Tax guide for Americans in Canada

Resident vs. non-resident of Canada

Your tax obligations in Canada are largely dependent on your residency status. The Canadian tax system differentiates between residents and non-residents, each having different tax implications.

Resident of Canada

If you are considered a resident of Canada for tax purposes, you are required to pay Canadian income tax on your worldwide income. This includes income from both inside and outside of Canada. As a resident, you are also eligible for certain tax benefits and credits that are not available to non-residents.

Non-resident of Canada

Non-residents, on the other hand, are only required to pay Canadian income tax on income earned from Canadian sources. This could include income from employment in Canada, business carried out in Canada, or rental and property income earned in Canada. Non-residents are not eligible for the same range of tax benefits and credits as residents.

Who can be considered a resident of Canada

Determining residency status can be complex and depends on a variety of factors. The Canada Revenue Agency (CRA) considers several ties to Canada that could influence your residency status:

• Permanent home in Canada: If you own or rent a home in Canada and it is available for your use, this is a significant residential tie.
• Spouse or common-law partner in Canada: If your spouse or common-law partner lives in Canada, this could indicate residency.
• Dependents in Canada: Having dependents who live in Canada is another important residential tie.
• Social and economic ties: Other ties, such as a Canadian driver's license, Canadian bank accounts, or membership in Canadian social or religious organizations, can also be considered.

The duration of your stay in Canada also plays a role. Generally, if you spend 183 days or more in Canada in a tax year, you may be considered a resident.

Types of taxation in Canada

Canada’s tax system is multifaceted, encompassing various types of taxes that fund the country’s extensive public services and social programs.

Personal income tax rates

In Canada, personal income tax is progressive, meaning that as your income increases, so does the rate at which it is taxed. The country employs both federal and provincial/territorial tax rates.

Federal tax rates for 2023:

Each province and territory in Canada has its own set of tax rates, which are applied to your income in addition to the federal tax rates. These rates can vary significantly from one region to another.

Provincial/territorial tax rates for 2023:

*Quebec operates under its distinct personal tax system, necessitating a unique computation of taxable income. Acknowledging Quebec's autonomy in tax collection, the federal income tax for residents of Quebec is reduced by 16.5% of the basic federal tax.

**For non-residents, instead of paying provincial or territorial tax, there is an additional tax of 48% of the basic federal tax on income that is taxable in Canada but not earned within any province or territory.

However, non-residents are subject to the provincial or territorial tax rates for employment income received, and business income associated with a permanent establishment (PE) in that specific province or territory. It's important to note that different tax rates may be applicable to non-residents under various circumstances.

Alternative Minimum Tax (AMT)

The Alternative Minimum Tax (AMT) is a parallel tax system designed to ensure that all individuals pay at least a minimum amount of tax, regardless of the deductions and credits they may claim.

The AMT calculation takes into account certain preference items and adds them back to your taxable income. If the AMT is higher than your regular tax liability, you are required to pay the AMT amount.

In Canada, the AMT is calculated as 15% of your adjusted taxable income, minus federal non-refundable tax credits.

It’s important to note that not all individuals will be subject to AMT, as it typically only affects those with large amounts of deductions or tax-preferred income.

Kiddie tax

The Kiddie Tax in Canada is designed to prevent income splitting between parents and their minor children. Income splitting is a strategy where higher-earning parents transfer income to their lower-earning children to reduce the overall family tax liability.

The Kiddie Tax applies to certain types of income earned by children under the age of 18, including dividends and interest from unearned income. This income is taxed at the highest marginal tax rate, regardless of the child’s own tax bracket.

There are some exceptions, such as income earned from employment or a business operated by the child, which are not subject to the Kiddie Tax.

Federal Goods and Services Tax (GST)

The Goods and Services Tax (GST) is a federal value-added tax applied to most goods and services sold in Canada. The current rate is 5%. Businesses collect GST on their sales and remit it to the government, while also receiving credits for the GST paid on their purchases. This ensures that the tax is ultimately borne by the final consumer.

Certain goods and services, such as basic groceries, prescription drugs, and medical devices, are exempt from GST or zero-rated, meaning they are taxed at 0%.

