Taxes are a fact of life, but tax systems vary tremendously from country to country. Americans are used to a system of citizenship and household filing, but Canada is based on residency and individual responsibility. From retirement savings to sticker shock at the checkout counter, the differences can be costly for the unwary. When individuals cross the border, for work or business or pleasure, some of these differences can be confusing or cause serious misunderstandings.
The TFSA “trap” for Americans
Canadian taxpayers love their Tax-Free Savings Account (TFSA). Money you earn inside the TFSA (whether through interest, dividends, or the stock market) is 100% invisible to the taxman.
However, if you are an American living in Canada and filing U.S. taxes, the TFSA can become a literal nightmare. Since the IRS taxes Americans wherever they live, and does not acknowledge the special “tax-free” status of this type of Canadian account, they often treat it like an ordinary taxable investment.
In the worst cases, they even label the TFSA as a “Foreign Trust,” which requires expensive tax forms to report.
Mortgage interest isn’t a tax break
In the U.S., deducting your mortgage interest can save you thousands of dollars a year. For your own home in Canada, however, that tax break does not exist.
Canadians pay for their homes using “after-tax” dollars, and the interest they pay will not decrease their tax bill at all. Due to this system, most Canadians are extremely aggressive about paying off their mortgage as quickly as they can, while Americans may be more relaxed about keeping a mortgage over the long term in order to keep that deduction.
Provincial taxes vary wildly
Americans who want to pay less in taxes sometimes move to “no-income-tax” states like Nevada or Florida. In Canada, there are provinces with lower taxes, but nothing like a zero-tax state. The differences can also be extreme.
If you file your taxes in Quebec, you actually have to complete two separate tax returns every year; one for the federal government, and another for the province of Quebec. In every other province, you just file once; the federal government will file both on your behalf.
No limit on home sale profits
If Canadians can’t deduct mortgage interest, what’s the payoff for owning your own home? The answer is: a big, fat tax-free capital gain when you sell.
When you sell your primary residence in the U.S., you can exclude up to $250,000 (or $500,000 for couples) from taxation, but any sale price above that is fully taxable. In Canada, you can sell your home for any profit at all and it’s 100% tax-free, thanks to the Principal Residence Exemption.
If you make a million dollars on a house in the U.S., the government takes a huge share. If you make a million dollars on a house in Canada, the CRA takes none of it.
Sticker shock at the cash register
Many American consumers are used to paying a low sales tax when they buy big-ticket items, from electronics to furniture. Many states have 0% sales tax, although it can go up to 9% in others.
In Canada, the HST (Harmonized Sales Tax) replaces sales taxes, and some provinces like Alberta have a 5% rate, while most provinces use a rate of 13% or 15%.
If an American sees a TV for $1,000 and a Canadian sees a TV for $1,000, the Canadian is usually going to pay a lot more when he or she gets to the checkout counter.
April 30th is the real deadline
April 15th is the well-known “Tax Day” in the United States, but in Canada that date is April 30th. It sounds like a nice two-week grace period, but the CRA is not so flexible.
In the U.S., you can file for an extension of time to file your paperwork. In Canada, the deadlines are pretty fixed: if you are self-employed and can file your paperwork by June 15th, for instance, you must still pay any taxes owed by April 30th. If you owe $1 to the CRA on April 30th and pay it the next day, the interest starts to accrue immediately.
Only half of your investment gains are taxed
American investment income is taxed as either “ordinary income” or as “capital gains.” Capital gains tax is a flat 20% but depends on how long you held an asset before you sold it.
Canada’s investment taxes are different; the government only considers 50% of your gains as taxable income. If you made $100 in profit selling stocks in Canada, the CRA just ignores $50 of it and adds the other $50 to your total income for the year. This makes the math much simpler for an average taxpayer to calculate.
You can’t “file together” as a couple
American couples file a “Joint Return” almost every year, combining their incomes and putting them in a single tax bracket. Canadian couples file “separately.”
If you are married or in a common-law relationship in Canada, you and your spouse each file a completely separate tax return. You can “link” returns to share some of the same tax credits (like donations to charity, or medical expenses), but you cannot lower your tax rate by pooling your incomes.
The “exit tax” for leaving Canada
Americans who move to Europe have no worries that the IRS is going to chase them down and re-assess their taxes. But if a Canadian resident packs up and moves away from Canada, the Canadian government has one last trick: “pay us everything you owe before you go.”
The CRA treats leaving Canada like a “massive liquidation” of your assets; they tax you as if you sold all your stocks, all your businesses, and all your property on the day you left (even if you didn’t actually sell a single thing) and collect all that tax money before you go.
Lottery wins are totally tax-free
If you win the Powerball lottery in the U.S., the government takes a giant chunk of it before you even collect the ticket.
In Canada, a $50 million “Lotto Max” ticket is worth exactly $50 million. The Canadian government doesn’t view lottery wins or casual gambling as income, it’s just “luck.” The same is true of betting on horse races, or playing poker or blackjack. If you win it, it’s yours, tax-free.
Retirement savings “roll over” forever
If your 401(k) contribution limit is $23,000 in the U.S. and you only contribute $10,000 in a given year, that extra $13,000 of “room” is gone forever.
In Canada, your RRSP (Registered Retirement Savings Plan) is much more generous. If you don’t use your contribution room in a given year, it simply gets added to next year’s limit. This “carry-forward” provision continues for the rest of your life, and lets you make massive RRSP contributions later in your career when your income is higher.
Sources: Please see here for a complete listing of all sources that were consulted in the preparation of this article.
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