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 findthe US’s taxationsystem 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 twosystems, BrightR ishere to help.Contactusfor further guidance on hiring in Canada and how to handle Canadian Taxes for the first time.
As a seasoned tax professional with extensive expertise in both the United States and Canada tax systems, I bring forth a wealth of firsthand knowledge and a deep understanding of the intricate details that differentiate the Internal Revenue Service (IRS) and the Canada Revenue Agency (CRA). My experience spans various aspects of tax regulations, from tax calculations to residency income treatment and nuances in personal income tax structures.
Tax Calculations: The article correctly highlights that both the IRS and CRA play crucial roles in overseeing and enforcing tax laws in their respective countries. However, the devil lies in the details, especially when it comes to tax calculations. The claim that Canadians in higher tax brackets are taxed more than their American counterparts is accurate. The differentiation in tax calculation methods, especially in the higher brackets, is a crucial distinction that individuals and businesses must consider.
Residency Income: The treatment of residency income is another area where the IRS and CRA diverge. The requirement for U.S. citizens and permanent residents to pay taxes regardless of their current location is a distinctive feature of the U.S. tax system. On the contrary, Canadian citizens residing abroad are subject to different tax rules, and the income earned may not be considered taxable income in Canada.
Personal Income Tax: The breakdown of personal income tax differences is well-explained in the article, shedding light on how factors and premises differ between the two countries. The variation in tax burdens for lower-income and higher-income earners provides a comprehensive understanding of how the tax systems impact individuals differently.
Federal Income Taxes: The comparison of federal income tax brackets in the U.S. and Canada is accurate. The article appropriately emphasizes the significant gap between the two countries, particularly in the lowest tax brackets. This information is crucial for individuals and businesses navigating the complexities of cross-border taxation.
CPP vs. Social Security: The distinction between the Canada Pension Plan (CPP) and Social Security in the U.S. is a key point of dissimilarity. The article correctly outlines the differences in contribution rates and income caps between the two systems, highlighting the financial disparities that individuals may encounter based on their location and employment.
Final Thoughts: The article provides insightful commentary on the challenges that Canadian citizens may face when working in the U.S. and navigating the intricacies of the tax systems. The mention of the taxation treaty and its role in facilitating tax collection for both countries adds a layer of complexity that individuals and businesses should be aware of when dealing with cross-border taxation.
In conclusion, the nuances between the IRS and CRA, as outlined in the article, reflect the intricacies of two distinct tax systems. BrightR's offer of guidance on hiring in Canada and handling Canadian taxes further underscores the importance of seeking professional advice in navigating the complexities of international taxation.
