia, Saskatchewan, Québec, and Manitoba, have a state version of sales tax known as the Provincial Sales Tax (PST). This is in addition to the federal GST.
But some Canadian provinces such as Newfoundland and Labrador, New Brunswick, and Nova Scotia have one harmonized version of sales tax that combines the GST and the PST into something fittingly called the Harmonized Sales Tax (HST).⁴
Comparing US and Canadian tax rates
It’s difficult to conclude whether Canadian residents pay more taxes than their American counterparts. There are many similarities between the two tax systems. But there are also significant differences.
That said, these are some helpful comparisons when considering the Canada tax rate vs the US.
Comparing US and Canadian Taxes
|Number of federal individual income tax brackets
|Federal individual income tax rates
|15% to 33%
|10% to 37%
|The lowest individual tax bracket for 2023
|Are there state/provincial individual income taxes?
|All provinces have a provincial income tax
|8 states don’t have a state income tax
|What is the federal corporate income tax?
|15% (for Canadian income that does not benefit from other preferential treatment)
|Do you declare all capital gains in your income?
|No. You only claim 50% of your capital gains
|What is the federal capital gains tax rate?
|Capital gains are taxed at the marginal income tax rate
|Short-term capital gains = ordinary income tax rate
Long-term capital gains = 0%, 15%, or 20%, depending on your income
|Do states/provinces tax capital gains?
|Yes. The same rates as income tax
|Yes. At various rates
|Federal sales tax rate
Key tax breaks for Americans living in Canada
Even if you move to Canada and become a tax resident there, Americans and Green Card holders are still required to file an annual tax return with the IRS if they meet the minimum filing threshold. What this effectively means is that every year, you will be required to file two tax returns: one with Canada, and one with the US.
The good news is, there are a number of tax provisions that can help you avoid double taxation when living abroad:
- Foreign Earned Income Exclusion (FEIE): Allows those who qualify to exclude up to $120,000 of foreign-earned income (for tax year 2023) from taxation
- Foreign Tax Credit (FTC): Allows those who qualify to deduct what they have paid in foreign income taxes from what they owe the US
- Foreign Bank Account Report (FBAR): Requires those with $10,000 or more in foreign accounts to file FinCEN Report 114
- Child Tax Credit (CTC): Allows parents to claim up to $1,500 in partially-refundable credits per qualifying dependent
- Foreign Account Tax Compliance Act (FATCA): Requires those with over $200,000 in foreign assets on the last day of the tax year (or over $300,000 at any point in the tax year) to file Form 8938. (Thresholds for filing Form 8938 are much lower for those who reside in the US).
Can Americans catch up on past tax returns while living in Canada?
If you were unaware of your US tax filing obligations while living in Canada, don’t panic. The IRS offers an amnesty program for this exact situation called the Streamlined Procedures that helps eligible taxpayers catch up on back taxes penalty-free.
Partner with Bright!Tax to navigate the Canadian and US tax rate
Navigating the Canadian vs US tax rates can be stressful. Bright!Tax brings a wealth of firsthand experience to the US expat tax filing process – many of our CPAs are US expats themselves! Additionally, we understand that filing in two countries is stressful and time-consuming.
That said: We’re pleased to be able to offer US expats living in Canada the option to file both US and Canadian tax returns when they choose to work with us.