Tax preparation is stressful enough. But take an international step into the mix and the process can get overwhelming. You already know that the IRS Tax Code reads like an ancient Roman text – confusing and terrifying in equal parts.
But after years of trying to understand these laws, fate has led you to the Great White North. However, do not try to find out the new tax codes while the boxes are unpacked in your home. For at least this year, use a DIY tax preparation service to file your tax return.
Canadian tax laws are different from America's
You've probably heard it before. While you've been 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 seems similar to American society. But the longer you are here, the more differences you will notice.
Tax policy is no different.
Tax rates are higher in Canada
We'll address the 800-pound grizzly bear in the room first. Canadian taxes are indeed higher than the US. After factoring in federal, state, and local taxes, the average American with children had an effective tax rate of 12.2%. That is lower (but only marginally) than Canada's effective rate of 12.5%.
The difference is more pronounced among people in the 99th percentile of the labor force (also known as 1%). Canadian one percent pay an effective tax rate of around 31%, while their American counterparts pay around 27%.
What explains the difference in tax rates? In essence, the Canadian government funds a larger social safety net than the American one. The largest item is social security costs, followed by general health care. 15 and 12 cents of every dollar go to these programs.
Canada does NOT tax you on your global income
Uncle Sam never sleeps. Every job you take, every dollar you make, will watch you. In other words, even if you are a non-US resident, you will still have to file US taxes.
This situation highlights a significant difference in Canadian and US tax policies. The US rates taxes based on citizenship while Canada rates them based on residence. When a Canadian moves to Singapore to work, he pays taxes there, but not in Canada. But as an American overseas, you'll need to file your 1040 as you normally would.
Before you panic, however, relax – two determinations work in your favor. First, if you qualify for overseas income exclusion, your first $ 107,500 of income is tax-free. If you are married you can write off up to a total of $ 215,200.
Second, Canada and the US have a reciprocal tax treaty. In it, you may be exempt from paying taxes on your Canadian withholding income in the United States.
Taxes are due April 30th
April 15th is a day most Americans despise. It's the day they send a significant portion of their money to the IRS. If you are dreading this day in Canada, breathe calmly – for at least another two weeks.
In Canada, those with a balance due must send it to the rating agency on April 30th. However, if that day falls on a weekend, this due date may be postponed by a day or two.
Have you accepted CERB payments?
If you established a residence prior to the COVID hit, you may have qualified for CERB. This Canadian Emergency Aid grant has provided qualified applicants with $ 2,000 per month.
If you were one of them, be aware that the Government of Canada regards these funds as taxable income. Depending on your quarantine spending habits, you may want to set aside a little more money over the next four months.
What tax preparation software packages work best in Canada?
If you don't want to tackle your return just yet, don't worry. There are several DIY tax preparation solutions available in Canada. We'll introduce you to the best below.
It's all in the name. In 2012, Jonathan Suter set about simplifying tax preparation. Eight years later, millions of Canadians have relied on this software suite to make the process easier for them. Since US fintech giant Wealthsimple only bought the company last year, SimpleTax is enjoying its day in the sun.
How does it work? You start out by answering a number of basic questions. If you then have an online account with the CRA, SimpleTax can pull data from it. Within seconds, the program automatically fills income, investments and other numerical data into your return on investment.
Now let's be honest – SimpleTax doesn't work for everyone. If you have a complicated tax situation (something beyond the typical employee) this DIY solution might not be for you. However, if you're like 90% of the people out there, SimpleTax is enough in a pinch.
Would you like to learn more? Please refer to this SimpleTax Tax Preparation Review for more information.
You may already be familiar with this DIY control tool. This program was started in 1984 by Michael A. Chipman in the USA and has been an institution since the early days of the personal computer. In a sense, it is the OG of tax preparation tools.
With decades of experience, this software package has added numerous useful functions. It can process both standard tax returns and more complex self-employment / business returns. However, for larger companies with more sophisticated businesses, it may be better to consult an accountant.
However, for most employees, freelancers, or small business owners, TurboTax saves a lot of stress.
Are you looking for a Canada-based DIY tax solution that is not TurboTax? UFile can prove to be an effective alternative. Thomson Reuters was founded in 2000 as Dr. Tax and took over the company in 2012.
Shortly afterwards, they started Dr. Tax as a new UFile, a surprisingly robust platform for tax home improvement. Despite the hassle in the shadow of the above programs, it can handle everything from employees to complex corporate taxes.
What are the advantages of this service? If you are new to Canada (but have multiple sources of income) you can take advantage of their free service. On other platforms, this is only possible if you submit a single income return. If you are self-employed and need to use the paid version, you are spending only half of what you would make with TurboTax.
The main drawback is the limitations of the free service. Today, many employees have more than one job. Even if they have a job, they might have a sideline. If you have more than one source of income (and not a newcomer, student, or make less than $ 20,000), you need 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 your life easier – try one of the DIY control solutions in this article. Unless your situation is complex, these tools can save countless hours each tax season.