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 true? The differences in income tax rates, taxable income amounts, the services provided, and costs beyond taxes make broad conclusions difficult and most likely require people to assess their financial situations individually.
Key Takeaways
- 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 Taxdoes not allow.
- The mortgage interest deduction is touted as being a huge benefit to American homeowners but home-owning Americans will most likely pay less tax north of the border if they make less than $84,200 and they don't own a home.
- Some U.S. 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 taxes toward the government program Medicare.
Personal Income Tax Guide
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 they reflect different factors.
Using an average is also problematic because extreme wealth inequality skews the data on both ends. Lower-income Canadians generally pay less in taxes than lower-income Americans for the services they receive. Rich Americans are better off than rich Canadians.
Federal Income Taxes
U.S. federal income tax brackets range from 10% to 37% for individuals. The range is 15% to 33% in Canada.
The lowest tax bracket in the U.S. is 10% for an individual earning $11,000 or less in 2023. It jumps to 22% after the 12% bracket for those earning over $44,725. These thresholds increase respectively to $11,600 and $47,150 in 2024.
The corresponding bottom Canadian bracket of 15% applies to income up to $53,359 in Canadian dollars.
State vs. Provincial Income Taxes
Comparing state and provincial income taxes is more problematic. U.S. state taxation is completely outside the federal tax system. 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.
Provincial income taxes are coordinated with the federal tax system in Canada, however, except in Quebec. They're based on a percentage of federal tax. 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 it's not technically an income tax, Canadians pay Employment Insurance (EI) premiums based on their employment income. EI premiums are paid by employees and employers. Employees pay 1.66% of maximum gross employment income of C$63,200 in tax year 2024. The Federal Unemployment Tax Act (FUTA) is levied exclusively on employers in the U.S.
It's important to note, however, that Canada offers more robust unemployment benefits. They include extended pregnancy and other parental leave and paid time off for compassionate care.
Social Security vs. Canada Pension Plan (CPP)
Social Security benefits that kick in at retirement in the U.S. 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).
American employees pay 7.65% of their wages into Social Security (6.2%) and Medicare (1.45%). The Social Security tax is capped at an income level of $168,600 annually in 2024. Income over this amount isn't taxed for Social Security. The Medicare tax has no income cap.
Canadian employees pay 5.95% of gross employment income into CPP up to C$65,000. 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's funded by general tax revenues. The OAS pension is taxable income available to people who are age 65 or older, who meet Canada's legal status and residence requirements, and who don't exceed maximum income caps.
Healthcare
The income taxes that Canadians pay partially fund the country's socialized health plan. Everyone has equal access to medical facilities, practitioners, and procedures at no additional cost under this plan.
Healthcare must be paid for out of pocket or through a health insurance plan in the U.S. All Americans contribute to Medicare in the U.S. throughout their working years. Medicare helps cover healthcare costs when people reach age 65.
Monthly premiums for these U.S. plans vary based on several factors. They include the state you live in, your age, and whether you have employer coverage. The average monthly premium for a 27-year-old is $382 in 2023 and $1,503 for a family of four. This includes copays and deductibles.
What Are the Lowest Income Tax Brackets in the U.S. and Canada?
The lowest tax bracket is 10% for income up to $11,600 in tax year 2024. It's 15% on the initial C$53,359 (Canadian dollars) in Canada.
How Does the Tax on Old Age Pensions Differ?
The systems offer similar approaches. Working people in both countries pay into government retirement funds throughout their working lives. But the amount they pay differs. Americans pay a tax of 7.65% into Social Security and Medicare on up to $168,600 in income in tax year 2024. Canadians pay a tax of 5.95% on up to C$63,100 (Canadian dollars).
Do Canadians Pay State As Well As Federal Taxes?
Yes. Every Canadian territory and province levies income taxes. Canadians could potentially pay more in income taxes overall than some Americans because some U.S. states levy no income taxes. These states are Wyoming, Texas, Tennessee, South Dakota, Nevada, Florida, and Alaska as of 2023.
The Bottom Line
Determining whether Canadians pay more in income taxes than Americans requires an analysis of the benefits received in exchange for those taxes and any other out-of-pocket costs. Along with many other factors, each taxpayer's individual situation can help determine whether they would be financially better off living in one country or the other.
