With the 2016 U.S. Presidential elections coming to a end, there has been a sudden surge on Google Search for information on settling in Canada. Unfortunately, settling in another country is not simple, especially for U.S. citizens who are not only subject to U.S. tax formalities regardless of whether they reside within or outside the United States but would need to deal with huge expenses if they renounce their citizenship.
Given that Canada is the preferred choice of location, the following provides a few Canadian tax-related facts summarized by AG Tax analysts that U.S citizens considering relocating to Canada should keep in mind before proceeding with the relocation.
You Are Still Subject To U.S. Taxes
U.S. citizens, (even accidental citizens i.e. those who acquired citizenship by being born in a U.S. hospital or to U.S. parents) are subject to U.S. federal income taxes on their worldwide income, regardless of whether they reside in the U.S. or not. Thus, even if the U.S. citizen starts living outside the U.S., he/she would be subject to U.S. taxes on their worldwide income which could turn out to be a huge annual expense when complying with both U.S. and Canadian taxes. Professional help would be required to avoid tax issues, and avoid errors. Renouncing citizenship may also be costly considering that the U.S. government has increased the tax costs associated with renouncing U.S. citizenship.
No Canadian Joint Tax Filing of Income Tax Returns
The U.S. Internal Revenue Service (IRS) provides taxpayers the facility to file joint income tax returns, which eases the tax burden since a higher combined income is subject to lower tax rates when one of the spouses is earning lower than the other. But, unfortunately in Canada each spouse is required to file their income tax return separately, thus if one of the spouses is not earning any income or earning a lower income it does not help reduce the tax burden on the family.
Higher Income Tax Liabilities
Canada’s marginal tax rates including federal and provincial taxes are higher than that of the U.S. including federal and state taxes. For example, a Canadian resident of British Columbia would pay a top marginal income tax rate of 47.7% on taxable income over CAD$200,000; while a U.S. resident of California would be subject to such high marginal tax rates ranging from 47% to 50% only if the income is equal to USD$415,000 or above.
Tax Benefits of A Corporation
In the U.S., corporations are required to pay high rates of tax on the income of a corporation, then the shareholder is taxed when the income is distributed. Small business owners in the U.S. generally rely on LLCs and S-Corps to reduce the income tax burden by having the corporate income taxed personally thus minimizing “double-tiered” taxation. In Canada, the Canada Revenue Agency (CRA) taxes the first CAD $500,000 profit at a lower tax rate of 13% to 15% and taxation of corporate and personal income tax is integrated. That is, the individual receives a credit for the tax the corporation has paid, so individuals are generally indifferent between earning income in a corporation compared to personal tax rate. Plus, there is the ability to defer the personal portion of the tax until the income is distributed resulting in more after-tax income that can be reinvested by the business. US citizens considering Canada as an alternate location to settle should be aware of this aspect of corporate taxation.
Lower Payroll Taxes
U.S. employment income is subject to Medicare and Social Security taxes while in Canada the employment income is subject to Canada Pension Plan and Canadian Employment Insurance. An individual employed in Canada pays approximately C$3,500 per year in Canadian payroll taxes on income of CAD$60,000 or beyond, while in the U.S. the taxpayer pays CAD$1,200 or higher on a similar income level and two to three times larger on higher incomes since the U.S. has a higher maximum on Social Security and no maximum on Medicare taxes. The maximum payable in Canada is approximately $3,500 while the maximum Social Security tax is $7,350.
Additional U.S. Reporting Requirements
In addition to filing income tax returns, U.S. citizens are subject to complex requirements to report any interests they may have in foreign entities and investments including corporations, trusts, retirement plans, mutual funds and financial accounts. Onerous penalties are imposed for failure to file any of these reports.
Planning is Essential Prior to Moving
Moving to another country is not easy especially for U.S. citizens who are subject to U.S. taxes and reporting even if they do not reside in the United States. Tax strategies to reduce the tax burden need to be planned considering the tax laws of two countries, which can be quite a task for the taxpayer who is not aware of the tax laws of both the countries. Consulting a professional tax practitioner who is well-versed with U.S. cross-border taxes not only makes the transition easy but also helps one be fully tax-compliant in both countries and avoid any tax or penalty issues.
AG Tax LLP Can Help
If you wish to discuss further on the above issue, or have any tax-related queries or need assistance with tax planning or filing please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian tax laws and can provide you the right guidance to handle your tax situation.
Aylett Grant Tax LLP is a full service accounting firm with a dedicated team of experts, who are highly-qualified and experienced in handling situations related to U.S., Canadian, and other international tax laws.
We can assist with:
- Canadian Personal and Corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.