Canada's favorite tax haven? The U.S.A.

The Canadian Press,AP Photo/Ryan Remiorz

(MoneyWatch) Federal income taxes are in the spotlight again, thanks to expiring tax breaks that President Obama wants to take away from the well-heeled. Given the heated debate, you would imagine that Americans pay some of the highest taxes in the world.

But don't tell that to a Canadian. Our northern neighbors are increasingly considering the U.S. as the world's best tax haven.

"It's a bit of a retirement dream for many Canadians to live in a sunny area where there's no snow and the taxes are low," says Robert Keats, a certified financial planner in both Canada and the U.S. and author of "Take Your Money and Drive. Canadian's Best Tax Haven: The U.S."

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Thousands of Canadians are buying houses in California, Florida, and Arizona, he says. That trend is being fueled by a strong Canadian dollar and a weak U.S. real estate market. But the biggest draw of the U.S. is tax rates that Canadians consider remarkably low.

To be sure, the top U.S. tax rate is currently 35 percent, and most states add on their own tax levies, too. You'll pay sales taxes when you buy things -- in California that adds more than 8 percent to the cost of retail goods -- and you pay property taxes ranging from 1- 2 percent of your property values, depending where you live.

But that's chicken feed compared to what the average Canadian pays. "Canadians are taxed at much higher rates in almost every respect," Keats says.

First, American couples don't hit the highest tax brackets until they earn roughly $400,000 a year. Canadians enter the highest tax bracket with a quarter of that annual income, at roughly $100,000. And that top bracket consumes 50 percent of income, Keats says. Even though high-tax states in the U.S. add a substantial income tax levy onto your federal bill, state taxes are deductible. So even California's substantial 9.3 percent state tax doesn't bring Californians' combined bracket near Canada's 50 percent.  

Sales taxes are also vastly higher  in Canada. Not only are U.S. sales taxes typically less than 10 percent, they're only levied on tangible goods like clothing. Food and services aren't taxed. In Canada, a 5 percent national sales tax adds to territorial levies, which are imposed on all goods and services, boosting the cost of everything from clothing to car repairs by 13-15 percent, Keats says. 

Canadian property tax rates are roughly comparable to what they are in the U.S. But in the states they're not deductible from federal taxes, so the bottom line cost is significantly more.

And yet that's not the only reason why the U.S. is Canada's best tax haven, Keats says.

A 70-year-old tax treaty between the U.S. and Canada allows people emigrating from Canada an even better tax rate that people who have lived here all their lives. If you take your million-dollar Canadian retirement plan to America, you'll pay just 15 percent, or $150,000, in tax on it as you withdraw your savings, Keats notes. In Canada, you'd pay $500,000.

Better yet, because of the clear, simple rules established by that same tax treaty, Canadian tax authorities won't classify this strategy a tax dodge. If you'd moved to a traditional tax haven like the Cayman Islands, the rules aren't as clear. If you so much as go back to Canada for a wedding, you could have Canadian revenue agents (Canada's equivalent of the IRS) on your heels, attempting to levy taxes on your worldwide income.

Of course, none of this is particularly helpful for U.S. citizens wanting to cut their own tax bills. But perhaps the knowledge that things could be worse might make Americans feel a little better.

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