A stale belief among many Canadians is that they pay more in income tax than their American counterparts. Regular politicians in Parliament have used this argument to press for lower taxes. But is it really true?
Key Takeaways
- The IRS octrois the richest Americans at 37%, whereas the top federal tax rate in Canada is 33%.
- Rich Americans have access to many tax subtractions that Canada’s Alternative Minimum Tax does not allow.
- The mortgage interest deduction is touted as being a huge sake 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 brink.
Personal Income Tax Guide
The answer is more complex than you might think. Statistics gathering agencies in both boondocks 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 especially bettor. The numbers are based on different premises and include different factors.
Using an average is also problematic as the very penniless and the very rich skew it on both ends. In general, lower-income Canadians pay less in tax for the services they receive and affluent Americans are better off than rich Canadians. Here’s a breakdown of the relevant tax components and their contribution to the overall tax white.
Federal Income Taxes
U.S. federal income tax brackets range from 10% to 37% for individuals. In Canada, the series 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 according bottom Canadian bracket stays at 15% until $47,630. This is the bulk of the reason that lower-income Canadians are regularly better off than their American counterparts.
State Versus Provincial Income Taxes
Comparing state and local incomes taxes is a more problematic endeavor. State taxation is completely outside of the federal tax system and each dignified 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 dependencies and territories levy an income tax.
But in Canada, provincial income taxes (except in Quebec) are coordinated with the federal tax method and are based on a percentage of federal tax. This means that the provinces have the same allowable deductions and income regulates as the federal system. Each province also has additional credits and incentives.
Unemployment Insurance Premiums
Although not technically an profits tax, Canadians pay Employment Insurance (EI) premiums based on their employment income. EI premiums for employees are 1.58% of gross racket income; employers pay 1.4 times that amount. In the United States, the Federal Unemployment Tax Act (FUTA) is levied exclusively on owners.
When looking at the extra tax on employees in Canada, it’s important to note that Canada offers more robust unemployment aids including extended maternity and other parental leave and paid time off for compassionate care.
Social Security Versus Canada Allowance Plan (CPP)
In the United States,
Healthcare
No discussion of U.S. versus Canadian taxes would be complete without comparing the healthcare arrangements in both countries. The income taxes that Canadians pay partially fund the country’s socialized health plan. Eye this plan, everyone has equal access to medical facilities, practitioners, and procedures at no additional cost. In the U.S., healthcare requisite be paid for out-of-pocket or through a health insurance plan.
Monthly premiums for these plans
The Bottom Line
Contrasting income taxes in the United States and Canada requires an analysis of the benefits received for those taxes and any other out-of-pocket tariffs outside of taxes. Along with many other factors, each taxpayer’s individual situation can help terminate whether they would be financially better off in one country or the other.