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In search of greener grass in the U.S.

Whether you'll be better off depends on where you move, TIM CESTNICK writes

It was two years ago that good friends of ours, Paul and Andrea, packed up their belongings and moved to Florida. No, they're not snowbirds. Paul was offered a job in the sunshine state, and after much deliberation, they decided to move.

When our family made a trip to Florida last month, we stayed with Paul and Andrea for a couple of days. If they had any reservations about life in Florida before they moved, those concerns have long since been laid to rest. A couple of years in balmy temperatures will do that for you.

Paul assures me that he and Andrea are much better off financially living in the United States than they ever were in Canada. And this is true even though his annual salary in the U.S. is lower than what he had been earning in Canada.

There are two reasons for Paul and Andrea being better off: Lower effective tax rates in Florida, and a lower cost of living in Orlando than in Toronto.

But this raises the question: Will you always be better off living and working in the United States than in Canada? It's an important question, because more Canadians than you can shake a hockey stick at have considered taking job offers in the United States. The "brain drain" continues.

The answer as to whether you'll be better off financially really depends on where you're moving from in Canada, and where your destination is in the United States. You've got to consider both tax rates, and the cost of living when making the comparison.

Tax costs

The more things change, the more they stay the same. You see, there have been more than just a few changes to tax law in Canada over the last few years, including some long overdue tax cuts. So, you might think that the gap between the high level of tax we pay in Canada and the lower level of tax paid by our American cousins has been shrinking. Hardly. As it turns out, tax rates in the United States have also been falling over the past few years.

Let's compare the tax burden in four Canadian cities and four U.S. cities. Check out the table. Paul earns $70,000 (U.S.) annually and Andrea earns $30,000. The table shows how much tax they'd pay in various cities.

If Paul and Andrea had remained in Toronto, they would have handed 27.31 per cent of that gross income to the Canada Revenue Agency (CRA) in 2003. As residents of Florida in 2003, they paid an effective tax rate of just 21.88 per cent last year, an improvement over Toronto of 5.43 per cent.

Interestingly, if they had moved to New York City, their overall tax burden would have been 27.94 per cent, which is slightly higher than the tax burden in all Canadian cities in the comparison except Montreal. New York is a highly taxed state, and you can add city taxes to the bill if you live in the Big Apple.

The table shows that three of the four U.S. cities in the comparison beat Canada's best hope in the tax rate competition, which is Vancouver in this example. Most people would've guessed that Calgary would be our best hope in this competition. The truth is, Calgary did have the lowest effective rate of the Canadian cities seven years ago when I wrote an article showing the same comparison at that time. But the numbers in the table this time around show the result of tax cuts introduced in British Columbia and Ontario in recent years.

While Alberta still has the lowest top marginal tax rate in the country, some of the other provinces have lower rates of tax on lower dollar amounts of income. For example, a person earning under $88,000 (Canadian) annually in British Columbia will pay less income tax than if he lived in Alberta (sales taxes are ignored here).

We can conclude from the table that, generally, American residents pay less tax than Canadian residents.

But the difference, although it's noticeable, is not exactly staggering. In our comparison, if you take the worst city (Montreal) and the best city (Orlando) out of the mix, the average tax burden among the remaining Canadian cities is 27.39 per cent, while the average burden in the remaining U.S. cities is 25.66 per cent.

Americans pay less tax partly because of the fact they can deduct mortgage interest, state taxes are generally lower (sometimes significantly) than our provincial taxes and are deductible federally.

Living costs

While taxes do make a difference, the most significant reason Paul and Andrea are better off today is that the cost of living in Orlando is lower.

Consider a couple living in Toronto earning $100,000 annually. They will have available $72,688 after taxes (see line C of the table). They can use these after-tax dollars to buy goods and services. If a particular basket of goods and services costs $1 in Toronto, then the couple could purchase 72,688 "baskets" in Toronto (the "relative purchasing power" in Toronto). A couple living in Calgary will pay just 85.18 cents (line D) for that same basket of goods and services in Calgary. With a disposable income of $72,129 in Calgary, the couple could buy 84,678 "baskets" in that city.

Now consider a couple living in New York City. They'll pay $1.23 (U.S.) for that same basket of goods and services. With a disposable income of $72,059, they'll be able to buy just 58,585 baskets.

The table shows that the relative purchasing power in Calgary, after taxes, is higher than in both San Francisco and New York. Phoenix is way ahead of the pack since that same basket costs just 57.05 cents, allowing a couple in that city to buy a whopping 133,250 baskets.

If you want to compare the relative purchasing power of other Canadian cities, consider the number of "baskets" you could purchase in the following locales: Edmonton -- 86,380; Regina -- 119,938; Saskatoon -- 118,995; Winnipeg -- 99,008; Ottawa -- 81,782; Quebec City -- 97,031; Saint John -- 122,882; Halifax -- 112,369; Charlottetown -- 120,611; and St. John's -- 117,985.

