Tax preparation is stressful enough. But, throw an international move into the mix, and the process can become overwhelming. You already know that the IRS tax code reads like an ancient Roman text – equal parts confusing and terrifying.
But, after years of trying to comprehend these laws, fate has led you to the Great White North. However, don’t attempt to learn its new tax codes while boxes lay unpacked in your apartment. For this year at least, use a DIY tax preparation service to file your return.
Canadian Tax Laws Differ From Those in America
You’ve probably heard it before. While hanging out with friends or colleagues, some may have referred to Canada as America Junior. The US, but with snow and hockey – lots and lots of hockey.
Despite these comments, there are numerous differences between the United States and Canada. On the surface, Canadian society may appear similar to America’s. But, the longer you’re here, the more differences you’ll spot.
Tax policy is no different.
Taxation Rates are Higher in Canada
We’ll address the 800-pound grizzly bear in the room first. Canadian taxes are indeed higher than in the US. Accounting for federal, state, and local taxes, the average American with children had an effective tax rate of 12.2%. That’s lower (but only slightly) than Canada’s effective rate of 12.5%.
The difference is more pronounced for those in the 99th percentile of earners (aka the 1%). Canadian one-percenters pay an effective tax rate of about 31%, while their American counterparts pay approximately 27%.
What accounts for the difference in taxation rates? Essentially, the Canadian government funds a larger social safety net than America’s. The biggest line item is social security costs, followed by universal healthcare. 15 and 12 cents of every dollar (respectively) goes to these programs.
Canada Does NOT Tax You on Your Global Income
Uncle Sam never sleeps. Every job you take, every dollar you make, he’ll be watching you. In other words, even as an American non-resident, you still have to file US taxes.
This situation underlines a significant difference in Canadian and American tax policy. The US assesses taxes based on citizenship, while Canada bases them on residency. So, when a Canadian moves to Singapore for work, they pay taxes there, but not in Canada. But as an American abroad, you’ll have to file your 1040 as usual.
Before you panic, though, relax – two provisions are working in your favour. One, if you qualify for the Foreign Earned Income Exclusion, your first 107,500 USD in income is tax-free. If you’re married, you can collectively write off up to 215,200 USD.
Secondly, Canada and the USA have a mutual tax treaty. In it, you may be exempt from paying tax in the USA on your Canadian source income.
Taxes are Due on April 30
April 15 is a day most Americans despise. It’s the day they send off a significant chunk of their cash to the IRS. If you find yourself dreading that day in Canada, breathe easy – for two more weeks, at least.
In Canada, those with a balance owing must send it to the CRA on April 30. However, when that day falls on a weekend, this due date may shift forward a day or two.
Did You Accept CERB Payments?
If you established residency before COVID hit, you might have qualified for CERB. Standing for the Canadian Emergency Response Benefit, this subsidy supplied qualified applicants with $2,000 per month.
If you were one of them, be aware that the Canadian government considers these funds to be taxable income. Depending on your quarantine spending habits, you may want to sock some extra cash aside over the next four months.
Which Tax Preparation Software Bundles Work Best in Canada?
If you don’t want to tackle your return just yet, no worries. In Canada, there are several DIY tax preparation solutions available. Below, we’ll introduce you to the best of the lot.
SimpleTax
It’s all in the name. Back in 2012, Jonathan Suter set out to make tax preparation simpler. Eight years later, millions of Canadians have relied on this software suite to make the process easier for them. With US fintech giant Wealthsimple buying the company just last year, SimpleTax is enjoying its day in the sun.
How does it work? You start by answering a series of basic questions. Then, if you have an online account with the CRA, SimpleTax can pull data from it. Within seconds, the program auto-fills income, investment, and other numerical data into your return.
Now, we’ll be honest – SimpleTax doesn’t work for everyone. If you have a complicated tax situation (anything beyond the typical employee), this DIY solution might not be for you. But, if you’re like 90% of people out there, then SimpleTax will do in a pinch.
Want to learn more? Check out this SimpleTax tax preparation review for more info.
TurboTax
You may already be aware of this DIY tax tool. Created in the USA by Michael A. Chipman way back in 1984, this program has been an institution since the dawn of the PC. In a sense, it is the OG of tax preparation tools.
With decades of experience under its belt, this software bundle has added scores of useful features. It can handle standard tax returns, as well as more complicated self-employment/business returns. However, for bigger companies with more sophisticated dealings, it may be better for them to stick with an accountant.
However, for most employees, freelancers, or small business owners, TurboTax will save a lot of stress.
UFile
Are you looking for a Canadian-based DIY tax solution that isn’t TurboTax? UFile may prove to be an effective alternative. Founded in the year 2000 as Dr Tax, Thomson Reuters acquired the firm in 2012.
Shortly after, they re-launched Dr Tax as UFile, a surprisingly robust platform for tax DIY’ers. Despite toiling in the shadow of the programs mentioned above, it can handle everything from employee to complex business taxes.
What are the pros of this service? If you’re a new arrival to Canada (but have multiple sources of income), you can use their free service. On other platforms, this is only possible if you’re filing a single income return. Also, if you’re self-employed and have to use the paid version, you’ll only spend half of what you would with TurboTax.
Its biggest drawback is the limitations it places on its free service. These days, many employees hold down more than one job. Even if they have one job, they might have a side hustle. If you have more than one income source (and are not a new arrival, a student, or make less than $20,000), you’ll have to open your wallet.
Canadian Taxes are Easy – With a Little Help From Your Friends
Taxes are a pain in the neck, no matter where you pay them. Make life easier on yourself – try out one of the DIY tax solutions in this article. If your situation isn’t complex, these tools could free up countless hours, each and every tax season.