IRS and CRA are similar in many more ways than you would think. This is not surprising, considering that both bodies are liable for tax and revenue management. The two bodies ensure that the federal and local governments collect taxes from individuals and businesses and review tax returns. Further, the US and Canada have nearly similar economic systems, and their legal systems are both based on the British common law.
However, there are significant notable differences between the IRS and CRA that HR departments need to know. What differentiates CRA from IRS?
Tax Calculations
Like IRS, Canada Revenue Agency regulates the Canadian tax laws. It oversees how those laws are interpreted and applied during tax collection and management. CRA is also liable for collecting taxes from Canadians and manages how the funds are allocated.
CRA oversees a range of taxes, including trust income tax, personal income tax, excise tax, and business income tax, to mention a few.
Nonetheless, while both the USA and Canada impose income taxes, IRS and CRA calculate the taxes differently. The difference mainly applies to the higher tax brackets. Canadians in this bracket are taxed higher than the Americans do. This means the high-earning individuals in Canada pay a higher tax than the same income earners in the US.
Residency Income
The other difference between the US and Canada taxation systems is the residency income treatment. Although both countries tax individuals living abroad, the US citizens and those with permanent residency must pay taxes regardless of their current location. However, Canadian citizens in other countries pay different taxes from the residents, and the income collected is not calculated as income tax in Canada.
Personal Income Tax
The personal income tax differences in the two countries depend on different factors and premises. Lower-income earners in Canada pay lower taxes for the same services compared to American low-income earners.
High-income earners in the US pay less tax than the rich Canadians. Here is a breakdown to make it easier.
Federal Income Taxes
There is a considerable gap between the US and Canadian federal income tax. In the USA, the tax bracket lies between 10% and 37%, while in Canada, the federal income tax brackets range between 15% and 33%. The lowest tax bracket in the US is 10% for people with an income of $9700 and 22% for individuals with an income of $39,476.
In Canada, the lowest tax bracket remains at 15% for individuals earning less than $47,630. This is the main reason why low-income earners in Canada have a more comfortable life than people with the same income in the US.
CPP vs. Social Security
In the US, individuals receive social security benefits upon retirement, depending on how much they have paid into the system in their working years. In Canada, the system is referred to as the Canada Pension Plan (CPP).
American workers are expected to pay 7.65% of their total wage into Medicare and social security up to $137,700, while in Canada, employees pay 4.95% of their gross income into CPP. The income level for this is capped at $44,800, making a significant difference from the US.
Final Thoughts
Canadian citizens moving to work in the US find the US’s taxation system more demanding than in their country. However, the two systems are alike in many ways, and with the taxation treaty, they can collect IRS can collect taxes for Canada and vice versa. The most notable difference is seen in income brackets where the low-income earners in Canada are taxed less than in the US while high-income earners are taxed more. While it can be confusing to understand the two systems, BrightR is here to help. Contact us for further guidance on hiring in Canada and how to handle Canadian Taxes for the first time.
