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%.
- Wealthy 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.
- In the U.S., some states levy no income tax whereas all Canadian provinces and territories do so.
- Canadians pay taxes for the healthcare services they receive; U.S. citizens pay for healthcare with their own funds or through a healthcare plan that they purchase (although they also pay payroll taxes for the government program Medicare that kicks in at age 65).
Personal Income Tax Guide
Determining whether Canadians pay more in taxes 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 extreme wealth inequality skews the data 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
For tax year 2022, U.S. federal income tax brackets range from 10% to 37% for individuals. In Canada, for 2022, the range is 15% to 33%. In the U.S., the lowest tax bracket for the tax year ending 2022 is 10% for an individual earning $10,275 or less and jumps to 22% (after the 12% bracket) for those earning over $41,775.* The corresponding bottom Canadian bracket of 15% applies to income up to $50,197 (in Canadian dollars).
*For 2023, these amounts will be $11,000 or less (10% bracket) and over $44,725 (22% bracket).
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 2022. 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 pregnancy 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 2022, American employees pay 7.65% of their wages into social security (6.2%) and Medicare (1.45%). Social security premiums are capped at an income level of $147,000 (for 2023, that cap is $160,200). Medicare premiums have no cap. In Canada for 2022, employees pay 5.70% of gross employment income into CPP up to $61,400. 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 taxable income available to people 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. Medicare in the U.S., which all Americans contribute to throughout their working years, helps cover healthcare costs once people reach age 65.
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 2022 is $368, and $1,440 for a family of four, not including co-pays and deductibles. For plan year 2023, these amounts will increase to $382 and $1503, respectively.
What Are the Lowest Income Tax Brackets in the U.S. and Canada?
In 2022, in the U.S., the lowest tax bracket is 10% for income up to $10,275. In Canada, it’s 15% on the initial $50,197 (Canadian dollars).
How Does the Tax on Old Age Pensions Differ?
While the systems offer similar approaches—working people in both countries pay into retirement funds throughout their working lives—the amount they pay differs. In the U.S., Americans pay a tax of 7.65% into Social Security (and Medicare) on up to $147,000 in income (in 2022). Canadians pay a tax of 5.70% on up to $61,400 Canadian dollars.
Do Canadians Pay State as Well as Federal Taxes?
Yes, although they aren’t referred to as states. Every Canadian territory and province levies income taxes. In such a case, they could potentially pay more in income taxes overall than some Americans because some U.S. states levy no income taxes. In 2022, these states are Wyoming, Texas, Tennessee, South Dakota, Nevada, Florida, Alaska.
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.