Steve_

This thread: http://britishexpats.com/forum/showt...6#post11258636 encouraged me to do my annual comparison of "how much tax would I pay if I lived in the US". Because basically the winter makes me think of moving then I do this comparison and I no longer want to.

Anyway, it is a very illuminating comparison because when I work through it, two things become immediately apparent - the US has way higher payroll taxes and has way lower thresholds for pension contribution, correct me if I'm wrong but in the US the maximum IRA contribution is $5,500 and in Canada it's up above $20,000 (a proportion of your income up to that).

You can itemize your deductions in the US and there is the mortgage tax credit but you've got to be going some to make up the difference in the pension tax credit and the payroll taxes.

However - if you live off of investment income, you probably aren't contributing to a pension and there is no payroll tax, and if you live in a State with no income tax then the marginal rates are lower in the US than anywhere in Canada. So on that basis, you would be better off, bearing in mind though that CGT in Canada is 50% of the income tax rate whereas the short-term CGT rate in the US is the income tax rate (so plan carefully in other words).

If you're self-employed though you get absolutely hammered in the US compared to Canada because you've got to pay both halves of FICA and in Canada although you have to pay both halves of CPP, you're exempt from paying EI (which is federal, unlike the US). And CPP is at a massively lower rate than FICA.

The downside being of course that Social Security pays out way more than CPP does.

Canada also has no estate tax, in case you're thinking of dying.

So what I take from this is that if you're a rich dude who has investment income you're better off in the US but if you're a working stiff you're better off in Canada. Provided you remember to contribute to your pension.

Michael

However 401K and 403b plans have a maximum employee contribution of $17,500 ($23,000 if age 50 or older) or $52,000 maximum employee and employer contributions.

scrubbedexpat091

Now I have no investments, no retirement plans of any sort, so its straight income from employment, but looking at an old pay stub from 2010 in California, the withholding amounts are basically the same, and my refunds in both countries is basically the same at around 300 or so.

Overall because medical care is cheaper in Canada, I am financially better off in Canada.

JAJ

The U.S. federal estate tax threshold is over $5m, so not a concern for most. Although some states have a lower threshold for estate or inheritance tax. Canada has a deemed disposal for capital gains tax purposes, which is a hidden form of estate tax.

cedros699

It depends on load of things but if you have a high income (100k), for sure you're better off in the US in a no state income tax than in Quebec
You can itemize your mortgage AND property tax, you cannot do that in Canada.
If you have a house with mortgage and 401k, you will end up paying less than 20% of your income for 100k in Florida, in Quebec I pay 35% (40% + RRSP max deduction).

Steve_

Deemed dispositions though is not in the same league, plus there is no gift tax either. You can easily avoid deemed dispositions by disposing of your assets which you can't do if there's a gift tax.

Steve_

Yes I forgot 401(k), I thought there was something similar hence my comment. It's done in a slightly different way than in Canada so the tax calculator didn't show it. So RRSP and TFSA put together is similar to 401(k) and IRA put together.

But anyway even then, payroll tax difference is huge.

Steve_

Well it depends on your income because the CPP ceiling is $51,100 and the social security ceiling in the US is $113,700, so as soon as you go over the CPP ceiling the difference becomes more obvious, plus California has a state income tax and BC has one of the lowest (in fact the lowest) rates in Canada up to $80,000 or so.

But even below $51,100, CPP and EI is 6.83% and FICA is 7.65%. And if you're self-employed the gap suddenly becomes much larger, because you're EI exempt in Canada so it's 9.9% v. 15.3%

I always do wonder when politicians in the US go on about "small businesses" being the "engine of job creation" because they hardly do anything to encourage it going by those rates. In the UK for example self-employed people pay Class 2 NICs which is way less than Class 1.

Why on Earth would you want to start your own business if you get hit with 7.65% more Federal tax?

audi4t

Quoting Warren Buffet - it doesn't matter what the tax rate is if the investment makes sense you do it

Steve_

It's not a simple investment per se, it's a business and if your income is 7.65% less then that is a massive disincentive to doing it.

audi4t

I repeat - a person intending to start a business assesses the return on their investment / human capital.

If my return is more as an owner I start the business, if not I pass and become an employee.

However there a millions of business owners in the US so I would assume they believe owning the business is the better investment than being the employee.

Steve_

Yes... which was my point... so the higher the differential in taxes, the greater the disincentive.

And my point was there would be more if they didn't have to pay such high payroll taxes.

Michael

The small businesses that politicians are referring to aren't the mom and pop businesses. Small businesses are Facebook, Microsoft, Google, Apple, and other large businesses of the past and is currently all of the Russell 2000 public companies plus most of the private firms that employee between 50-2,000 employees.

Yorkieabroad

And if you're self employed, SEP IRA contribution limit is 25% to a max of $52000 this year I think.

Steve_

The thing with an SEP IRA though is that there is a 10% tax penalty if you withdraw before you're 59.5 years old, whereas with an RRSP you just have to pay income tax so it's purely a tax deferred savings plan.

There are a blizzard of tax shelter plans in both countries so it's difficult to compare. The govt. here is in the process of setting up various new ones as well (such as the PRPP and this), mainly to fend off arguments that the payroll tax should be increased, so Ontario is planning to have their own pension plan to supplement CPP (depending on who wins the election).

I tend to think CPP and OAS put together are a bit of a joke and payroll taxes here probably should be higher, but it's too late now, they should have done it back in the 1980s when FICA went up in the US.