Last Updated on November 20, 2024 by Rashad Bolbol

Thinking about making the big move from the US to Canada? While the two countries may seem similar, there are significant differences in how each treats your income, assets, and taxes. Understanding these differences is crucial to avoiding surprises and ensuring compliance with both tax systems.

In this blog post, we’ll break down the key points for Americans moving to Canada, covering the essentials and helping you avoid any tax surprises along the way. With careful planning, you can take control of your tax situation, minimize obligations, and make the transition smoother. Below, we outline practical steps to help you prepare for life in Canada.

Understanding the Basics: Similarities and Differences

Similarities in Tax Systems:

Both Canada and the US tax residents on their worldwide income. However, while the US taxes its citizens and permanent residents no matter where they live, Canada only taxes individuals who are considered tax residents. This means that if you’re a US citizen moving to Canada, you’ll be required to file taxes in both countries, reporting your global income to each.
Both countries also have self-reporting tax systems, where it’s up to you to declare your income, deductions, and credits accurately. In both the US and Canada, tax returns are generally due in April. And if your taxes reach a certain threshold, both require that you make quarterly tax payments to avoid penalties and interest.

Key Differences in Tax Rates:

While both countries have similar top tax rates, where those rates kick in differs significantly. In Canada, you may hit a higher tax rate sooner, depending on your income. For instance, in British Columbia, the top marginal rate starts at around CAD 240,000, while in the US, the federal top rate doesn’t begin until around USD 600,000 for married couples filing jointly.
Payroll taxes also differ, with Canada’s Canada Pension Plan (CPP) and Employment Insurance (EI) contributions being capped, while US payroll taxes, including Medicare, can continue regardless of income level. This can impact your take-home pay, depending on your income level and where you’re moving from in the US.

Pre-Move Planning Tips

Proactive planning before your move can help you address tax challenges and reduce stress. Here are key considerations to prepare effectively for life in Canada:

• Decide What to Do with Your US Home
  If you own property in the US, you’ll need to consider whether to keep it, sell it, or rent it out. Selling before you move may allow you to take advantage of the US primary residence exclusion, which lets you exclude up to USD 500,000 of capital gain (for married couples filing jointly) on the sale of your primary home. If you keep the home and rent it out after you move, it could complicate your tax situation with both countries.
• Compensation and Remote Work
  Planning to keep your US job while living in Canada? Be aware that your US employer may need to set up Canadian payroll and withhold Canadian taxes since your work is now performed in Canada. If they don’t, you could face cash flow issues, as you may owe tax in Canada without being credited for any withholding paid in the US. To ensure compliance and avoid potential pitfalls, your employer may want to seek the assistance of a third-party firm like ours to help with payroll setup in Canada. Learn more about our payroll services here.
• Handling Investment Portfolios
  Canada treats investment income differently than the US, and certain investments, like mutual funds, could trigger complex reporting requirements. You may want to discuss your investments with an advisor before moving. If you have a US investment account, check whether your advisor can continue managing your investments while you’re in Canada, as not all US firms can serve Canadian residents.
• Pre-Move Gifting
  Canada has “attribution rules” that limit income splitting between spouses, which means that any income or gains on funds you give your spouse may still be attributed back to you for tax purposes. However, gifts made before becoming a Canadian tax resident are generally not subject to these rules. This can help with tax planning and income splitting if done correctly.
• Handling US Retirement Accounts
  Retirement accounts like IRAs and 401(k)s don’t need to be closed or cashed out before moving. The Canada-US tax treaty allows you to defer tax on these until you withdraw funds, similar to US rules. However, moving these accounts to Canada, such as by converting them to an RRSP, may not be beneficial, as you could face early withdrawal penalties in the US and potential double taxation.

After the Move: Keep in Mind the Following Points

1. Investment Rules for US Citizens in Canada
   As a US citizen, owning Canadian mutual funds outside of a registered account (like an RRSP) can trigger complex US tax rules known as the Passive Foreign Investment Company (PFIC) rules. PFICs require extensive reporting and can lead to higher tax rates and penalties. If you’re set on investing in Canadian mutual funds, consider holding them within your RRSP, which is generally protected from PFIC rules.
2. Managing US Retirement Income in Canada
   Your US Social Security income is only taxable in Canada if you’re a Canadian resident, and Canada generally taxes it at a lower rate than the US. Other types of US pension income (like distributions from a 401(k) or IRA) will be taxed in both countries, but the US-Canada tax treaty helps reduce the chances of double taxation by allowing tax credits.
3. Principal Residence Rules
   Canada doesn’t tax the gain on the sale of your primary residence, whereas the US only offers a limited exclusion. You can only claim a principal residence exemption for one home at a time, so if you own a home in both countries, you may want to consider your future plans to maximize these exemptions.
4. Trusts and Estate Planning
   US living trusts don’t offer the same benefits in Canada and may require additional reporting if you become a Canadian resident. Canada taxes trusts as separate entities, and if you’re the trustee or a contributor to the trust, you may have to file Canadian trust returns even if there’s no income.

Final Thoughts

Relocating to Canada comes with unique tax challenges, but careful planning can make all the difference. By consulting a cross-border tax expert, you can navigate complexities, minimize your obligations, and focus on enjoying your new home. Don’t let tax concerns overshadow this exciting chapter—proactive steps now will ensure a smooth transition.