Are Taxes in Canada Higher than in the US?
Table of Contents
Taxes are an essential part of any country’s financial system, funding everything from healthcare and education to infrastructure and defense. When comparing two neighboring countries like Canada and the United States, a common question arises: Are taxes in Canada higher than in the US? The answer isn’t straightforward, as it involves various types of taxes and numerous factors influencing tax rates and tax burdens. In this comprehensive blog, we’ll explore the different aspects of taxation in both Canada and the US to provide a clear understanding of how they compare.
Understanding the Tax Systems
Tax Structures: Canada vs. US
Canada
Canada has a progressive tax system, meaning that the more you earn, the higher the tax rate you pay. This system is used for both federal and provincial taxes. The primary types of taxes in Canada include:
- Income Tax: Both federal and provincial income taxes are applied.
- Sales Tax: Includes the Goods and Services Tax (GST) and Harmonized Sales Tax (HST) or Provincial Sales Tax (PST) in some provinces.
- Corporate Tax: Tax on business profits, with federal and provincial components.
- Property Tax: Imposed by municipalities on property owners.
United States
The US also employs a progressive tax system. However, the structure and rates can differ significantly from Canada. Key taxes in the US include:
- Income Tax: Federal, state, and sometimes local income taxes.
- Sales Tax: No federal sales tax, but states and localities levy their own sales taxes.
- Corporate Tax: Federal and state taxes on corporate income.
- Property Tax: Levied by local governments on property owners.
Comparing Income Taxes
Federal Income Tax
Canada
In Canada, federal income tax rates for individuals in 2023 are as follows:
- 15% on the first $53,359 of taxable income
- 20.5% on income over $53,359 up to $106,717
- 26% on income over $106,717 up to $165,430
- 29% on income over $165,430 up to $235,675
- 33% on income over $235,675
United States
In the US, federal income tax rates for individuals in 2023 are:
- 10% on the first $11,000 of taxable income
- 12% on income over $11,000 up to $44,725
- 22% on income over $44,725 up to $95,375
- 24% on income over $95,375 up to $182,100
- 32% on income over $182,100 up to $231,250
- 35% on income over $231,250 up to $578,125
- 37% on income over $578,125
State and Provincial Income Tax
Canada
Each Canadian province has its own tax brackets and rates, which are added to the federal tax. For example, Ontario’s 2023 tax rates are:
- 5.05% on the first $47,630 of taxable income
- 9.15% on income over $47,630 up to $95,259
- 11.16% on income over $95,259 up to $150,000
- 12.16% on income over $150,000 up to $220,000
- 13.16% on income over $220,000
United States
US states have varied income tax policies. Some states, like Texas and Florida, have no state income tax, while others, like California and New York, have multiple tax brackets. California’s 2023 tax rates, for example, are:
- 1% on the first $10,099 of taxable income
- 2% on income over $10,099 up to $23,942
- 4% on income over $23,942 up to $37,788
- 6% on income over $37,788 up to $52,455
- 8% on income over $52,455 up to $66,295
- 9.3% on income over $66,295 up to $338,639
- 10.3% on income over $338,639 up to $406,364
- 11.3% on income over $406,364 up to $677,275
- 12.3% on income over $677,275
Local Income Tax
Canada
Local income taxes are generally not applicable in Canada.
United States
Some US cities and counties impose local income taxes. For example, New York City has its own income tax rates ranging from 3.078% to 3.876%.
Sales Taxes
Canada
In Canada, the sales tax includes the federal Goods and Services Tax (GST) and provincial sales taxes (PST) or the Harmonized Sales Tax (HST). The GST is 5%, and combined rates (HST) can go up to 15% depending on the province.
United States
The US has no federal sales tax. Instead, sales taxes are levied by states and local governments. State sales tax rates range from 0% to 7.25%, with local additions potentially increasing the total sales tax to over 10% in some areas.
Corporate Taxes
Canada
Canada’s corporate tax rate includes both federal and provincial components. The federal rate is 15%, with provincial rates varying. For example, Ontario has a provincial rate of 11.5%, making a combined rate of 26.5%.
United States
The US federal corporate tax rate is a flat 21%. State corporate taxes vary widely, with some states having no corporate income tax and others, like California, having rates up to 8.84%.
Property Taxes
Canada
Property taxes in Canada are levied by municipalities and vary widely. These taxes are based on the assessed value of the property and can range from 0.5% to 2.5% of the property’s value annually.
United States
In the US, property taxes are also levied by local governments. Rates vary but typically range from 0.2% to 2% of the property’s assessed value.
Social Security and Healthcare
Canada
Canada funds its universal healthcare system through general tax revenues, which means there are no separate payroll taxes for healthcare. The Canada Pension Plan (CPP) and Employment Insurance (EI) contributions are deducted from employees’ paychecks. For 2023, the CPP rate is 5.95% (up to a maximum annual contribution), and the EI rate is 1.58%.
United States
In the US, Social Security and Medicare are funded through payroll taxes. The Social Security tax rate is 6.2% (up to a certain income cap), and the Medicare tax rate is 1.45%. Additionally, there is an extra 0.9% Medicare tax on high earners.
Tax Benefits and Deductions
Canada
Canadian taxpayers benefit from various credits and deductions, such as:
- Basic personal amount
- Medical expense tax credit
- Tuition and education credits
- Childcare expense deduction
- Home buyers’ amount
United States
US taxpayers can take advantage of several deductions and credits, including:
- Standard deduction or itemized deductions
- Earned Income Tax Credit (EITC)
- Child Tax Credit (CTC)
- Mortgage interest deduction
- State and local tax deduction (SALT)
Tax Burden Comparison
Average Tax Burden
Canada
In Canada, the overall tax burden (total taxes as a percentage of GDP) is approximately 33%.
United States
In the US, the overall tax burden is about 24%.
Income Distribution and Tax Impact
The impact of taxes also depends on income distribution and government services. Canadians receive more comprehensive social services, such as universal healthcare, which can offset higher taxes. In contrast, Americans might have lower taxes but face higher out-of-pocket costs for services like healthcare and education.
Case Studies and Examples
Middle-Income Family
Canada
A middle-income family in Canada earning CAD 80,000 might pay around 20-25% in combined federal and provincial income taxes. They benefit from free healthcare, public education, and various family-related tax credits.
United States
A similar family in the US earning USD 60,000 might pay around 12-22% in combined federal and state income taxes. However, they would need to purchase health insurance and might face higher out-of-pocket education costs.
High-Income Individual
Canada
A high-income individual in Canada earning CAD 300,000 would face a combined federal and provincial tax rate of around 45-50%.
United States
A high-income individual in the US earning USD 300,000 would face a combined federal and state tax rate of around 35-45%.
Conclusion: Are Taxes in Canada Higher?
The answer to whether taxes in Canada are higher than in the US depends on various factors, including income level, the type of taxes considered, and the benefits received in return. Generally, Canada has higher income tax rates, especially for higher earners, but offers more extensive social services. The US has lower overall tax rates but provides fewer universal services, leading to higher out-of-pocket costs for things like healthcare and education. This makes the overall financial impact of taxes and services a critical factor in evaluating the two systems.
In summary, while Canada’s taxes might be higher in many respects, they come with a trade-off of greater social benefits. Understanding this balance is crucial for anyone comparing the tax systems of these two neighboring countries. An expat tax advisor in Canada can help navigate these complexities and make informed decisions based on your specific situation.
