Canada vs US Tax: How the Two Systems Compare

The difference that defines everything: residence vs citizenship

Canada taxes you because you are resident here, and stops taxing your worldwide income once you cease to be a resident. The US is one of only two countries (with Eritrea) that taxes its citizens on worldwide income no matter where they live. That asymmetry is the whole story for cross-border families.

A Canadian who moves to the US becomes a US tax resident and, once non-resident in Canada, generally drops out of the Canadian income-tax net -- subject to a departure "deemed disposition" tax on the way out. An American who moves to Canada becomes a Canadian resident AND stays fully inside the US system as a citizen, filing both a Canadian T1 and a US Form 1040 every year, plus US foreign-account reporting (FBAR / FATCA). The burden is far heavier going south-to-north than north-to-south.

The treaty does a lot of work -- including for the RRSP

The Canada-US income tax treaty is one of the most developed in the world. For individuals it recognises the RRSP: a US person can elect to defer US tax on income accruing inside an RRSP until withdrawal, so it behaves much like a 401(k) or traditional IRA across the border. The totalization agreement assigns you to one country's social-security system and prevents paying both CPP and US Social Security on the same earnings. So most people are not actually double-taxed -- but they must claim the treaty positions correctly.

The TFSA trap for US persons

The TFSA is tax-free under Canadian law, but the US-Canada treaty does not extend RRSP-style recognition to it. To the IRS, a US person's TFSA is a currently taxable account, and it may be treated as a foreign trust (Forms 3520 / 3520-A) or hold PFICs if it contains Canadian funds. For a dual citizen or American living in Canada, the TFSA largely defeats its own purpose -- the standard advice is to use the RRSP and avoid (or hold only cash in) the TFSA. It is the mirror image of the UK ISA problem.

Capital gains: a 50% inclusion rate, not a preferential rate

The US taxes long-term capital gains at preferential 0/15/20% rates (plus 3.8% NIIT). Canada has no preferential capital-gains rate; instead it includes HALF the gain in your ordinary income and taxes that at your normal marginal rate. At a 50% inclusion and a combined top rate above 50%, the effective tax on a large Canadian gain lands in the mid-20s percent -- broadly comparable to the US 20% + NIIT. The 2024 proposal to raise Canada's inclusion rate to two-thirds above $250,000 was deferred and then cancelled, so 50% stands for 2026.

Leaving: Canada's departure tax vs the US exit tax

Both countries tax you on the way out, but differently. When you emigrate from Canada you are deemed to have disposed of most property at fair market value (a departure tax on the unrealised gain). The US imposes its exit tax only on "covered expatriates" who formally renounce citizenship or give up long-held green cards. A Canadian moving to the US faces Canada's departure tax; an American leaving the US permanently faces the US exit tax regime -- different triggers, same idea of taxing built-in gains before you go.

If I move from Canada to the US, do I keep paying Canadian tax?

Generally no, once you become a non-resident of Canada -- but you pay a departure tax on the way out. Canada deems you to have disposed of most property at fair market value when you emigrate, taxing the unrealised gain. After that, as a non-resident you pay Canadian tax only on certain Canadian-source income. This is the opposite of an American moving to Canada, who keeps filing US returns forever because the US taxes citizens worldwide.

I'm a US citizen living in Canada -- is my TFSA really taxable?

Yes. The TFSA is tax-free under Canadian law, but the US does not recognise the wrapper, so the income and gains inside it are taxable on your US return each year, and it can trigger foreign-trust reporting (Forms 3520/3520-A) and PFIC issues if it holds Canadian funds. The RRSP, by contrast, IS treaty-recognised and can be deferred for US purposes. Most cross-border advisers tell US persons in Canada to use the RRSP and keep the TFSA in cash or avoid it.

Who pays more tax, Canada or the US?

At most income levels Canada is the higher-tax country once provincial tax is included -- combined federal-plus-provincial top rates exceed 50% in several provinces, versus a 37% US federal top rate plus state tax. But the comparison depends on the full stack: Canada's 5% GST plus provincial sales tax, CPP/EI, and the fact that Canada funds public healthcare through taxation while many Americans pay large private premiums. Headline federal rates (33% vs 37%) understate Canada's total.