Looked at another way, if a couple wants to purchase 72,688 baskets of goods and services, they'll need to earn $100,000 (Canadian) in Toronto; $90,422 in Vancouver; $84,648 in Calgary; $98,345 in Montreal; $89,845 (U.S.) in San Francisco; $55,098 in Phoenix; $52,469 in Orlando; and $131,045 in New York City. (These figures assume one spouse earns $30,000 while the other earns the balance, as with Paul and Andrea.)

Now, a few things about the table. The cost of living factors exclude government services, such as government-paid health care. Government services don't represent a direct cost to the individual, but are factored into the taxes paid to the government, which are accounted for in the table. Any health care costs that are usually borne by the individual directly are counted in the cost of living factors here.

It's generally true that cities with higher costs of living also offer higher salaries. A 2003 labour survey in the United States showed that mean salaries in our comparison cities were as follows: San Francisco, $50,240 (U.S.); Phoenix, $34,660; New York, $48,050, and Orlando, $32,160. The 2001 Canadian census showed average salaries as follows: Vancouver, $46,806; Calgary, $49,321; Toronto, $51,112; and Montreal, $41,792. In the table, I've chosen to assume a $100,000 income annually so that we can see just how many "baskets" can be purchased in each city. If we were to assume different income levels, we couldn't make that comparison.

You'll also notice that figures for the Canadian cities are in Canadian dollars, while the U.S. cities are reflected in U.S. dollars. This is important since we want to determine how many "baskets" of goods and services can be purchased in each city, and those baskets will have to be purchased in the local currency.

Tim Cestnick, FCA, CPA, CFP, TEP is author of Winning the Tax Game 2004, and The Tax Freedom Zone. He is managing director, Tax and Estate Planning, AIC Ltd.

A tale of eight cities: Cost of living burdens across North America

Canadian cities (all figures in Canadian dollars)


Income: $100,000 (A)

Federal tax: $16,012

Provincial tax: $6,404

CPP / QPP: $3,114

EI / Medicare: $1,449

TOTAL TAXES: $26,979 (B)

Effective tax rate: 26.98%

Disposable income (A-B): $73,021 (C)

Cost of living factor: 0.9193 (D)

Relative purchasing power (C/D): 79,431


Income: $100,000 (A)

Federal tax: $16,012

Provincial tax: $7,296

CPP / QPP: $3,114

EI / Medicare: $1,449

TOTAL TAXES: $27,871 (B)

Effective tax rate: 27.87%

Disposable income (A-B): $72,129 (C)

Cost of living factor: 0.8518 (D)

Relative purchasing power (C/D): 84,678


Income: $100,000 (A)

Federal tax: $16,012

Provincial tax: $6,737

CPP / QPP: $3,114

EI / Medicare: $1,449

TOTAL TAXES: $27,312 (B)

Effective tax rate: 27.31%

Disposable income (A-B): $72,688 (C)

Cost of living factor: 1.0000 (D)

Relative purchasing power (C/D): 72,688


Income: $100,000 (A)

Federal tax: $13,371

Provincial tax: $14,876

CPP / QPP: $3,114

EI / Medicare: $1,449

TOTAL TAXES: $32,810 (B)

Effective tax rate: 32.81%

Disposable income (A-B): $67,190 (C)

Cost of living factor: 0.9120 (D)

Relative purchasing power (C/D): 73,673

U.S. cities (all figures in U.S. dollars)

San Francisco

Income: $100,000 (A)

Federal tax: $13,164

State tax: $4,234

CPP / QPP: $6,200

EI / Medicare: $1,450

TOTAL TAXES: $25,048 (B)

Effective tax rate: 25.05%

Disposable income (A-B): $74,952 (C)

Cost of living factor: 0.9358 (D)

Relative purchasing power (C/D): 80,094


Income: $100,000 (A)

Federal tax: $13,514

State tax: $2,817

CPP / QPP: $6,200

EI / Medicare: $1,450

TOTAL TAXES: $23,981 (B)

Effective tax rate: 23.98%

Disposable income (A-B): $76,019 (C)

Cost of living factor: 0.5705 (D)

Relative purchasing power (C/D): 133,250

New York

Income: $100,000 (A)

Federal tax: $12,201

State tax: $8,090

CPP / QPP: $6,200

EI / Medicare: $1,450

TOTAL TAXES: $27,941 (B)

Effective tax rate: 27.94%

Disposable income (A-B): $72,059 (C)

Cost of living factor: 1.2300 (D)

Relative purchasing power (C/D): 58,585


Income: $100,000 (A)

Federal tax: $14,226

State tax: --

CPP / QPP: $6,200

EI / Medicare: $1,450

TOTAL TAXES: $21,876 (B)

Effective tax rate: 21.88%

Disposable income (A-B): $78,124 (C)

Cost of living factor: 0.6039 (D)

Relative purchasing power (C/D): 129,366

Assumptions: One spouse earns $70,000 and the other $30,000; deductions include mortgage interest (in the U.S.) of $8,000, property taxes of $3,500, and state taxes; the couple files jointly in the U.S. All tax rates are for 2003. Factors are based on the price of a weighted basket of goods and services a follows: housing 33%; miscellaneous services 33%; consumables 16%; transportation 10%: and utilities 8%. Prices and exchange rates are from the fourth quarter of 2003. They do not reflect income taxes or government services.


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