There Are Two Certainties in Life – Death and Taxes
Canadian gain from free healthcare and generously subsidized education services. The U.S. does not get offered those be, clearly Canadians are paying more tax to finance these profound benefits. This is a common belief between many Canadians.
The heterogeneity of family statuses as well as the intricacies of the tax structures in Canada and the U.S. makes it quite difficult to compare who pays more taxes. But, I am going to prove it while enlightening you with some empirical and statistical findings. Why death tax? Because this will lead to some counterintuitive results!
I would rather dub it as the inheritance tax. As you may die, we will start taxing your soul! This might sound a bit extra and it is, so let me be clear. The United States of America (U.S.) has an official estate tax and Canada does not, which is a big deal.
Of Course, you should be a U.S. citizen and domiciled in the U.S. in order to be applicable. U.S. estate tax arises on the death of an individual and is applied at a progressive rate from 18% to 40% (updated 2016) on the fair market value of the individual’s taxable sum of assets. The rate seems rather high; say if you inherit $1,500,000, you will only receive $954,200 and the rest is U.S. government’s revenue.
Canada does not incorporate this type of tax in its tax regime, which seems too good to be true. But, you are exempted from this tax if the inheritance amount is equal to or lower than $5,450,000 (2016 – adjusted for inflation), which explains why only 0.6% of the Federal revenue of the U.S. is generated by estate tax. The distribution of wealth graph for the U.S. just explains my point further.
So, really, not that big of an advantage for Canadians. In fact, even though Canada does not have this inheritance tax, it has implemented a “deemed disposition” tax and other similar taxes, i.e. estate administration tax, which forces the recognition of any capital gains immediately prior to death. Thus, these gains are taxed.
Deemed disposition is when a person is considered to have disposed of a property, even though a sale did not take place. Canada also taxes selected registered pension assets (i.e. RRSP) upon the death of the Canadian resident. Basically taxing every little capital gain you can possibly receive, prior to your death. But if we only look at estate taxes, Canada’s tax rate is very small but with zero exemptions unlike U.S.’s tax system.
Canada’s estate administration tax rates:
- $5 per $1000 – estate value range is from $1,000 to $50,000 (rate: 0.5%)
- $15 per $1,000 – estate value range is from $50,000+ (rate: first 0.5% then 1.5% for $50,000+)
When someone dies, the taxman treats the fair market value of this someone’s RRSP as income, therefore it is taxed depending on this person’s marginal tax rate.
Who pays more death tax? Why should I CARE? I am not dying right now!
By simply observing the “Composition of Revenue” pie chart for Ontario, Canada’s tax revenue, we can safely say that Canada’s tax revenue distribution is quite spread out. Unlike U.S. citizens, Canada’s residents (not just citizens) pay more in taxes as they are paying taxes on assumptions of sale of their estates (properties, like houses), unrealized pension assets (i.e. RRSP), etc.
If you are a Canadian resident, you will probably be paying these “estate” taxes right now or later on, definitely before you die.
After analyzing the Canadian Consumer Tax Index, on average, Canadians pay about 42% of their income in taxes. In contrast, an average U.S. citizen pays only 27% in taxes, which include income, sales and real estate taxes.
This article shows one of the major proofs that Canadians pay more in taxes than the States (in terms of percentage).
Writer: Hamza Hasnain
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