A common belief among many Canadians is that they pay more in income tax than their American counterparts. Even politicians in Parliament have used this argument to press for lower taxes. But is it really true?
- The IRS taxes the richest Americans at 37%, whereas the top federal tax rate in Canada is 33%.
- Rich Americans have access to many tax deductions that Canada's Alternative Minimum Tax does not allow.
- The mortgage interest deduction is touted as being a huge benefit to home-owning Americans. However, if you make less than $84,200 and do not own a home, you will most likely pay less tax north of the border.
Personal Income Tax Guide
The answer is more complex than you might think. Statistics gathering agencies in both countries publish averages of income taxes paid, but comparing the two numbers is like comparing the stats of a hockey player with those of a basketball player. The numbers are based on different premises and include different factors.
Using an average is also problematic as the very poor and the very rich skew it on both ends. In general, lower-income Canadians pay less in tax for the services they receive and rich Americans are better off than rich Canadians. Here's a breakdown of the relevant tax components and their contribution to the overall tax story.
Federal Income Taxes
U.S. federal income tax brackets range from 10% to 37% for individuals. In Canada, the range is 15% to 33%. In the U.S., the lowest tax bracket for the tax year ending 2019 is 10% for an individual earning $9,700 and jumps to 22% for those earning $39,476. The corresponding bottom Canadian bracket stays at 15% until $47,630. This is the bulk of the reason that lower-income Canadians are often better off than their American counterparts.
State Versus Provincial Income Taxes
Comparing state and provincial incomes taxes is a more problematic endeavor. State taxation is completely outside of the federal tax system and each state has its own tax laws regarding deductions and credits. Some states, like Florida and Alaska, have no state income tax at all whereas all Canadian provinces and territories levy an income tax.
But in Canada, provincial income taxes (except in Quebec) are coordinated with the federal tax system and are based on a percentage of federal tax. This means that the provinces have the same allowable deductions and income rules as the federal system. Each province also has additional credits and incentives.
Unemployment Insurance Premiums
Although not technically an income tax, Canadians pay Employment Insurance (EI) premiums based on their employment income. EI premiums for employees are 1.58% of gross employment income; employers pay 1.4 times that amount. In the United States, the Federal Unemployment Tax Act (FUTA) is levied exclusively on employers.
When looking at the extra tax on employees in Canada, it's important to note that Canada offers more robust unemployment benefits including extended maternity and other parental leave and paid time off for compassionate care.
Social Security Versus Canada Pension Plan (CPP)
In the United States, Social Security benefits that kick in at retirement are paid out based on what individuals have paid into the system throughout their working lives. Canada has a similar system in the Canada Pension Plan (CPP).
In 2020, American employees pay 7.65% of their wages into social security and Medicare. Social security premiums are capped at an income level of $137,700. Medicare premiums have no cap. In Canada, employees pay 4.95% of gross employment income into CPP up to $44,800. Medicare-style benefits are included as part of the country's healthcare plan.
The Old Age Security (OAS) program is Canada's largest pension program, and it is funded by general tax revenues. The OAS pension is the non-taxable income available to seniors age 65 and older who meet Canada's legal status and residence requirements and don't exceed maximum income caps.
No discussion of U.S. versus Canadian taxes would be complete without comparing the healthcare systems in both countries. The income taxes that Canadians pay partially fund the country's socialized health plan. Under this plan, everyone has equal access to medical facilities, practitioners, and procedures at no additional cost. In the U.S., healthcare must be paid for out-of-pocket or through a health insurance plan.
Monthly premiums for these plans vary based on a number of factors, including which state you live in, your age, and whether you have employer coverage. That said, the average monthly premium for a 27-year-old in 2020 is $388, and $1,520 for a family of four, not including co-pays and deductibles.
The Bottom Line
Comparing income taxes in the United States and Canada requires an analysis of the benefits received for those taxes and any other out-of-pocket costs outside of taxes. Along with many other factors, each taxpayer's individual situation can help determine whether they would be financially better off in one country or the other.