Canada vs. U.S. Tax Rates: Do Canadians Pay More?

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Canada vs. U.S. Tax Rates: Do Canadians Pay More?

Many Canadians believe that they pay more income tax than their American counterparts. This argument has been used by MPs in Parliament to advocate for reduced taxes. Is this, however, true?

Key Takeaways

  • The IRS taxes the wealthiest Americans at 37%, whereas Canada’s maximum federal tax rate is 33%.
  • Many tax breaks are available to wealthy Americans that Canada’s Alternative Minimum Tax does not.
  • The mortgage interest deduction is promoted as a significant advantage to house owners in the United States. If your income is less than $84,200 and you do not own a property, you will almost certainly pay less tax north of the border.

Personal Income Tax Guide

The solution is more complicated than you would expect. Both nations’ statistics collecting organizations provide averages of income taxes paid, but comparing the two data is like comparing hockey stats to basketball stats. The figures are based on several assumptions and incorporate various elements.

Using an average is particularly problematic since high wealth disparity skews the data on both ends of the spectrum. In average, lower-income Canadians pay less tax for the services they get, whereas wealthy Americans outperform wealthy Canadians. Here’s an overview of the essential tax components and how they fit into the overall tax picture.

Federal Income Taxes

Individual income tax rates in the United States vary from 10% to 37% for tax year 2022. In Canada, the range for 2021 is 15% to 33%. In the United States, the lowest tax rate is 10% for those making $10,275 and rises to 22% for those earning $41,775. The lowest Canadian group remains at 15% until $49,020.

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State Versus Provincial Income Taxes

Comparing state and provincial income taxes is a more difficult task. State taxation exists independently of the federal tax system, with each state having its own tax rules governing deductions and credits. Some states, such as Florida and Alaska, have no state income tax, but all Canadian provinces and territories have one.

However, in Canada (except in Quebec), provincial income taxes are coordinated with the federal tax system and are based on a percentage of federal tax. This implies that the provinces follow the same income and deduction rules as the federal system. Each province has its own set of credits and incentives.

Unemployment Insurance Premiums

Although not strictly a tax, Canadians pay Work Insurance (EI) premiums depending on their earnings from employment. Employee EI premiums are 1.58% of gross employment income; employers will pay 1.4 times that amount in 2022. The Federal Unemployment Tax Act (FUTA) is imposed only on employers in the United States.

When considering the additional tax on workers in Canada, it’s vital to remember that the country provides more substantial unemployment benefits, such as prolonged pregnancy and other parental leave, as well as paid time off for compassionate care.

Social Security Versus Canada Pension Plan (CPP)

In the United States, Social Security payments are paid out depending on what people have contributed to the system over their working years. The Canada Pension Plan is a comparable arrangement in Canada (CPP).

In 2022, American workers will contribute 7.65% of their earnings to social security (6.2%) and Medicare (1.45%). Social security premiums are restricted at $147,000 of annual income. There is no limit on Medicare premiums. Employees in Canada pay 5.70% of their gross work income into CPP up to $61,400 in 2022. The country’s healthcare plan includes Medicare-style features.

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The Old Age Security (OAS) program is Canada’s biggest pension program, and it is supported entirely by general taxation. The OAS pension is taxable income that is available to those aged 65 and above who fulfill Canada’s legal status and residency criteria and do not exceed the maximum income limitations.

Healthcare

A comparison of US and Canadian taxes would be incomplete without a comparison of the healthcare systems in both nations. Canadians’ income taxes help to support the country’s socialized health care system. Everyone enjoys equal access to medical facilities, practitioners, and treatments under this plan at no extra expense. Healthcare in the United States must be paid for out of cash or via a health insurance plan.

Monthly rates for these plans vary depending on a variety of criteria, including as where you reside, your age, and whether you have workplace coverage. Nonetheless, the average monthly premium for a 27-year-old in 2022 is $368, and $1,440 for a family of four, before co-pays and deductibles.

The Bottom Line

Comparing income taxes in the United States and Canada necessitates an examination of the advantages gained from those taxes as well as any additional out-of-pocket expenses other than taxes. Each taxpayer’s specific position, along with numerous other criteria, might assist establish whether they would be financially better off in one nation or the other.

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