Harmonised Sales Tax (HST)

The Harmonised Sales Tax (HST) is a combined tax that includes both the federal GST and a provincial sales tax component. The HST is applied in provinces that have chosen to harmonize their provincial sales tax with the GST. The rate of HST varies by province, ranging from 13% to 15%.

Like the GST, businesses collect HST on their sales and remit it to the government, while also receiving credits for the HST paid on their purchases. The HST is designed to be a more efficient tax system, simplifying the collection and remittance process for businesses.

Provincial Retail Sales Tax (PST)

Provincial Retail Sales Tax (PST) is a sales tax levied by individual provinces in Canada, applied to the sale of goods and services within the province.

The rate of PST and the types of goods and services it applies to vary significantly across provinces. Some provinces have chosen to harmonize their PST with the federal Goods and Services Tax (GST), creating the Harmonized Sales Tax (HST), while others maintain separate GST and PST systems.

Businesses operating in provinces with PST are required to collect the tax on applicable sales and remit it to the provincial government. Consumers ultimately bear the cost of PST, as it is added to the sale price of goods and services at the point of purchase.

Quebec Sales Tax (QST)

The Quebec Sales Tax (QST) is a sales tax specific to the province of Quebec, applied to the sale of most goods and services within the province.

The QST is similar to the GST and is calculated at a rate of 9.975% on the sale price of taxable goods and services. Like the GST, the QST is a value-added tax, meaning that businesses collect the tax on their sales and remit it to the government, while also receiving credits for the QST paid on their purchases.

The QST is administered by the provincial government of Quebec, and businesses operating in Quebec are required to register for, collect, and remit the QST in addition to the GST.

Inheritance tax

Canada does not have a federal inheritance tax, meaning that there is no tax payable by the beneficiaries of an estate on the value of the inheritance they receive.

However, Canada does tax the deemed disposition of a deceased person's assets at their fair market value at the time of death. This means that any accrued capital gains on the deceased's assets are subject to tax on the final income tax return of the deceased.

Some provinces also impose probate fees or estate administration taxes, which are fees paid to the provincial government for the legal validation of a will and the administration of the estate. The rates and thresholds for these fees vary by province.

Estate tax

In Canada, there is no specific estate tax levied on the value of an individual’s estate upon their death. However, Canada does impose a deemed disposition tax at the time of death, which can have similar financial implications.

Upon death, a person is deemed to have sold all their capital property at its fair market value, and any resulting capital gains are subject to tax on the deceased’s final income tax return. This can result in a significant tax liability, especially if the individual held valuable assets that appreciated over time.

To mitigate the impact of this deemed disposition, there are various tax planning strategies and exemptions available, such as the Principal Residence Exemption for a primary home and the rollover of assets to a surviving spouse.

Gift tax

Canada does not impose a gift tax, meaning that individuals can give gifts of money or property to others without incurring a tax liability. However, if you give someone a gift of property that has appreciated in value, you are deemed to have sold the property at its fair market value, and any resulting capital gain is subject to tax.

It’s important to note that while Canada does not have a gift tax, there are implications for both the giver and the receiver of the gift. The giver may be subject to capital gains tax if the gifted property has appreciated in value, and the receiver may be subject to tax on any income generated by the gifted property.

Property tax

Property tax in Canada is a local tax imposed by municipal governments on real estate property owners. The tax is calculated based on the assessed value of the property, which is determined by the local assessment authority.

The rate of property tax varies significantly across different municipalities and provinces, and it is used to fund local services such as education, public transportation, and municipal infrastructure.

Property owners are required to pay property tax annually, and failure to pay can result in penalties or even the seizure of the property. Some municipalities offer property tax relief programs for seniors, low-income individuals, or those facing financial hardship.

Luxury tax

As of 1 September 2022, Canada has implemented a federal luxury tax on certain high-value goods.

This tax is applied to sales made for personal use of luxury cars and personal aircraft with a retail sales price exceeding CAD 100,000, and boats with a retail sales price over CAD 250,000.

The tax is calculated at the lesser of 20% of the value above the sales price threshold or 10% of the full value of the luxury car, boat, or personal aircraft.